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Pre-Budget Report: Too Little Too Late For Small Business

Richard Teather - Tue 06 Nov, 2007

More toxic fallout from the pre-Budget Report this week; Alistair Darling must be wondering why he took the job. We covered some of the problems he introduced, and the good news is that the government is now said to be preparing for a U-turn on at least one of those. The bad news is that it's really more a wobble than a U-turn. Anyone thinking of selling a business will have to keep an eye on this. Should you do it before April, to get the last of the taper relief, or hang on for a vaguely offered retirement relief next year?

More toxic fallout from the pre-Budget Report this week; Alistair Darling must be wondering why he took the job.

We covered some of the problems he introduced, both here and in Finance Confidential, and the good news is that the government is now said to be preparing for a U-turn on at least one of those. The bad news is that it’s really more a wobble than a U-turn, and I’m not very impressed.

This is about the owners of small businesses.

If you can remember when we had a Tory government, before 1997 you could sell your business and make a gain of up to £250,000 tax-free. Yes, £¼ million free of capital gains tax, thanks to “retirement relief”. Even the next £750,000 was only taxed at half the normal rate. Admittedly it could be fiddly to claim (what tax relief isn’t), but it helped many small business owners build up a decent retirement pot.

Then in came taper relief, and Gordon Brown abolished retirement relief. Instead he offered us a 10% tax when we sell our business. Great news for Brown’s chums and financial backers in the hedge funds, who can now earn millions and pay just 10% tax, but less good for those of us with more modest businesses who were suddenly paying 10% tax when we had been fully exempt.

Combine that with all the other attacks on small businesses; taxes, regulation, employment law, health and safety (don’t get me started…) and it added up to a climate of discouragement. It seemed the government would prefer us to sit at home filling in Tax Credit claim forms rather than get out and generate wealth.

Well, we all know that Darling dropped Brown’s taper relief system into the dustbin the other week. Instead of the typical Brownite fiddly mess, with different rates depending on what you sell and how long you had owned it, from April 2008 we are promised a simple 18% capital gains tax rate for everyone.

But wait a minute; that’s 8% more than small business owners were paying last month. Just 10 years ago we could pay nothing on many business sales; then it was 10%; now it’s going to be 18%. Not surprisingly, small business groups are up in arms about this.

Finally the Chancellor threw them a bone; a vague talk of binging back retirement relief. Excellent news? Hardly. Instead of a £¼ million exemption, the new relief “will run into "tens of thousands" and could be close to a £100,000 limit”. Pardon? A £100,000 limit is pathetic, and they’re saying it might not even be that high?

Given rising costs since 1997, £500,000 would be more appropriate. It wouldn’t cost much either; the old retirement relief was an exemption from 40% tax, so exempting from today’s 18% tax will be much cheaper. Even if the government only gave us the proposed £100,000 exemption, they could preserve the old 10% rate for the next £400,000. Cost? Negligible; my estimate is about £150 million (or 0.04% of tax receipts).

Well, anyone thinking of selling a business will have to keep an eye on this. Should you do it before April, to get the last of the taper relief, or hang on for a vaguely offered retirement relief next year? We’ll have to watch the Treasury smoke signals.

Regards,

Richard Teather

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