Capital gains reform creates channel gloom

Critics claim chancellor's plan for flat-rate CGT will discourage long-term investment in the industry

Channel watchers are up in arms after the chancellor signalled he will not back down over his proposed capital gains tax (CGT) shake-up.
Alistair Darling last week told the UK’s four largest business groups that he will plough on with plans to introduce a flat 18 per cent CGT rate on 6 April, which critics argue will stunt investment in the channel.
In the current tapered system, CGT is payable at 40 per cent, but sellers of business assets pay just 10 per cent CGT on disposals of assets held for two years or longer.
Paul Morris of ISIS Equity Partners, which has funded resellers Quantix and Panacea, claimed channel entrepreneurs seeking investment will factor the hike into their asking price, discouraging long-term investors.
“Under the changes, start ups will have to pay 80 per cent more in tax when they sell their shares,” he explained.
Morris added that introducing a flat rate will play into the hands of equity houses that “flip their investments quickly”, while discouraging genuine business builders.
Keith Humphreys, managing consultant at market watcher Eurolan, said: “This is a concern because most of the mergers and acquisition in the channel are being funded by private capital.”
Resellers predict the change could also spark a short-term spike in acquisitions as entrepreneurs considering a sale look to offload before the April deadline.
Scott Yates, managing director of third-party services firm Comms-care, said: “From our perspective it is positive because we are on the acquisition path. It is speeding up a lot of targets we are speaking to. On a £3m deal they will save £240,000 in tax, if they sell before April.”
Yates said withdrawal of the 10 per cent rate will encourage entrepreneurs to find ways to avoid paying CGT, for example moving to tax havens such as Monaco or Gibraltar.
Speaking after last Monday’s meeting with the chancellor, CBI director Richard Lambert said: “The pre-Budget proposals represent a significant step in the wrong direction for the UK economy. We will continue to press the case for them to be changed.”
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