The CBI is calling for the Capital Gains Tax (CGT) change announced in the Chancellor's Pre-Budget Report to be abandoned.  The general business outcry has been fairly universal and it's not hard to see why. If you are the director of a small business looking to sell, then do it quickly or you will be clobbered for 80 per cent more tax than you were expecting.

I wonder if the Chancellor has actually stopped to think through the full implications of this tax rise. Over the past 10 years, the government has, quite rightly, spent a lot of time trying to develop a proper entrepreneurial culture in the UK: one that rests on a really robust supply side allowing companies access to growth finance and provides incentives for re-investing any wealth created into new entities. 

The tapered CGT at 10 per cent was contingent upon holding an investment in one entity, fund or trust for more than two years. This was to encourage business angels and individuals to put longer-term cash into Venture Capital Trusts and into high growth potential businesses. The assumption was that by tying in business angels, in particular, they would have more than an arm's length interest in the performance of the company and would therefore provide the mentoring and managerial support necessary as well.

This approach was ideal not just for creating a proper "market" at the lower end of the growth finance escalator, but also for creating a system where successful entrepreneurs at the top of the escalator would want to reinvest some of their wealth into the bottom again.  In short, it created the "wealth recycling" that is so essential for any truly entrepreneurial economy to thrive.

In one fell swoop the Chancellor has destroyed the wealth recycling aspects of entrepreneurship in the UK.  We might see a "Darling boom" over the next six months where many small businesses sell or try to sell and thus artificially inflate the market prices of their business. But they won't use that wealth to reinvest in the growth companies at the bottom of the escalator any more. Instead, the PBR announcements will mean that their clearest incentive is to put the money into stockmarkets—lower risk and lower tax.

The tax system is core to the entrepreneurial sector in the UK. By removing the taper at the lower end of the market, the incentive to take risks are removed as well. Surely this is something that should be reconsidered?

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