Darling Has Got Taper Relief All Wrong

As someone who has campaigned in various guises for a more enterprising business climate in the UK, I was both surprised and dismayed at the Chancellor’s announcement of his intention to abolish a tapered approach to capital gains tax on business assets. It is the opposite of what is needed.

To stimulate economic growth, we need to encourage enterprise. That means encouraging entrepreneurs to start businesses and encouraging established businesses to pursue long-term growth strategies. One of the distinctive and worrying developments in recent years has been the growth in speculation as the route to high financial reward, rather than investment in creating and building businesses. It goes hand in hand with increasing short-termism.

Many institutional investors will deny this, and some do take a longer-term view, but ask any company chairman or chief executive what really dominates their thinking. Try announcing a well-thought-through strategy and long-term investment plan. It might attract favourable comment but little else. Then try announcing a profit warning for the coming quarter (albeit accompanying a positive long-term outlook) and listen to the howls as the share price dives. Indeed, most quoted companies will admit in private that the key comparator when they look at projected year-end or half-year performance is not the company’s annual plan but “consensus”, the shared current market expectation.

At its worst, this focus on immediacy reaches its peak when short-term “investors” move in and dictate strategic decisions, such as break-ups or mergers, before taking their gain and swiftly moving on. Even with entrepreneurs, there is pressure to sell out early rather than build an enterprise equipped for continuous growth. Be clear: there is nothing immoral about speculation, about betting on short-term changes in fortune or market sentiment. Those who do so generate returns for themselves and those they represent. It’s legitimate and that is their job. Moreover, a degree of speculation is essential to the liquidity of markets. However, it does not generate wealth. It simply moves it around. For every winner, there is a corresponding loser. It is the growth of businesses that generates real wealth, and it is that growth that underpins the future success of the economy.

The Chancellor and, particularly, his predecessor have spoken enthusiastically about the need to create more of an enterprise culture in the UK. The problem for government is that it has few ways in which to help to bring this about (and, indeed, has many more ways to inhibit it). But one of the levers at its disposal is tax policy, and that policy needs to be aimed at stimulating investment. To do so, it needs to differentiate between genuine investment and speculation. It needs to reward those who take the risk of forming their own business. It also needs to encourage those who put their money into backing sustained business growth, people who act like long-term owners rather than like punters.

The tapered capital gains approach was aimed at just such targets. There may well have been abuses, as with any other aspect of the tax system, but the answer is to look at the flaws, not abandon the concept. I have argued for a much longer and more continuous taper, with the proportion of the gain that is liable to tax going from 100 per cent in year one, successively decreasing by 20 per cent each year to reach zero from year five onwards. This contrasts with the existing taper, which drops sharply to 25 per cent of the gain after two years (giving an effective rate of 10 per cent) but falls no farther. Such a change would increase the separation between the rewards of speculation and the rewards for long-term investment. It would be a bold move, but if we really want to transform the UK economy, some big levers need to be pulled.

Undoubtedly, part of the motivation behind the proposed scrapping of the system has been to satisfy political pressures over the rewards reaped by some private equity investors. Why, some ask, give tax concessions on small fortunes made from an opportunistic purchase followed by a relatively rapid restructuring and resale of a business? A longer-tapered scheme such as I propose would answer that criticism. It would add incentive to reconstruct a business that was leaner and had long-term growth prospects. In any case, tax policy should stimulate the efforts of tens of thousands of entrepreneurs and business leaders rather than curb the seemingly disproportionate gains of a handful of individuals.

Scrapping the existing system is a step backwards. The concept needs revision and extension, not rejection. If the Chancellor really believes in the concept of an “enterprise economy”, he should think again.

— Sir George Cox is a past director-general of the Institute of Directors and was the author of the Cox Review of Creativity in UK Business , commissioned by the Government in 2005.

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