Personal Finance: `Small businesses will never take on a scheme which they fear will be more expensive to run'

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Indy Lifestyle Online
I STILL haven't got used to living under a Labour government which wants to turn us all into risk-taking, shareholding American entrepreneurs. This is probably something to do with being old enough to remember when Denis Healey was Chancellor - you just can't imagine Gordon Brown threatening to "squeeze the rich till the pips squeak".

Mr Brown wants us all to become rich, but doesn't want to alienate the Labour Party. His pre-Budget statement was based on reconciling enterprise and fairness. The tangles he is now getting into in his efforts to reform employee share schemes and Capital Gains Tax (CGT) perhaps show the limits to this approach (see page 1). Both reforms face pressures often at odds with each other: flexibility, cost, and Inland Revenue paranoia.

Mr Brown wants share schemes to embrace many types and sizes of business. Hence the three "modules" in the scheme: free shares, partnership shares and matching shares. You can have eight combinations of these schemes. Great for flexibility. But the more complicated a scheme becomes, the more it costs to administer. Small businesses will never take on a scheme they fear will be more expensive than the old one.

Much the same goes for CGT. The more the Chancellor tries to target tax relief at high growth, hi-tech companies, the more mind-bogglingly complex the system becomes - and all the more expensive for the company involved.

The Inland Revenue views any reform to CGT with deep suspicion. It believes any reliefs given to CGT payers will tempt people to manipulate their affairs to present as much of their income as possible as a capital gain. This would enable the naughty taxpayer to escape their due burden of tax.

There are two reasons why the taxman should be more relaxed. For a start, the Revenue is no beginner at sniffing out tax evasion. Most of the tax experts I spoke to this week believe the Revenue is more than equal to the task of deciding when income is dressed as capital gain.

Secondly, we have already seen how cutting taxes does not always mean a fall in tax take - quite the reverse. It often means people will be more forthcoming about their affairs. This is supported by the American experience, where they reacted to the stagflation of the Seventies by cutting CGT to just 20 per cent across the board.

Mr Brown and his advisers believe this low rate of CGT is one of the main reasons for the flowering of high-growth, high-tech companies through the US. People know they can keep the fruits of their labours, so entrepreneurs invest, confident that they will be rewarded for taking risks. Translating this into UK tax reform is another matter, as Mr Brown is now finding out.

So what does all this mean for you? If you're an employee who prefers shares to an annual cash bonus, and you don't mind keeping the shares for five years, it's good news. The flip side is you will no longer be able to sell your bonus shares until three years are up. You will be "locked in" to the stock market performance of your employer.

CGT will affect hardly any of you unless the Government massively reduces the minimum shareholdings which employees and investors have to hold in a company before they qualify for CGT relief.

At the moment you have to own 5 per cent of a company to qualify if you are an employee, and 25 per cent if you're an external investor. How many people do you know like that? Quite. Cut those minimums to, say, half a per cent and 10 per cent respectively, and we could be in business.

John Willcock is the Personal Finance Editor of `The Independent'