CBI and unions attack Chancellor over changes to capital gains tax

Alistair Darling has been hit with a surprising pincer attack from the business establishment as well as a labour union over his decision to scrap tax relief for entrepreneurs.

Both Paul Kenny, the general secretary of the GMB union, and Richard Lambert, director general of the CBI business lobby group, sent letters to the Treasury yesterday criticising the changes to the capital gains tax that the Chancellor unveiled in his pre-Budget report earlier this week.

The decision to abolish taper relief, which allowed investors to pay just 10 per cent tax on investments held for more than two years rather than the typical 40 per cent rate, came after the Government came under intense pressure to close a loophole that greatly benefited wealthy private equity managers. Critics say the relief was not meant for them. Introduced a decade ago, the tax rule was introduced to foment entrepreneurialism, but was used to great effect by buyout executives who were able to pay just 10 per cent on the vast sums generated from the sale of companies such as the AA and Debenhams.

In place of taper relief, Mr Darling is introducing an across-the-board 18 per cent capital gains tax rate. The populist move, which Mr Darling said would, "ensure that those working in private equity pay a fairer share," seems have upset everyone except the industry it targeted. Buyout professionals feared a more extreme tax hike. The dual attacks from the GMB and the CBI, two groups that often clash in the views they espouse, will be a blow to the Chancellor.

In his letter, Mr Lambert said the new regime was too broad and threatened to stifle innovation at small and medium-sized businesses. He added: "By removing taper relief, you have deployed an extremely blunt instrument that will deeply damage a much wider community, and, in so doing, risk the medium-term health of our economy."

Mr Kenny said the Chancellor should go "back to the drawing board" because the new rules still allow buyout executives to pay less tax, at 18 per cent, than most workers because they can classify their compensation as capital gains. "These elite will still be able to present income as capital and pay a lower rate of 18 per cent tax which is below that paid by ordinary working men and women," Mr Kenny wrote. "There is no justification for affording privileges to this elite and indeed proposing to continue to do so is scandalous. It is time that the few were treated like the many."

The GMB, the country's third largest union, has lost thousands of members through job cuts at private equity-owned companies and has been the most consistent critic of the industry.

The union would have preferred Mr Darling to wait until after the Treasury Select Committee, which is conducting an inquiry into the sector, publishes its findings. A Treasury spokesman said: "The capital gains tax regime has encouraged investment and enterprise. The reforms the Chancellor announced will make the system more straightforward and sustainable, ensuring it sets consistent incentives for investment, while retaining incentives for enterprise, and ensuring it remains competitive internationally."