Chancellor rejects calls for tax U-turn

Alistair Darling refused to bow to calls from senior business leaders for a U-turn on the changes he plans for capital gains tax, rejecting demands yesterday to scrap the reforms in a face-to-face meeting with his leading critics. The Chancellor told a coalition of business groups he could not offer any concessions on CGT policy, despite an increasingly vociferous campaign against the measures.

The row follows the announcement in this month's pre-Budget report of an overhaul of the UK's CGT system. From April, Mr Darling intends to implement a single rate of CGT of 18 per cent, abolishing the right of some taxpayers to claim taper relief, which reduces the tax payable on assets held for longer periods.

The reforms will create some significant winners because the top rate of CGT is 40 per cent. However, business groups are furious that owners of small businesses, who pay just 10 per cent tax on profits made on disposals of their ventures as long as they have been up and running for two years or more, will be caught by the higher rate.

The campaign against the proposals culminated yesterday in a meeting between Mr Darling and the leaders of the CBI, the British Chambers of Commerce, the Institute of Directors and the Federation of Small Businesses. However, while all four groups accused the Chancellor of undermining the efforts of entrepreneurs, Mr Darling told them he was committed to the reform.

The stalemate prompted a furious reaction from small businesses, despite promises from the Chancellor that he would consider other measures designed to stimulate enterprise, primarily through an ongoing review of the advice available to would-be entrepreneurs.

John Wright, the national chairman of the Federation of Small Businesses, said the CGT reforms would reduce the incentives on offer to investors such as business angels, which provide capital to start-up businesses, as well as penalising successful entrepreneurs. "There are four and a half million small businesses – many would have been unable to start up under this proposed new regime," Mr Wright said. "Others that were relying on the proceeds of the sale of their business to provide for their retirement will now be heavily taxed on that income."

Privately, however, all four business groups concede there is little prospect of persuading Mr Darling to change his proposals, a U-turn that would cause huge political embarrassment. And while Conservative MPs have vowed to vote against the reforms, there is little appetite among Labour backbenchers for a revolt on the issue.

Business leaders are also sceptical about the Treasury's commitment to increasing support for start-ups. A Treasury source said last night: "While there's been no change of policy on CGT, the Chancellor has agreed to work with business groups in order to improve the business environment and to encourage entrepreneurialism in the UK."

A spokesman for the British Chambers of Commerce warned: "We'll take that as a statement of good intent ... but we'll have to wait and see what it actually means."

Richard Lambert, director-general of the CBI, said the groups would campaign against the proposals. "We believe the pre-Budget proposals represent a significant step in the wrong direction for the UK economy," he said. "... They will hold back vital investment in businesses of all sizes and send out the wrong message about the Government's attitude to enterprise."

The pre-Budget report measures were unveiled after criticism of the fact that private equity groups have been huge beneficiaries of the 10 per cent CGT rate. However, Mr Darling sprung a surprise by unveiling an overhaul of the CGT system, rather than focusing on private equity.