Tax system 'is making UK less competitive'

The Conservative Party is set to seize on a damning report investigating the decline of Britain's small business sector under Gordon Brown's economic stewardship.

Commissioned by the shadow Chancellor, George Osborne, the secret report from the European School of Management is likely to form the basis of policy recommendations to encourage enterprise in the UK.

The report, due to be published next month, shows a deterioration in small businesses, claiming that their rate of growth has collapsed over the past decade. The ESM's team of analysts says the number of companies reaching an annual turnover of £1m five years after their creation has halved under the Labour Government, from 29 per cent in 1996 to 16 per cent in 2006.

At the same time the number of UK companies that have a turnover of more than £7m five years after they were set up, is, at 6.8 per cent, much lower than the European average of 16 per cent.

Professor Davide Sola, the report's author and dean of the ESM, said: "The tax system for small businesses in the UK is becoming less competitive. The changes to capital gains tax in the 2007 pre-Budget report will further undermine the attractiveness of the UK as a place to grow a business. The implications for investment and job creation could be very damaging."

Labour has come under growing criticism from the business community over its proposed changes to CGT, which will scrap taper relief incentives introduced to encourage entrepreneurship.

The ESM report looked at 10 years of data on the quality and speed of growth of new firms as it is a better guide for entrepreneurship than the number of companies starting up – partly because a third of all new businesses fail in the first three years, and of those that survive, only 10 per cent achieve high growth.

Professor Sola said his report would include policy measures focusing on how companies can grow, although many do not even consider doing this because of the regulatory burdens. He said: "If these recommendations are pursued, we feel that the UK can unleash the energy of its entrepreneurs to become the enterprise capital of the world."