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Tech pros up in arms over tax change
Start-ups to lose out...

By Peter Judge

Published: Monday 15 October 2007

Technology professionals have reacted angrily to tax changes announced by Chancellor of the Exchequer Alistair Darling.

The changes, announced last week, will penalise people who start technology companies, by abolishing so-called "taper relief" on capital gains tax.

Darling is to abolish the taper relief scheme, under which company investors have paid as little as 10 per cent tax on the gains they get when they sell on their stake. The chancellor will raise this figure to 18 per cent on 1 April, 2008, to limit the profits of private-equity investors.

But, according to James Bennet, technology director at accountancy firm Ernst & Young, the move will hit entrepreneurs and people who invest in their own companies much harder.

He said: "This is just bonkers. It will have a devastating effect on technological entrepreneurship in the UK. People I know are planning to sell their companies before 1 April to avoid this.

Bennet added: "Darling has been getting loads of heat from the press over private-equity investors. If that's an issue, he could make some distinction between a person who starts a company and the person who invests in it." Large investment companies will find ways around paying the full 18 per cent, he said, while smaller business entrepreneurs will not.

The director general of the Confederation of British Industry (CBI) has also raised concerns. Richard Lambert wrote an open letter to Darling late last week.

Lambert wrote in the letter: "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."

A Facebook group against the tax change, which was started by Doug Richard of business information company Library House, has grown to more than 200 members. Richard is also vice chairman of investor group Cambridge Angels.

Taper relief was originally introduced to encourage long-term investors by easing the "punitive" regime of the 1990s, according to Bennet. "In the 1990s, anyone serious about technology moved to the US," he said.

Taper relief was a "fantastic scheme" though it was introduced five years too late - just after the tech bubble burst, said Bennet.

Robert Peston, a blogger at the BBC, wrote last week: "This is the equivalent of the Treasury saying: 'let's turn the UK into a hedge-fund paradise, where the biggest rewards go to those who search out the easiest short-term profits'. It's a really odd signal for the government to send out."

Peter Judge writes for ZDNet UK