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Capital gains tax changes will deter investment and damage enterprise culture, a CBI survey has found. Signs are emerging that the credit crunch is starting to affect entrepreneurs and smaller business bosses, but the impact on economic activity still looks limited, a CBI survey has revealed.
The CBI found that only 12 per cent of firms surveyed had already experienced deterioration in the availability of capital, but that 22 per cent expected some constraint over the next three months, and 31 per cent over the next 6-12 months. Overall, some 35 per cent are either experiencing, or expect to experience, some deterioration.
The GfK NOP survey for the CBI targeted the owners, chairmen and directors of 500 small and medium sized enterprises (SMEs) across all sectors, and sought to confirm anecdotal evidence on the impact of the credit crunch and the proposed changes to capital gains tax.
More stringent lending conditions and the increased cost of credit are the main signs of the deterioration. Lack of availability of new finance and the withdrawal of previous credit lines - which would both be of more serious concern to companies - were less frequently cited.
Only one in five (19 per cent) of the firms questioned said credit tightening was currently affecting or was expected to affect business decisions and plans. Of this fifth, 34 per cent said they are cutting output or stock levels, 29 per cent are trimming capital investment and a further 25 per cent are postponing investment plans. In addition, 26 per cent are cutting jobs or recruitment plans.
Ian McCafferty, CBI Chief Economic Adviser, said that the credit crunch has not caused funding to small firms to dry up, and that a majority do not think they will be affected. A minority are feeling the pinch, however, and have started to scale back business plans, whilst more expect the situation to worsen.
"These businesses are concerned that over the coming year credit will cost more, and lending conditions will tighten. There will clearly be a knock-on effect on investment, jobs and the wider economy, but the overall impact is still likely to be limited," he added.
Asked about recent government proposals to change the capital gains tax (CGT) regime, 40 per cent of SMEs said the changes have a negative impact on their business. This sentiment sharpened to 57 per cent among those who have held equity in the business for more than ten years. Of all the business leaders surveyed, 61 per cent held equity in the firm.
All three key elements of the CGT shake-up – the abolition of taper relief, the change in the marginal rate, and the abolition of indexation relief – were seen as important factors, especially among those with an equity stake. There was a spike of strong concern around taper relief, with 85 per cent of those who said CGT changes were “very negative” citing taper relief as “highly important”.
The CGT changes were not regarded as a move that cut tax red tape, with 63 per cent of respondents saying the proposals were not a "desirable simplification".
Instead the proposals are already hitting future business plans: 43 per cent have altered their plans for investment in new business, while 36 per cent have changed their minds on investing in existing business. Over four in ten (42 per cent) equity holders said they will become less entrepreneurial because of the CGT changes. The youngest and smallest businesses were particularly prone to investment cutbacks.
Seventy per cent of all respondents said the CGT changes had undermined the government's approach to enterprise, and 72 per cent believed that the government’s commitment to enterprise was in doubt.
Two thirds of firms (66 per cent) doubted that the government is fully committed to encouraging enterprise, with 31 per cent of those firms strongly disagreeing, while an overwhelming 93 per cent thinks the Government needs to do more to restore its commitment to an enterprise culture.
John Cridland, CBI deputy director-general, said that the government's standing with business has been “sorely undermined” by the proposed capital gains tax changes. He believes that there is a lot of damage to be repaired.
"These changes are trampling on the spirit of enterprise and discouraging entrepreneurs from investing in their businesses. The market is also being distorted as firms rush through plans for sale,” Cridland added.
“The Chancellor needs to recognise the consequences of these ill-conceived proposals and must find alternatives to the capital gains tax changes as a matter of urgency,” he said. Related links
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