Capital gains tax and VAT red tape hurts SMEs, say advisers

The government’s raid on capital gains and VAT will tie up individuals and businesses in red tape, leading to higher costs for those already set to struggle with the tax hikes.

The controversial CGT rises on “non-business assets” such as shares, second homes and buy-to-let properties, include complex carve-outs to protect the over-65s and entrepreneurial activities.

Business groups are also bracing themselves for a staggered VAT hike to 20%, which could see SMEs’ cashflow put under pressure as they pay more to their suppliers while facing administrative costs associated with each separate increase.

The CGT plans, which could see the flat rate increase from 18% to 40%, has met with outcry from politicians, business groups and taxpayers. Advisers have now warned of other knock-on effects. Accountants working for clients caught in any one of the new CGT nets face a heavier workload, compiling highly complex acquisition documents.

These documents will have to set out why each asset falls into, or escapes, the non-business assets net, and also pinpoint the length of ownership for holdings that may have passed back and forth between family members for generations. The abolition of taper relief for assets disposed of after 6 April 2008, which helped reduce the proportion of gains that are taxed, will mean taxpayers are in for more misery when the new CGT regime starts unless the coalition reverses the change.

The absence of the sliding scale could see a return to complicated indexation rules as a result, advisers say.

Cathy Corns, tax partner at Mercer & Hole, said: “The [CGT] legislation will become longer and much more complex with these changes to the non-business asset framework – and indexation would be hideous.”

Indexation tables attempt to smooth out the effect of inflation on future gains made by those asset disposals, but cause a headache for accountants.

“It’s inevitable that taxpayers are going to face higher professional fees for the extra work,” Corns added. “Whoever dispensed with taper relief should be shot,” said Richard Mannion, national head of tax at Smith & Williamson.

The CGT raid will adversely affect people investing in companies through shares because they will lose the benefit of a lower tax rate in return for their investment in businesses. “If they over-egg it, people just won’t invest. Sales and deal flow will be impeded,” Mannion added.

When this is taken together with the expected VAT rise to 20%, business groups have voiced concern about the prospects for fledgling companies in the UK. The British Chamber of Commerce has argued against a staggered VAT rise so administrative costs can be kept down.

“It is essential that if there is a rise it happens in one fell swoop, at a convenient date and is not staged, so that administrative costs are minimised,” the body said.

In 2009, smaller employers spent more than £9bn per year, or an average of 37 hours per month, on the cost of compliance, the Forum of Private Business found.

A VAT increase to 20% could also have serious repercussions for some small businesses unable to absorb the cost, particularly in those industries which adhere to tight profit margins, said advisers.

Further reading:

Oxford professor backs CGT hike