Scots firms urge Chancellor not to raise capital gains tax

Published on Sunday 13 June 2010 21:39

ALMOST half of Scottish businesses believe they would be adversely affected by a capital gains tax hike in next weeks emergency Budget.

The Chancellor is set to announce an increase in CGT from the current flat rate of 18 per cent to 40 or 50 per cent on 22 June as part of its package for tackling the deficit. But Scottish businesses are concerned about several implications of any rise in the tax, according to research published today by the Scottish Chambers of Commerce (SCC).

It found 47 per cent of Scottish firms are concerned about the proposed rise, with particular fears over the availability of capital for start-ups and SMEs.

Liz Cameron, chief executive of the SCC, said: "CGT has historically been utilised as a tool by government to encourage and reward entrepreneurship, and many businesses are clearly unconvinced of the wisdom of imposing dramatic increases in the rates of CGT during a phase of fragile economic recovery."

Business leaders across the UK would instead favour a rise in VAT, according to KPMG's latest quarterly National Business Confidence Survey, out today.

Almost two-thirds of the chief executives questioned by KPMG said a VAT rise would be the best option for their business, of any tax increase.

Russell Hills, head of tax for KPMG in Scotland, said the government would be tempted by an increase in VAT, saying a VAT hike from the current 17.5 per cent to the 20 per cent rate typical across Europe would raise about 1 billion a month, based on current spending patterns.

"The big unknown, however, is the potential risk that such a move could stifle consumer spending and thus hamper the recovery, as it could cost the average household 425 a year," said Hills. "VAT is seen as the lesser of the tax evils because it is an indirect tax paid by consumers."

However, Hills acknowledged that a VAT rise would have a far greater impact on businesses operating in consumer markets, including financial services, retail and hospitality. The extra cost would have to either be absorbed by suppliers, at the cost of squeezing their margins, or by consumers in the form of higher prices.

KPMG's research found that a National Insurance increase was the least preferred option among UK firms, the majority of which believe the new government will have a positive impact on the UK's corporate

But Hills warned that the government's honeymoon period with the business community could be brief.

He said: "With very strong signals from Whitehall that some painful measures are on the way, it remains to be seen whether such an upbeat mood will last long and especially beyond the 22 June Budget."