So how did businesses take advantage of the 10% rate of capital gain tax payable on the selling of a business after the 5th April this year? Linda Bennett of LK Bennett shoes and the potato farmer behind Tyrells Crisps had a neat trick. They effectively “sold” their businesses to a trust otherwise known as warehousing. Capital gains tax rules judge the date of disposal as being when an unconditional contract is entered into, not when a deal is completed. The unconditional agreement was to sell the business to a trust contingent on finding a third party buyer. As such, this crystallised any gain so as to be liable for the 10% rate with a view to disposing of the business by the trust later in the year.

So what is the problem? The difficulty could come where the company that is warehoused is no longer able or willing to be sold. In this case the Inland Revenue may consider that you have sold a company to your trust and then effectively bought it back by tearing up the unconditional sale agreement. This would mean that you may face a large tax bill without the proceeds to pay it. Now that would be bad news.

The Inland revenue has always maintained that advance clearance or approval may be given to any sort of tax avoidance measure including company sales. As such it could be that if anyone had any doubts they should have consulted the revenue first. If the economy becomes more fragile and many potential sales fall through then entrepreneurs will also be out of pocket on stamp duty and legal fees.

However, it is unlikely that in practice the inland revenue would try and force this issue and demand payment of tax when no real benefit or proceeds have been realised. But the Inland revenue are not generally considered to be very generous so it is important to be vigilant.

There exists a glaring omission in the new Capital Gains Tax rules – they did not address earn-outs. Thousands of entrepreneurs who sold their businesses in 2005/06 have until 31st January to sort out a CGT tax nightmare for which HMRC issued no guidelines whatsoever.

This affected those people who are receiving part of their payment for their business in shares or loan notes as an earn-out (deferred payment). They had to tell HMRC before the end of January whether they were paying the CGT immediately or deferring it until they are able to cash the shares/loan notes in. The consequences of making a wrong decision can be enormous.

Thanks to PKF (UK), who provided the following illustration of this problem:

• A qualifying business was sold in 2005/06, half for cash and half for an earn-out right in the form of loan notes redeemable in 2009.
• The owner had to pay 10% CGT on the cash part by 31 January 2007 but 18% on the other half of the proceeds received when a loan note matures after 5 April 2008.
• The owner can elect, by 31 January 2008, to treat the loan note proceeds as received in 2005/06 to get the 10% tax rate but will have to pay the tax now, long before he gets the final cash (and pay interest because the tax should have already been paid!).
• If the owner does make the election it cannot (currently) be revoked at a later date – for example, when the position on the new Entrepreneurs’ relief is known.

In a further twist, the Institute of Chartered Accountants of Scotland have claimed that the government’s latest CGT changes could have broken European law.

The EU law states that changes to tax legislation must provide a reasonable time period to claim the money. From the date of Alistair Darling’s announcement, business owners had less than ten weeks to arrange their assets or even sell their businesses to protect some of the indexation relief accruing because of inflation.

Previous tax decisions made under European law have indicated that even by having a transitional period of three months would be insufficient. Icas called for the chancellor to defer implementation of the legislation for two years to give businesses enough time to rearrange their affairs.

Well, what a surprise. Several hours after the chancellor announced the changes to the capital gains tax regime yesterday, a few very nasty details emerged.

The first startling discovery was that ‘entrepreneurs’ relief’ is in fact a misnomer. The 10% CGT rate turned out to be a lifetime allowance, an effective kick in the teeth for all serial entrepreneurs for whom a one-off £80,000 tax concession will not make a huge difference. They are more concerned about the 80% tax hike they will have to wear for all their hard work for the end of their days.

Secondly, this new two-tier system will require a whole raft of new anti tax avoidance legislation to be drawn up – so much for the supposed objectives of creating a simple system.

Thirdly, the government is striking out one of the chief incentives for retention of key staff. Any employee with less than 5% of the company they work for is ineligible for the Entrepreneurs’ Relief. Not many can lay claim to that level of stake-holding. The vast majority of employee shareholders will therefore face a near doubling of tax rates on share gains.

Alistair Darling today issued a major concession to the forthcoming capital gains tax changes due to come into effect on 6th April.

A new 10% Entrepreneur’s Relief is to introduced (similar to the old Retirement Relief), for business owners selling up and making gains of less than a million pounds. Under the CGT plans announced at the end of last year, the existing taper relief would have been replaced with an across-the-board flat 18%, meaning an effective 80% hike in tax rates for vendors. This will now be lowered to 10% for business sale gains of under one million pounds.

Small business owners should welcome these changes, as it certainly goes some way to reclaim the ‘entrepreneur spirit’ many outraged business pressure groups have said the government had damaged with the new proposals.

Nobody I have spoken to about this has yet manged to locate the fine print on the government website, so watch out for the devil in the details!