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Good (and old) news

The pre-Budget report offered few surprises, especially the announcements that affect the private equity industry. That is mainly because the government has consulted so widely on so many issues. But if it consults, it must also listen to what is being said, says SJ Berwin.

The UK Chancellor's up-beat ‘pre-Budget report', an interim review of the state of the UK's finances delivered this week, gave a positive outlook for the UK economy - while acknowledging that times are uncertain - and confirmed some important tax and spending measures. But few of the announcements were new, and there was little to answer those who view the Chancellor as a tinkerer who has multiplied the complexity and red tape inherent in the UK's tax system.

The fact that many of the measures have been heavily trailed in previous announcements is not necessarily a criticism of the government. While cynics argue that announcing the same (positive) proposals several times increases their publicity value, it is true that one of the government's important innovations has been its willingness to consult widely on many issues - and sometimes to change significantly the proposals as a result. This has happened with the (now confirmed) exemption for gains on sales by companies of substantial shareholdings, which began life as a mere tax deferral. A lengthy consultation process means that by the time the measures get implemented, they have been the subject of several press releases and announcements.

Most of yesterday's announcements, particularly those of interest to the private equity community, fall into the category of old news, but that doesn't make them any less welcome. So it is good that there will, from next April, be an exemption for gains on sales by trading companies of substantial (20 per cent or more) shareholdings in other trading companies, and this might unlock buy-out opportunities (as a similar measure in Germany has been predicted to do next year, although the evidence of that is still to come through). It is also positive that the effective rate of capital gains tax on ‘business assets' will, from next April, be 10 per cent after only two years. This is a reduction from the current four-year period. And the extension of the Enterprise Management Incentive Scheme - a highly tax-advantaged share option scheme introduced last year - to companies with gross assets of up to £30m can only be welcome.

But if the Government shouldn't be criticised for consulting widely before implementing new tax measures, it must listen to what is being said - and its record is mixed on that score. Most fundamentally, the charge that the Chancellor is meddling, while failing to grasp the nettle of more fundamental reform and simplification, is one that he should be taking very seriously indeed.

This is an extract from a weekly bulletin produced by SJ Berwin providing an update of legal and tax developments that relevant to the European private equity community. If you would like to be added to their mailing list please send an e-mail to sjbnetworks@sjberwin.com

Copyright © 2001 SJ Berwin

SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on our services to the private equity industry please contact Jonathan Blake or Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com