Business tax loophole to stay open

AN extraordinary climb-down over a £1bn-a-year tax loophole has been quietly agreed by the Treasury - just days before Chancellor Gordon Brown unveils his pre-Budget report.

The Treasury has dropped plans to close a loophole that allows people selling a business to avoid most of their liability for capital gains tax.

In June, the Inland Revenue announced that the loophole - in which the seller of a business banks an IOU from the buyer but does not cash it for four years - was largely invalid.

The decision threatened to add up to 30% to tax bills of those selling their businesses, netting the Treasury £1bn. But last week Brown pledged to the Institute of Directors that 'support for enterprise' would be 'the central economic theme' of his November 27 report.

And Paymaster General Dawn Primarolo said the IOUs - known as loan notes - would not, after all, attract the full rate of capital gains tax.

'Is this really joined-up Government asked Mike Warburton, tax specialist at accountant Grant Thornton. 'Our clients are pleased by the decision, but the impression is farcical.'

The loan-note climbdown comes ahead of what is expected to be a strongly pro-business report next week. On Thursday, Brown told the IoD: 'We are considering further measures to extend the cuts in small company tax.' He has mentioned on several occasions his determination to help Britain's ailing manufacturing industry.

But major tax changes are unlikely to be announced next week. Instead, the Chancellor is expected to hint at reforms in his Budget in the spring.

These may include reshaping inheritance tax to safeguard middle class families and hit the super-rich, and extensive tax credits to encourage firms to spend on training, research and development. Brown may also use stamp duty to raise new 'stealth' revenue, according to accountants Andersen.