Changes to the provisions for capital gains tax (CGT) announced by the UK government in last week’s Pre-Budget Report could “deliver a fatal blow” to the country’s bioscience sector, the BioIndustry Association (BIA) has warned.

The government plans to introduce legislation in the Finance Bill 2008 that would overhaul the current system for taxing capital gains by moving to a single 18% tax rate. The current CGT rules would still apply to disposals made up to and including 5 April 2008. The revised arrangements “will put the CGT regime on a more sustainable footing and help investors plan for the long term”, the government says.

What has “dismayed and shocked” the BIA is that the new system would abolish the so-called ‘taper relief’ available on capital gains tax, whereby the amount of tax payable on an asset (including shares) when it is sold can be reduced – down to a minimum rate of 10% – according to how long the asset is held. Taper relief was introduced by the current Labour government to encourage entrepreneurial investment in long-term assets. There has been concern, however, that the provision is being exploited by wealthy private equity investors to reduce tax on their earnings.

The announcement in the Pre-Budget Report was attacked in a letter to the chancellor from Richard Lambert, director-general of the Confederation of British Industry. “By removing taper relief you have deployed an extremely blunt instrument that will deeply damage a much wider community and, in doing so, risk the medium-term health of our economy,” he claimed.

For the BIA, the new flat-rate CGT threatens the long-term investments in small and medium-sized enterprises (SMEs) that are the lifeblood of the biotech industry. “We strongly believe that investments in innovative SMEs should not be treated with this heavy-handed approach,” commented the association’s chief executive Aisling Burnand. ”This decision needs to be reversed as a matter of urgency to prevent an immediate exit of funds from the sector. March 2008 will be too late.”

Long-term investment 'vital'

With up to 12 years needed to steer a compound from bench to market, long-term investment “is vital for the survival of this sector and its ability to deliver new medicines for patients”, Burnand noted. “Taper relief encourages longer-term investing – without this incentive, investment in UK bioscience companies could be severely hampered.”

The decision is also at odds with the government’s strong encouragement for the bioscience sector through initiatives such as the R&D tax credit, the Cooksey Review on health research funding and the recent Sainsbury Review on science and innovation, she added.