The government’s rhetoric about the knowledge economy is starting to look dangerously like hot air.

The replacement of capital gains tax taper relief with a flat rate of 18 per cent, announced in the chancellor’s pre-Budget speech last week, is the subject of universal censure from the business community.

The impact will be felt throughout the economy, says the Confederation of British Industry. Longer-term investment and risk-taking will be discouraged, it says. And business angels and venture capital (VC) funding will be deterred.

The UK’s high-tech innovation sector is particularly vulnerable. First, the proposed changes come against a background of falling levels of VC investment in technology startups.

Proof-of-concept stage investment has dropped by £100m in the past 12 months. And entrepreneurs are already taking ideas to the US, with its less risk-averse climate and more flexible funding options ­ Call for government to help startups, page 10.

Second, more IT-centric firms are even less restricted than most in their choice of location. In a networked world, decisions about geography may be made purely on the basis of the availability of appropriate skills and the friendliness of the business environment.

Almost doubling the capital gains tax rate will not attract innovative ideas to the UK and is likely to exacerbate the worrying trend in the opposite direction.
Not only is the government wrong-headed, it is inconsistent.

Last week saw the commitment of £1bn to improve UK competitiveness in the global economy by putting more money into science and IT education and providing funding sources for technology startups.

And much has been made of the benefits to the UK economy from the fallout of complex Sarbanes-Oxley regulatory requirements in the US.

The capital gains tax situation needs clarification immediately. Though the planned changes are not due until April, the effect is immediate. The flat-rate policy is ill-considered and the UK IT sector will be hit hard.