Alistair Darling yesterday beat a partial but humiliating retreat from what Tories called "his one big idea", a flat rate of capital gains tax.

The Chancellor announced a special 10% rate of the tax for some entrepreneurs who sell business assets worth up to £1m in their lifetime.

But that did little to satisfy business leaders, who lobbied against his proposal to charge 18% on all capital gains.

"It's too little, too late," said Liz Cameron, chief executive of Scottish Chambers of Commerce. "The message from government has been that they want to encourage business, yet in practice their actions on capital gains tax are a complete contradiction."

Mr Darling first announced his package of reforms in his pre-budget speech three months ago, effectively raising an extra £900m a year from business people.

His climbdown yesterday cut that tax haul by £200m. Around 80,000 people are expected to benefit. But business leaders stressed they were facing £700m in extra tax as they stared down the barrel of what many of them believe will be a new year recession.

Mr Darling said: "This measure will benefit the owners of small businesses when they choose to sell their business and it will benefit business angels and other business investors who take a 5% or greater stake in the company concerned.

"Entrepreneurs and material business investors will keep 90% of the first £1m of gains that they make."

The timing of his announcement was highly unusual. Chancellors rarely unveil tax policy outwith budgets or pre-budget reports. It leaves entrepreneurs just 10 weeks to figure out the new rules before they are imposed on April 6.

George Osborne, the Conservatives' Shadow Chancellor, said the move was "a textbook example of how not to write tax law in this country".

Capital gains tax, however, remains lower than when Mr Osborne's party was in power. Labour inherited a 40% rate. Mr Darling will officially cut that rate to 18% in April. In reality, however, most entrepreneurs have been paying far less than 40% since 1998, thanks to Mr Darling's predecessor, Gordon Brown.

Mr Brown introduced hefty concessions in 1998, eager to establish Labour's pro- business credentials. Mr Brown's so-called "taper relief" allowed a sliding scale of charges to as low as 10%, depending on how long business assets were held.

It was the abolition of this "taper relief" announced by Mr Darling in October that angered business leaders. Yesterday's concessions did little to appease them.

Aidan McLaughlin, the Scottish head of tax for Tenon, a firm of accountants, said: "There is nothing to relieve the tax burden on the highly successful entrepreneurs who have created great businesses; nor is there any encouragement to the serial entrepreneurs who invest time and time again and are the lifeblood of the UK's entrepreneurial culture."

Vince Cable, of the Liberal Democrats, yesterday told the Commons Mr Darling had been too generous to business. He asked: "Can you confirm that after all the twists and turns, and comings and goings, these extremely rich people will now be paying 18% and in some cases 10% whereas their cleaners will now be paying 20% plus National Insurance contributions?"

There are some who are happy with Mr Darling. Mr Brown's "taper relief" had never applied to second homes and property investments. So anyone selling a second home will only pay 18% on their gains after April 6, down from 40%.

'The decision will encourage people to try out new things'

JAMES MORGAN

ANNE Mulhern is delighted that the Chancellor's decision to introduce a tax relief will mean her bill, should she decide to sell her business, will be less hefty.

Mrs Mulhern, 51, has run the Charles Rennie Mackintosh design Willow Tea Rooms since 1983.

In that time she has developed her brand such that more than 100,000 people a year come to drink in the stunning architecture of the remarkable building on Glasgow's Sauchiehall Street. She has also opened a second tea room on Buchanan Street, which she owns outright.

The original Willow Tea Room is only leased, but the naming rights to the business belong to her, and would fetch a profit of at least £1m, should she decide to sell.

Under Mr Darling's original tax relief proposal - a flat rate of 18% - she would have been hit with a capital gains bill of £180,000.

But that figure will now be almost halved, thanks to the concessions he announced yesterday.

"I've invested everything I have in this business, so I'm depending on it, whether I want to retire, move on to a new business venture, or pass it on to my children," said Mrs Mulhern, who lives in the west end of Glasgow.

"I think that today's announcement will encourage entrepreneurs like myself to try out new things.

"I'm in my fifties, but I'm always coming up with new business ideas.

"I have my fingers in a few pies, such as the Glasgow Girls, a business which sells upmarket corporate gifts."