The current (ten per cent) rate of tax on private equity firms was supposedly intended to stimulate the growth of small businesses, not provide a tax dodge for big businesses.
The cheek of it…
The private equity world’s trade body has threatened to quit the UK if a tough tax regime is imposed on it.
The British Private Equity and Venture Capital Association (BVCA) said its members might shift to other EU nations if faced with unwelcome new tax rules.
The Treasury is examining the situation whereby private equity firms can pay as little as 10% in tax.
Critics have alleged that the private equity industry is taking advantage of the UK’s tax laws.
The BVCA maintains that the UK only has a “fragile” lead over its economic rivals in Europe and says France, Italy or Germany could attract firms departing in resentment at harsher taxes.
But the private equity world does not speak with one voice on the issue.
Earlier this year, John Moulton, a founding partner of private equity group Alchemy, accused some firms of “abusing what is already a generous tax regime” by moving money overseas to avoid tax.
At heart of this debate is what is known as carried interest.
This comes from the 20% of profits that firms take after their investors have been repaid.
This carried interest is treated as a capital gain and hence incurs a tax rate of 10%.
The BVCA contends that carried interest represents only 40% of private equity earnings.