Leave us alone, pleads private equity industry


Robin T Cox

Leave us alone, pleads private equity industry

· Threat to move abroad if tax breaks are scrapped
· 'We are driving growth and efficiency in Britain'

Phillip Inman
Friday September 14, 2007
The Guardian


Private equity chiefs warned yesterday that their industry faced meltdown
if the Treasury decides to scrap tax benefits that allow them to pay as
little as 5% on their investments.

The multibillion-pound private equity industry would be forced to move
abroad with the loss of thousands of jobs if the chancellor, Alistair
Darling, raised taxes on the personal wealth of private equity partners,
according to a report yesterday by the industry's trade body.

The British Private Equity and Venture Capital Association (BVCA) said it
feared that next month's pre-budget report by the Treasury will target tax
perks under fire from trade unions and MPs.

Accusations that the industry was exploiting tax breaks designed for
investors in start-up businesses surfaced this year when a spate of big
private equity deals hit the headlines. A bidding war for Sainsbury's and
the £11bn takeover of Alliance Boots raised public concerns about the
industry's ambitions. Trade unions also criticised the huge gains made by
private equity firms and their highly paid partners, who joined hedge fund
managers on the lists of Britain's highest-paid executives.

After intense lobbying by unions, the Treasury has spent the summer
investigating the tax breaks used by private equity firms, in particular
the "carried interest" that allows partners to take 20% of the profits
from selling companies they have managed and treat them as a capital gain
rather than income. This means capital gains tax is applied, which has a
rate of only 10% if the asset has been held for two years or more - much
lower than income tax.

Carried interest accounts for about 40% of a firm's total receipts, with
the remainder coming from management charges and fees. Most private equity
firms buy existing companies and sell them after three to five years,
either to another company or by floating it on the stock exchange.

The BVCA said: "We are warning of the serious and dire consequences of
changes that would mean capital was treated as income. The private equity
industry is driving growth and efficiency in British businesses and is of
great benefit to the economy."

It also said other countries were lowering taxes and would lure private
equity executives offshore if the tax regime in Britain became

The BVCA said it was concerned that rule changes already taking effect
were discriminating against private equity in several areas including
corporate transfer pricing rules and it feared intense lobbying by trade
unions would lead to further tax increases. It said the significance of
carried interest was also overplayed in the debate about excess profits.

"Carried interest is a mix of gains, interest and dividends," it said.
"The 10% rate on gains made after two years is only part of the picture.
Interest and dividends, which can form a substantial part of the returns,
are taxed at 40% and 25% respectively."

Unions argue that private equity firms disguise income as capital gains to
enjoy the 10% rate and are able to pay a tax rate as little as 5% once
they have offset various costs against their profits. Jack Dromey, Unite's
deputy general secretary, said: "How can it be right that private
equiteers boast of paying less tax than their cleaners and then expect the
ordinary tax-paying public to back their privileged position?"


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