Darling Rules Out Tax Hike On UK Private Equity

by Robert Lee, Tax-News.com, London

05 July 2007

The UK's new Chancellor of the Exchequer Alistair Darling, has ruled out any immediate changes to the tax system aimed at making the private equity industry pay more tax, saying that to do so would send out all the wrong signals to the City.

In his first interview with the press since being appointed Chancellor in Prime Minister Gordon Brown's new-look cabinet, Darling told the Financial Times that the government should not bow to pressure from unions, the public and from within the ruling Labour Party to end the tax privileges currently enjoyed by private equity firms operating in the UK, even though such a move would be a popular one.

“I think we should be very, very wary indeed of a knee-jerk reaction or a reaction to a day’s headlines into making a tax change that could result in unintended consequences and undesirable consequences,” he told the paper, adding: "If any tax changes need to be made in this or any other area, they ought to be made in the proper context of considering what is best for the economy overall. Once you get yourself into a situation where you make economic policy up on the trot, then you get into huge difficulties."

On Wednesday, private equity bosses faced their second grilling in as many weeks on the tax issue from MPs in the Treasury Select Committee, but once again the industry failed to mount a consistent defence. Indeed, Jon Moulton, managing partner of the British private equity house Alchemy Partners, suggested that the activities of some private equity firms are bringing the industry a bad name, telling the committee that: "In some cases people are abusing what is already a generous tax regime."

Moulton was one of four representatives of the private equity industry called to give evidence before the committee. The other three, including Peter Taylor, managing partner of Duke Street Capital, David Blitzer of Blackstone and Donald Mackenzie of CVC disagreed with Moulton's view that buy-out firms were playing the system. "I am not aware of any abuses," Taylor told the committee. However, all agreed that the tax system could be made simpler.

The activities of private equity groups have come increasingly under the microscope, as some of Britain's biggest firms have become targets for buy-outs. This has prompted fierce criticism from labour unions, which charge that private equity groups are effectively rewarded for sacking staff and stripping a company's assets with a tax system which lets them take advantage of taper relief rules on capital gains at rates as low as 10%.

Private equity firms have also come under fire for loading up on debt to finance their take-overs and using interest payments to offset corporate tax in the companies they buy. In one example of this, the BBC revealed earlier this week that vehicle recovery firm, AA and holiday company Saga, both owned by private equity firms, paid no corporate tax on their collective GBP430 million (US$868 million) profits last year. The BBC also reported that the firms will pay no corporate tax when they merge later this year, since the GBP4.8 billion debt of the combined firm will be significantly higher than the GBP3.3 billion in borrowings of the individual companies.

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