Labour Government Embroiled In Tax Row With Venture Capitalists

by Robin Pilgrim, LawAndTax-News.com, London

12 April 2005

Venture capitalists in the United Kingdom fear that the government may be planning to significantly reduce the tax advantages afforded to the sector, according to reports.

Under new rules unveiled just before the delivery of the Budget last month, the government announced plans to tighten the provisions which allow companies to offset their interest charges against profits, arguing that as private equity is almost entirely debt funded, venture capital firms can unfairly reduce their tax bills to nearly nothing.

In order to remove the allegedly unfair tax advantage, the UK authorities have argued that where private equity firms provide much of the debt funding themselves in the form of loan notes, the loan notes should be treated as equity to reduce the interest charge, thereby increasing the taxable profit.

Implementation of the proposed measures was postponed when they were removed from the Finance Bill to be more fully discussed after the election.

Accountants fighting the corner of the UK’s venture capital sector have reportedly argued that the changes would cost the industry an additional £400m-£500m in tax every year.

However, the Treasury disputes such figures, and has predicted that the cost will be just £5m in 2005, rising to £20m in 2007.

However, according to a Telegraph report, the British Venture Capital Association has refused to actively participate in the debate on the matter, preferring to wait until after the May 5 election.

Recommended