UK Tory Tax Plans Lambasted By Venture Capitalists

by Robert Lee, Tax-News.com, London

07 July 2009

The UK Conservative Party’s proposal to remove the tax deductibility of interest paid on debt has provoked the ire of the venture capital industry, which argues that such a move, while well-intentioned, would increase the rate of business failures.

The Tories’ tax reform proposals, unveiled earlier this year, seek to replace incentives in the tax system that encourage excessive corporate borrowing and replace them with new tax breaks that would reward equity financing. This, in combination with the removal of other complex relief schemes, would, according to Shadow Chancellor George Osborne, allow a future Tory government to cut the headline rate of corporate tax by 3% to 25%.

However, venture capitalists beg to differ. They argue that without the availability of credit it would be far harder to turn around struggling companies or fund new ventures, with the attendant risk that jobless figures would rise and the recession prolonged.

“Debt is not an economic four-letter word,” said Simon Walker, Chief Executive of the British Venture Capital Association. “At the personal level, Britain would not have the Tory ideal of a property-owning democracy without a large mortgage market. In the corporate sector, debt is often the only device for securing the investment essential for companies to expand and prosper.”

“Sensible debt can offer a positive outcome,” Walker added. “Take the household names Birds Eye and New Look. The first was a tired old trouper which has now been reinvigorated. The second has recorded a marked rise in sales in the teeth of this recession. Chiefs at each company would welcome the cut in corporation tax that changes in the taxation of debt are supposed to be subsidising. But for both companies there would not be healthy profits to be taxed had debt not allowed them to restructure.”

John Moulton, founder and managing partner of Alchemy Partners, one of the UK’s largest private equity houses, has also cautioned that the negative effects of Tories’ plans could spill over into other sectors of the economy.

"Forget my industry - banks, property companies and leasing businesses would all sink like stones if this were introduced over-night,” he said, according to the Daily Telegraph.

While Moutlon acknowledged that the easy availability of debt had encouraged many businesses to become over-leveraged, he warned that there would be “chaos” if debt interest suddenly became no longer tax deductible. “Put simply, it would be an act of vandalism,” he asserted.

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