UK Venture Capitalists Face Stricter Limits On Tax Deductions

by Jason Gorringe, Tax-News.com, London

07 March 2005

The British venture capital industry is currently in talks with the Inland Revenue, seeking to prevent the introduction of a more stringent regime that will limit the level of tax deductions that can be made against the costs of borrowing.

According to the Financial Times, the private equity sector faces restrictions on the tax deductions that portfolio companies can claim on their financing costs, after the Revenue began to argue last year that extra measures were needed to limit the ability of firms to offset interest payments on loans from private equity investors under 1998 transfer pricing legislation.

This stricter regime could be applied retrospectively as far back as 1999.

"I dread to think what would happen if the Inland Revenue sticks to that line,” one venture capitalist told the FT.

“They would have to go back on hundreds of company accounts to work this out. It would be a logistical nightmare," he added.

The Inland Revenue and the British Venture Capital Association are currently in negotiations, in an attempt to clarify the legislation and mitigate its impact.

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