UK Venture Capitalists Hit Out At MBO Tax Rules

by Robin Pilgrim, LawAndTax-News.com, London

17 December 2003

Venture capitalists in the United Kingdom have hit out at new tax rules introduced earlier this year, which were designed to increase tax on the often massive gains generated by company executives when they acquire shares (often at deep discounts) during management buy outs (MBO).

Currently, such gains just attract capital gains tax at a rate of 10%. However, under the new rules, unless executives involved in such transactions can prove that they paid a fair market value for the shares, the profits will be considered to be "earnings from employment", and will be taxed at a rate of 41%, in the same way as ordinary share options given to executives.

Speaking to The Times this week, head of private equity tax at KPMG, Paul Megson condemned the new rules, arguing that:

"This uncertainty is making it very difficult for firms to make incentive arrangements with management. I don't think the Inland Revenue fully understands how some of the venture capital deals work."

Also speaking to The Times, PricewaterhouseCoopers partner, John Whiting observed that:

"In trying to tighten up the rules on share schemes in general, they have unwittingly done some collateral damage."

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