UK Venture Capitalists Likely To Remain Income Tax Exempt

by Robert Lee, Tax-News.com, London

15 July 2003

The venture capital industry in the UK has lobbied successfully to reverse a decision made by Chancellor of the Exchequer Gordon Brown in his 2003 budget that would have made venture capital profit sharing payouts liable for income tax at 40%, instead of capital gains tax at 10%.

It appears that the industry was taken very much by surprise when it came to light that changes intended to tighten up the law regarding the taxation of share options would also extend to private equity groups' executives. However, it is thought that the move was the result of an unintentional oversight by the Chancellor.

Some within the industry feared that the Treasury would stick by the new rules rather than face a humiliating U-turn on the issue. However, threats by venture capital firms to take their business offshore, combined with negotiations between industry representatives, the Inland Revenue and Treasury officials seem to have won the day for the private equity groups, although the government has yet to confirm their exemption from income tax on the payouts.

The proposals set out in this year's budget would have required venture capitalists' 'carried interest'- their major source of income- to be taxed up front as income at 40%, rather than treating it as capital gain which attracts a 10% levy.

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