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BVCA Outlines UK Budget Proposals

by Jason Gorringe, Tax-News.com, London

18 September 2007


In its 2007 Budget Report Submission, issued last week, the British Venture Capital Association makes a strong case against any change in the taxation regime for 'carried interest', that's to say the returns on private equity investment earned by managers and investors, something that has become a controversial topic in recent months.

The BVCA's 2007 Pre Budget Report submission outlines private equity's contribution to the economy, the industry's economic and regulatory environment and recent fund performance, as well as the BVCA's representations on taxation policy, including carried interest, small company tax reliefs, employee share ownership, Venture Capital trusts, VAT, stamp duty and transfer pricing.

The BVCA sets out its case that carried interest is risk capital and should therefore continue to be treated as a capital gain, 'just as it is by all the UK's competitors'.

'Carry is a long-term, illiquid investment, which requires a significant commitment of capital from executives,' says the BVCA. 'It is also highly risky, and is far from being a one-way bet: 50% of funds do not pay any carried interest at all, and one quarter lose more than 25% of their capital.'

The Submission complains that companies backed by private equity are often denied many reliefs offered to small companies, including Research and Development Tax Credits, smaller companies' tax rates, Enterprise Management Incentives, and the Enterprise Investment Scheme, due to restrictions on the ownership structure of beneficiary companies. The BVCA also says that employee share options schemes are often denied to private equity backed firms.

The BVCA says that the VCT industry appreciates the new provisions for a six month disregard of the disposal of certain qualifying holdings which should give more commercial flexibility to VCTs in achieving Government policy, and also the proposed laying of Regulations to give a statutory footing to HMRC’s power not to withdraw VCT approval in cases of anticipated and actual unavoidable breaches. However, the Association is concerned that changes to the VCT and Enterprise
Investment Schemes driven by EU State Aid regulations will reduce the effectiveness of the schemes in addressing the equity gap faced by smaller companies with high growth potential, and wants the government to press its case to the European Commission for a review of the way in which the State Aid Risk Capital guidelines are drawn up and applied to ensure that proper account is taken of the relevant economic arguments for Government intervention in the UK.

The Submission records that private equity backed companies create jobs at a considerably faster rate than other private sector companies. Over the five years to 2005/6, the number of people employed worldwide by UK private equity backed companies increased by an average of 9% p.a. This compares dramatically with FTSE 100 and FTSE Mid-250 companies, at 1% p.a. and 2% p.a. respectively. Furthermore, around three-quarters of companies surveyed said their growth was organic, rather than by acquisition, since receiving private equity backing.

Over the five years to 2005/6, on average private equity backed companies’ sales rose by 9% p.a., compared with FTSE 100 companies (7% p.a.) and FTSE Mid-250 companies (5% p.a.). Exports grew by 6% p.a., compared with a national growth rate of just 2.2% and investment rose by 18% p.a., compared with 1.1%
nationally. 92% of responding companies said that without private equity the business would not have existed at all or would have developed less rapidly. It is estimated that companies which have received private equity backing over the last five years, generated total sales of £424 billion, exports of £48bn and in the last year contributed over £26 billion in taxes to the Exchequer.

'The private equity industry is a force for good in Britain,' concludes the BVCA, 'and brings huge benefits to the UK economy. Overall it creates jobs, grows companies and increases sales and exports at much higher rates than the public markets, as well as producing superior returns for investors, who include many millions of pensioners. All of this helps maintain the UK's position as the leading centre for private equity in Europe, second only to the US on the world stage. In these times of uncertainty in global financial markets, it is particularly important that London's competitive position is not weakened.'


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