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Blair Steps Into UK Private Equity Tax Debate

by Robert Lee,, London

25 June 2007

As private equity bosses attempted to justify their industry's much-criticised tax regime in front of parliamentarians last week, British Prime Minister Tony Blair indicated that the government will take a "serious" look at how buy-out funds are taxed.

During Prime Minister's questions in the House of Commons last Wednesday, Liberal Democrat leader Menzies Campbell asked if Blair believed it was right for executives in the industry "to pay tax at a lower rate than those who clean their offices," to which the PM replied: "We've said we will look into it in a sensible and serious way and reflect on what we can do."

Blair's handover of the reins of power to his Chancellor Gordon Brown is imminent, but this is unlikely to alter the course of the government's thinking on the issue as the Chancellor has already hinted that changes to the private equity tax regime could come after a review of the industry is published later in the year.

While the private equity tax debate has been simmering on for some time, it reached boiling point recently when Nicholas Ferguson, a prominent venture capitalist and chairman of SVG Capital, a major fund management business listed on the London Stock Exchange, remarked in an interview with the Financial Times that it was hard to justify highly-paid fund bosses paying "less tax than a cleaning lady." Since Ferguson's interview was published, none other than Sir Ronald Cohnen, regarded as the founding father of the British venture capital industry and who has a personal fortune of GBP260 million, also publicly questioned why private equity firms should enjoy such a favourable tax regime.

At centre of the debate is a 2003 memorandum of understanding between between private equity firms and HM Revenue and Customs which treats 'carried interest' as capital gains rather than income and therefore enables buy-out funds to pay much less tax than they otherwise would.

In a gruelling session before the Treasury Select Committee on Wednesday, leaders of the UK's largest private equity firms attempted to justify the current system by warning that any changes could cause uncertainty within the industry and prompt a drift of firms offshore.

"Any shift in the tax system, at a time when other European countries are coming into line with the British perspective, could put the UK at a disadvantage," private equity firm Carlyle stated in written testimony presented to the committee.

Similarly, Philip Yea, chief executive of 3i Group, told the MPs that any increase in tax “might just mean that people like us might just invest our funds outside the UK."

A suggestion from committee member Angela Eagles that the MoU with HMRC be scrapped and tax arrangements made on a case-by-case basis was also rejected by the industry representatives, with Damon Buffini, managing partner of Permira, warning that it would be dangerous for tax policy to be made "on the hoof."

However, the industry's arguments held little weight with the Labour Party dominated committee, with Sion Simon MP summarising the mood of the gathered MPs by remarking that: “There’s a sense you’re taking the mick, you’re too rich and you’re not paying enough tax.”

The uncoordinated way in which the private equity industry has presented its arguments led to British Venture Capital Association head Peter Linthwaite to fall on his sword last week, and industry representatives will have to shore up their defences in time for the next grilling by select committee MPs in July.

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