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UK Private Equity Tax Debate Rages On In Commons Committee

by Robert Lee,, London

13 June 2007

The issue of taxation unsurprisingly took centre stage during a Commons hearing called to examine the practices of the private equity industry in the UK, held on Tuesday.

The Treasury Select Committee hearing was scheduled as part of a wider parliamentary investigation into the workings of the UK financial services industry, and whether the activities of highly-leveraged buy-out firms present a risk to the stability of the economy as a whole. However, venture capitalists were once again forced to defend their industry amid criticism of the perception that they are paying far less tax than they ought to be.

At the centre of this debate is the issue of whether private equity firms should be entitled to 'taper relief' on their, often vast, profits, which enables them to reduce capital gains tax to as little as 10% as long as they hold shares for at least two years.

According to Professor Karel Williams of the Centre for Research on Socio-Cultural Change, who spoke at Tuesday's hearing, to allow this to happen is "completely politically indefensible." Meanwhile, Professor Tim Jenkinson from the Said Business School at Oxford University, argued that private equity firms played an important function in the UK economy, but he concurred that taper relief "doesn't scale on a very politically acceptable way."

In response, Jeremy Hand, deputy chairman of the British Private Equity and Venture Capital Association (BVCA) told the committee that knee-jerk changes to the tax system by the government to assuage growing criticism could have "significant unintended consequences" of their own by targeting just "a few successful businessmen."

Chancellor of the Exchequer Gordon Brown has hinted that changes may be made to the tax system to “make sure there is justice and equity in the treatment of tax arrangements" in the area of private equity, but any changes are unlikely until the government completes a review of the private equity tax arrangements.

Further Commons committee hearings on the private equity industry are scheduled for June 20 and July 3 and will hear from members of the firms themselves, in addition to the Financial Services Authority and trade unionists.

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