BVCA hits back over Eurobond criticism

Director general Tim Hames has slammed the latest attack on private equity's tax arrangements, and warned that removing the tax exemption in question would threaten foreign investment into the UK.

The British Private Equity and Venture Capital Association (BVCA) has hit back at a report suggesting that private equity-backed businesses use a Eurobonds ‘loophole’ to avoid tax. 

The report, by Corporate Watch and UK newspaper The Independent, claimed that a number of leading UK retailers – including several private equity-backed businesses – have “cut their taxable profits” by making use of the Quoted Eurobond Exemption (QEE). This allows owners to lend money to companies via an instrument listed on the Channel Islands Stock Exchange, the interest payments for which are not currently subject to the standard 20 percent withholding tax usually applied to overseas payments.

However, BVCA director-general Tim Hames criticised the report as “inaccurate and misleading”, arguing that the exemption exists to encourage foreign investment. Removing QEE would result in “less investment coming into the UK, and into social care providers where it is desperately needed”, he said.

“The Quoted Eurobond Exemption is designed to encourage inward investment by global investors, many of them pension funds who are exempt from tax. Those investors who are not exempt pay tax on the interest. HMRC reviewed this matter last year but accepted the investment case for its retention,” he added. 

The government quite deliberately [decided] it wanted major UK companies to be able to raise finance on the capital markets. The private equity funds are [just] replicating that

Patrick Stevens

When a UK-based business pays interest to an overseas lender overseas, it would usually have to pay 20 percent tax, known as withholding tax. However, according to existing UK tax legislation, this withholding tax doesn’t apply to any payments in relation to a quoted Eurobond.

“By simply structuring the debt, you don’t have to pay the withholding tax,” said Patrick Stevens, acting tax policy director at The Chartered Institute of Taxation. Many people use the Channel Island Stock Exchange because of the ease of listing, according to Stevens. 

The exemption is a very deliberate policy, he added. “The government quite deliberately [decided] it wanted major UK companies to be able to raise finance on the capital markets. The private equity funds are [just] replicating that.” 

The structure is not a 'loophole' but “absolutely a legal thing to do”, he insisted. “My definition of a loophole is when you are doing something that the government, who brought in the law, doesn’t intend you to do. In this case, the government certainly does intend you to do it.”

“This was brought out by the fact that in 2012, there was a consultation document brought out by the government [where it looked at this structure and considered whether it remove this option]. Various people put their views to the government and it decided that it was comfortable with [the structure] that is in place.” 

Firms typically only use the structure on larger transactions, he said. “It’s only worthwhile for larger [deals] because you have to get the documentation to [transfer the debt] into a Eurobond and pay a fee to the Channel Island Stock Exchange. But if it is a big [transaction] then it’s worthwhile.” 

This is the second public attack on private equity tax practices in recent weeks. Earlier this month, one of Britain's biggest unions Unite called for taxation reform for private equity-backed business. It also demanded a specific investigation into KKR-backed Alliance Boots, which it claimed had avoided at least £1.12 billion in tax. The company has denied this claim.