BVCA secures UK tax agreement

The British Venture Capital Association (BVCA) has reached agreement with the UK Inland Revenue to stave off the threat of significantly increased tax liabilities for general partners.

The BVCA has won a reprieve for its members following agreement with the UK government over proposed changes to the UK tax system which would have seen heightened tax burdens for general partners.


In his 2003 Finance Act, unveiled in April, Chancellor of the Exchequer Gordon Brown included legislation relating to the treatment of both management shares on a buyout or venture investment and carried interest payments received by general partners. The legislation threatened to dramatically increase the level of tax paid by general partners by changing the current system.


The legislation sought to impose an income tax charge on shares and securities granted to employees instead of the current system, which sees individual partners charged at ten per cent via capital gains tax. The measures would have made profit-sharing payouts liable to a 40 per cent income tax.


The BVCA voiced its concerns at the new legislation, warning ministers that the changes posed a threat to the UK private equity industry, with the prospect of firms moving offshore to escape the changes.


However, in a last minute reprieve, the UK Inland Revenue has joined forces with the BVCA to publish two memoranda which maintain the ten per cent capital gains tax treatment. According to the Financial Times, the proposed reforms to the tax system were erroneously added by officials at the Inland Revenue.


The BVCA and Inland Revenue's two joint Memoranda of Understanding address issues which flow out of the “employee securities” legislation in this year's Finance Act. The first deals with cases where individuals acquire interests in investee companies and the second with the income tax treatment of private equity funds and carried interest holders. The latter replaces the corresponding material in the 1987 Guidelines, which is of limited relevance following enactment of the Finance Act 2003.


Full details of the memoranda of understanding jointly published by the BVCA and Inland Revenue can be found at: