BVCA warns of dire consequences of tax change(3)

The UK Treasury has been advised by the BVCA, in its submission for this year’s pre budget report, not to make changes to private equity taxation because any adjustment could have “dire consequences”.

UK industry body the BVCA has defended capital gains tax relief on carried interest in its submission for the UK Treasury’s 2007 pre-budget report.

The British House of Commons Treasury Select Committee is currently examining the role of private equity in the UK and it is considering whether to recommend changes to the tax treatment and legal status of buyout firms.

The BVCA’s spokesman said: “We are keen to ensure the rate of taxation remains the same to ensure that London remains competitive. The smallest change to the tax system can have unintended consequences and potentially these consequences could be dire.”

The tax relief enjoyed by private equity executives can be as little as 10 percent on carried interest is currently under review and it has been singled by figures both within and outside the industry. Its critics point to the remarks of SVG

Ferguson: pays
less tax than

Capital chairman Nick Ferguson, who suggested in an interview withb UK newspaper Financial Times that UK private equity executives paid less tax “than a cleaning lady or other low paid workers”.

The BVCA said in a statement accompanying its submission to the treasury carried interest was risk capital and should therefore be treated as a capital gain. “Carry is a long-term, illiquid investment, which requires a significant commitment of capital from executives. It is also highly risky and is far from being a one-way bet: 50 percent of funds do not pay any carried interest at all, and one quarter lose more than 25 percent of their capital.”

However, critics say the industry has done well to blur the line between carried interest earned on their investors money compared with the carry buyout executives earn on their own capital in the fund. They say the latter is clearly a capital gain and should be taxed as such, while the former is a performance fee and should therefore be taxed as income.

“Carried interest is an important part of the private equity industry and it is a capital gain. The UK makes up for 60 percent of the whole European industry and it would not be to anyone’s advantage to damage this,” the BVCA’s spokesman said.