Industry on back foot over CGT taper relief

The UK parliament’s Treasury Committee has grilled representatives of the domestic private equity industry on tax and other issues, while listening to evidence from unionists, academics and a think tank.

The first evidence session today of the UK parliament’s investigation into private equity ended in a sustained assault on the industry’s low level of personal taxation, over-shadowing a number of other contentious debates.

Sparked by private equity veteran Nick Ferguson’s comments in the media last week, the Labour chairman of the investigating Treasury Committee John McFall asked whether Ferguson “had lost his marbles” when he said it was indefensible for a buyout executive to pay a lower rate of tax than a cleaner.

The BVCA in its evidence to the committee defended private equity’s use of capital gains tax taper relief to reduce tax payments on carried interest to between five and ten percent.

Jeremy Hand, deputy chairman and managing partner of Lyceum Capital, said: “To modify the tax regime to target a few successful businesses could have unintended consequences.” It would, the BVCA said, harm the competitive environment which had helped make the UK the envy of Europe and the second largest centre of private equity in the world.

Hand said the Treasury was also benefiting from the taper relief’s intended consequence of increasing capital gains tax income from £2 billion in 1997/1998 to £3.8 billion in the most recent tax year because more entrepreneurs, including private equity executives, were staying in the country and paying the lower rate of tax instead of becoming exiles.

However, the BVCA, represented by chief executive Peter Linthwaite, Wol Kolade, BVCA chairman and partner of ISIS Private Equity, and Hand, could not say how much of that increase private equity-backed companies generated.

However, Hand said it was a complex equation of many taxes, including corporation tax from increased profits and taxes from jobs created.

Asked by McFall if the tax loophole was an exception to progressive taxation, Kolade said that it was, but argued it applied to all private companies.

Kolade had to concede private equity’s use of taper relief was not what the Chancellor had intended when he cut the period of the taper from ten years to two.

Karel Williams, professor at the Centre for Research on Socio-Cultural Change and one of three academics presenting evidence, said: “Taper relief is completely politically indefensible”.

Will Hutton, chief executive of think tank The Work Foundation, who gave evidence to the committee before the BVCA, said: “CGT taper relief was designed for entrepreneurs. I am pretty confident as a result of this inquiry taxation of carried interest will change.”

His thoughts were echoed by Angela Eagle, member of parliament for Wallasey and a Treasury committee member. She said her constituency is facing 821 job losses from Burtons, a biscuit manufacturer owned by Duke Street Capital. She told PEO outside the committee room: “Private equity is not bad in itself. But wise heads in the industry have already realised that a different tax treatment of capital gains is required and they cannot put their heads in the sand like ostriches.”

Other concerns explored by the committee included excessive leverage in deals and the level of systemic risk that entails, as well as appropriate levels of disclosure.

The BVCA highlighted the exhaustive level of detail shared with investors in funds and it acknowledged the industry’s success had brought it before a wider stakeholder group. It is looking at how best to deal with this in a working party led by Sir David Walker, who is also giving evidence to the committee early next month.

Hutton was concerned a debt bubble was creating an unsustainable boom. He said: “The system cannot hedge against itself. Following this party there will be a bust.” He was concerned money raised by private equity firms exceeded that raised by initial public offerings. He called it an emerging crisis in public markets.

Kolade in the industry’s defence said leverage loads were in most cases appropriate and only taken on after extensive diligence.

To listen to the session click here.