MBO tax increase under discussion

The British Venture Capital Association (BVCA) and the Inland Revenue (IR) are holding ongoing talks aimed at clarifying the capital gains tax (CGT) treatment of shares owned by MBO company executives.

The UK management buyout industry will be awaiting with interest the outcome of further talks between the BVCA and IR that could resolve considerable uncertainty surrounding the tax treatment of MBO company shares.

The rules relate to shares acquired by members of management teams involved in a buyout, which have traditionally attracted ten per cent capital gains tax. Under new proposals, managers will be seen as employees of the company rather than investors in it, and could consequently attract CGT of up to 41 per cent.

John Mackie, chief executive of the BVCA, stressed that the talks were ongoing and that no final decisions had yet been reached. “We are in continual constructive dialogue with the IR on a number of issues,” he said, when asked for comment.

Paul Megson, head of private equity tax at KPMG, said the uncertainty surrounding the issue was not helping a recovery in MBO activity. “During the summer few deals were being concluded but since September things have really picked up and a lot of people are wanting to complete by the end of the year. Therefore, the issue has now become more crucial. I’m not aware of deals falling through because of the CGT issue, but it is certainly putting pressure on people.”

Megson said he did not expect the discussions to arrive at a resolution until March or April of next year and speculated that it may involve a compromise between the existing situation and that proposed. He said that any conclusion, whether favourable or otherwise, would be welcomed as providing a ‘degree of certainty’.
Earlier in the year the IR produced a potential compromise in which under certain circumstances the higher rate of CGT would not be levied. But the nature of the exemptions is still under discussion. Megson said the IR would not wish to damage entrepreneurship but is wary of concessions that could provide a loophole for less deserving groups than private equity managers.