Potential tax U-turn worries UK PE industry

The BVCA is attempting to dissuade the UK Inland Revenue from changing its interpretation on tax deductibility provisions for private equity-backed companies.

The UK Inland Revenue is considering changing its interpretation of existing rules relating to tax deductions enjoyed by private equity portfolio companies in connection with interest payments on loan stock provided by private equity investors. 

The move, which could have serious implications for the UK private equity industry, relates to the Revenue’s interpretation of anti-avoidance provisions on tax deductibility. The provisions were introduced in Schedule 28AA of the Income and Corporation Taxes Act 1988 – the so-called “transfer pricing” regulations.

The Revenue is debating changing its position to state that the transfer-pricing regulations should be applied to private equity-backed companies in the UK, which would be a turnaround from how it originally viewed and interpreted the legislation.

The British Venture Capital Association (BVCA) is currently in talks with the Inland Revenue, arguing that the rules should not be applied to the private equity industry. According to a report from Dow Jones, the BVCA has warned the Inland Revenue that any such move could have “a significant impact on the pricing of deals in the UK and the number of deals done in the UK.”

The main impact of such a move would be that private equity portfolio companies would not be able to deduct the interest they pay on specific loan stock debt instruments from their tax bills. Previously, portfolio companies were able to claim tax deductions on interest payments on loans from private equity investors.

Estimates vary greatly as to how much such a move might end up costing the UK private equity industry, although the debate has aroused further anxiety on suggestions that any payment demands could be backdated to 1999 by the Inland Revenue.

A representative of the BVCA’s tax committee declined to comment.