UK government defends 18% CGT reforms

The UK government has signalled it will not change plans to introduce a flat rate of capital gains tax despite widespread criticism of the reforms. Tomorrow, the Treasury Select Committee re-opens its investigation of private equity.

The UK government has defended its planned capital gains tax change to a flat rate of 18 percent in its response to the Treasury Select Committee’s report on private equity, published in July.

The government said it believed the changes to the capital gains tax regime announced in the Pre-Budget Report would create a more sustainable tax system that is “straightforward for all taxpayers and which remains internationally competitive.”

The move will scrap the 10 percent “taper relief” buyout executives enjoy on capital gains on business assets in favour of a flat rate of 18 percent on all capital gains.

Alistair Darling

The change has received widespread criticism from trade bodies such as the Confederation of British Industry and the British Private Equity and Venture Capital Association. The reforms have also attracted criticism from business luminaries such as Apax Partners co-founder Sir Ronald Cohen and Virgin Group owner Sir Richard Branson.

UK Chancellor of the Exchequer Alistair Darling said last month he expected to publish final proposals on the CGT change this month. He said he was “listening” to critics. This had led to speculation the government would reconsider its CGT reforms.

A Treasury spokesman said: “[There is] merit in a simpler tax regime and it’s the right thing to do.” He said the final announcement on tax reforms would come by Tuesday next week at the latest.

“I don’t think the changes will be a million miles away from where we are now but there will be room for reform around the edges,” he said. This has been widely trailed as tax relief for business owners on retirement.

The statement to the Treasury Select Committee said the CGT change, along with its decision to alter residence and domicile rules, including a £30,000 levy on non-domiciled residents who have been in the UK for more than seven years, would increase the fairness of the tax system, as well as for individuals in private equity.

The government said changes to transfer pricing rules introduced in 2005 had brought private equity within the scope of the rules on shareholder debt. But the government said these rules may be less effective at regulating highly leveraged transactions and it would continue to monitor such deals.

The regulator Financial Services Authority said in response to the committee’s report it would continue to check that banks have in place and operate effective controls and risk management practices in relation to private equity in areas including loan origination, risk transfer and ongoing risk management of exposures. It also said it would continue to monitor private equity firms’ due diligence as well as their risk management systems and controls.

Tomorrow Sir David Walker will present his findings from his review of transparency and disclosure in private equity to the committee.

The committee will also explore financial stability and transparency during its session on private equity with a panel of Sir Callum McCarthy, chairman of the Financial Services Authority and its chief executive Hector Sants as well as Loretta Minghella from the Financial Services Compensation Scheme.

Last week, the US Senate passed a bill to temporarily fix an outdated tax act that, unlike a similar bill passed by the House of Representatives, did not call for resulting lost revenue to be counterbalanced by increasing tax on carry for fund managers. In order to generate a bill that both the Senate and House will approve, the House Ways and Means Committee chairman, Charles Rangel, has said it will draft new legislation without the controversial carry provision.