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Private equity's tax breaks
By Jeff Salway
Headlines claim that private equity firms are abusing tax rules to rake in the cash. A trade union official agrees, while an executive defends the industry
The tax benefits enjoyed by private equity firms have been under scrutiny, with many claiming they create an unfair advantage. Like other business start-ups, private equity executives often pay just 10% capital gains tax on carried interest, rather than the 40% income tax that critics say they should have to pay. Paul Maloney, a GMB union national secretary with responsibility for the AA, claims this is undeserved, but Philip Shuttleworth, chairman of the British Venture Capital Association, insists it's vital.
Paul Maloney, GMB national secretary
The case of the AA illustrates how private equity is abusing tax rules. When private equity paid £1.75 billion for the AA, just £500 million of it was its own money, so the AA went into £1.25 billion debt immediately. Within a year, the owners borrowed £500 million to pay off their amount, so they then owned the AA on debt alone, all of which was written off against corporation tax. The chief executive and the AA's owners didn't invest a penny in it, used tax relief to increase profits and haven't paid any tax whatsoever. So the revenue loses out, 4000 jobs disappear and there's no investment in the company, yet the chief executive walks away with £40 million paid under the taper relief tax system.
If you set up a business and borrow £1 million to develop it - you deserve tax relief, and if you invest your own money you deserve taper relief. But if you target companies specifically to asset strip, you don't deserve any help. Private equity firms have been caught with their pants down after years of denying what they were doing, but we're not going to let up until we've got regulatory transparency and the tax is key to that.
Philip Shuttleworth, BVCA chairman
The tax break that private equity gets is just part of the picture and its importance has been inflated. The dispute surrounds what is called carried interest, which is a share of the fund's profits. Part of the carried interest is capital gains, which is taxed at the lower rate of 10% after the second year of the private equity investment, and the rest of carried interest is taxed as normal.
Yet the GMB says we should pay 40% income tax on all of the carried interest. If this happened, it would move us in the opposite direction to our European competitors, making the private equity model in the UK deeply unattractive. It's in the
interest of the industry and the economy as a whole that we are competitive.
Secondly, I strongly refute the suggestion that we don't invest our own capital. Private equity managers invest between 1% and 5% of a fund in a given deal, which is a huge proportion of their individual wealth, so they are taking a significant personal risk.
In relation to debt, new rules became effective in April this year, so many of the headlines you see regarding the tax position of private equity-backed companies are probably based on the old regime.
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