Select Committee on Treasury Written Evidence


Memorandum submitted by the London Stock Exchange

INTRODUCTION

  1.  The London Stock Exchange acknowledges the important role of private equity in the risk capital financing chain. Our concern is to ensure that companies and investors have effective choice about where and how they raise capital and where and how they invest. The tax treatment of different instruments and asset classes is key to their relative attractiveness and it is important therefore to ensure that the taxation system does not lead to unintended consequences.

Private versus public equity

  2.  Private equity currently benefits from favourable tax treatment in two key areas:

    —  interest payments on debt are tax deductible;

    —  performance fees are treated as capital gains rather than as income.

  3.  Whereas all companies gain from tax deductible interest payments, the debt capitalisation model for private equity companies provides a specific tax advantage. However, public equity companies, far from receiving a tax advantage, are uniquely burdened by the imposition of stamp duty on share ownership. As the Committee will be aware, the London Stock Exchange, along with the Association of British Insurers (ABI), City of London Corporation and Investment Management Association (IMA), recently commissioned a study into the impact of stamp duty and the benefits of its abolition from independent economic consultants Oxera. For ease of reference, a copy of the report is enclosed as an Appendix to this memorandum.

  4.  The report highlights the contrast between the treatment of private and public equity. While private equity enjoys its tax advantages, listed companies labour under a uniquely damaging tax that reduces the attractiveness of public equity as a model for economic ownership. It undermines the public good that such an ownership model offers including transparency in the conduct of business, world leading governance standards, wide accessibility to pension funds and private investors alike and the provision of financing for enterprise. Despite the world-wide boom in markets it should not be forgotten that public equity markets are also highly liquid—enabling investors readily to invest or switch to other assets when economic conditions require, thus reducing levels of systemic risk in the economy. Liquidity is especially important to individual savers and fund managers who want to "lifestyle" investments—reducing exposure to higher-risk, higher-return (equity) assets and into lower-risk, lower-return (fixed income) assets as the fund-holder nears retirement or otherwise plans to liquidate funds.

  5.  The Oxera report examines the specific impact of stamp duty on the relative attractiveness of private and public equity. While the cost of equity of UK listed companies is between 7% and 8.5% higher than it would be if stamp duty were abolished, the effect of stamp duty on the cost of equity of private equity companies is likely to be negligible. This is therefore a relevant factor in decisions between public and private equity financing for companies and public or private equity investment by investors. Furthermore, stamp duty depresses UK share prices by 7.2%, making them substantially cheaper (and more attractive to private equity investors) than their international competitors.

CONCLUSION

  6.  The playing field between private and public equity is currently unequal, distorting decision-making and creating perverse incentives for companies and investors. The removal of stamp duty on shares would help strengthen the role of public equity with all its advantages in terms of transparency, accessibility, governance and liquidity.

May 2007





 
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