Select Committee on Treasury Written Evidence

Supplementary memorandum submitted by the BVCA

  The BVCA—the British Private Equity and Venture Capital Association—is the industry body for the UK private equity and venture capital industry. It represents virtually every UK based private equity and venture firm. The UK industry accounts for over 50% of the European private equity and venture capital market.


  Following the BVCA's oral evidence to the Committee on 12 June and in advance of the publication of the interim report, we submit here supplementary written evidence which seeks to fulfil two purposes:

    —  Address immediate questions from the Committee in the 12 June session to which BVCA was asked to respond in writing.

    —  Address wider points of note which we feel the committee needs to take into account when undertaking its inquiry.

    —  Comment on Paul Myners written submission to the Committee, 27/6/07 (Appendix 1).


2.1  Capital Gains Tax

How much of the country's CGT receipts are attributable to private equity activity?

  Firm data on this does not exist. Some indication may be drawn from HMRC tables 14.1 and 14.2 ( and we attach these. These tables show CGT receipts by year, and break down CGT receipts into categories based on the size of gains reported by individual taxpayers. We have also added to these tables a column showing tax rates.

You will be aware that the Government has made clear that information is not collected in a way which enables estimates to be made on the amount of CGT attributable to private equity.

  As the Economic Secretary to the Treasury stated in the House of Commons on 25 June 2007:

    "There are no special rules for private equity fund managers and we do not collect information on the specific tax reliefs that private equity fund managers receive. It is therefore not possible to identify the particular gains that are made on carried interest or to disaggregate the proportion of the cost of the overall relief, which is approximately £4.78 billion in 2006-07." [141]

2.2  Capital Gains Tax revenue has increased since taper relief's introduction

  HMRC's figures show that CGT collected in 1997-98 (the last year before taper was introduced) was £2 billion and in 2004-05 (latest year for which data is available) it was £3 billion. The last budget statement also stated CGT is once again up partly because of taper relief[142]. All of which confirms our view that competitive tax rates lead to increased tax collections because of increased economic and entrepreneurial activity. There is also a wealth of academic study supporting that view.

2.3  The wider tax picture

  Moreover, CGT is a small part of the picture and shouldn't be looked at in isolation. The private equity industry contributes £26 billion a year in UK taxes and the 9% growth rate means this isn't static, but is growing ahead of trend[143].

2.4  Government reviews and carried interest

  We would like here to summarise and reiterate a few of the more important tax points relating to private equity.

Government reviews

  There are two reviews under way by HMT into our industry: one is into the rules around shareholder debt (although not the tax deductibility of interest on loans in general); the other is into the tax treatment of carried interest as part of a wider review of employment-related securities.

 (a)   The tax deductibility of interest on loans:

    —This principle of the tax deductibility of interest applies to all UK companies (both public and private)[144], and the Government has stated that this is not under review:

    "There is, of course, nothing specific to private equity in the tax-deductibility of interest. Any kind of company can claim it, and most quoted companies do. It is also the international norm—that interest is in general treated as a business expense and deductible from taxable profits for companies in any form of ownership. We have no plans to review this principle[145]."


  The Government is looking specifically at the extent to which interest can be deducted in the structure of a deal.

    "The Government will review the current rules that apply to the use of shareholder debt where it replaces the equity element in highly leveraged deals in the light of market developments, to ensure that existing rules are working as intended and report back by the Pre-Budget Report. This is consistent with the Government's focus on ensuring that commercial decisions are taken on a level playing field, take a long-term view and maximise opportunities for employment and investment."[146]

  We would make the following points on this:

    —  We have a tax rule already—introduced in April 2005—that restricts the amount of interest that can be deducted. This is the so called "arms-length" test. The same rules apply for private equity as for all other companies in UK. This applies to all shareholder debt from April 2007, following a two year "grandfathering" period.

    —  Some commentators have argued that if the lender is non-UK and doesn't pay UK tax then the "zero sum game" (ie interest deduction on the borrower is offset by taxable interest income of the lender) analysis fails. That is wrong because it is a long-established feature of the tax system in the UK and all the major countries that inward investors are not taxed on the interest they earn on their investment. The UK gets substantial other benefits from such inward investment including the VAT, PAYE, etc taxes on all the entrepreneurial activity financed by the investment. The UK competes in a global economy for inward investment capital and adverse changes in this area would place the UK at a serious disadvantage.

 (c)   Tax rates for individuals on carry

    —  Executives pay standard income tax and NI on their income and standard capital gains tax on their investments, at the same rates and in the same manner as all other UK taxpayers. There are no special tax breaks for private equity.

    —  Carried interest is genuine capital investment: very long term (typically five to 10 years); highly illiquid; and because of steep performance targets, "carried interest" investments are also high risk. In 2005, the BVCA performance measurement survey indicated that over half the 300 funds recorded would not generate any carry at all. Private equity executives are entrepreneurs and investors as well as employees. Their investors only support them if they invest significant sums of their own money alongside the funds which they manage.

    —  Some commentators have observed that carried interest can amount to 20% of a fund's profits while the carried interest holders invest typically 1.5%-5% of a fund's capital. However, carried interest is the riskiest capital—the first to be lost if the fund does not perform well. It is also the last to be paid out: all fund capital and management fees, as well as the hurdle rate of return (typically 8-10% pa) must be repaid to the investors before any carried interest is paid. There is zero carry unless the hurdle rate is reached (which is only the case in about 50% of cases, across the industry.

    —  It is illogical therefore to compare the 20% with the 1.5%-5% because they are different things.

 (d)   Implications of changing the taper relief rate:

Unintended consequences

    —  If taxes were changed to target a few successful investors, the unintended consequence would be to damage the enterprise culture that the UK now enjoys—hitting the owners of the three million or so private enterprises that are reliant on private risk capital.

    —  We would urge that any changes to the current system should only be considered after a full analysis of the impact of such a change.


    —  Whilst currently the centre of the European market in terms of investment, the UK slipped last year from 1st to 3rd in the EVCA rankings. Of the regulatory and tax regimes/infrastructures in European countries, Ireland and Luxemburg now rank higher.

    —  Other European Countries are watching this debate with interest. The UK private equity industry is the envy of Europe.

    —  Many European countries have recently enacted legislation to encourage private equity, including France and Germany, and many countries are actively competing to attract private equity talent, partly through competitive rates, including Spain, Ireland, Luxembourg and Switzerland.

    —  Any recommendations on changing the tax current position should keep the above firmly in mind.

July 2007

141   Hansard, 25 June 2007, Col 106. Back

142   P289, Budget 2007, C.54: Back

143   Economic Impact of Private Equity in the UK, 2006. P6. Back

144   Incidentally, it is not a tax break, because where interest is tax deductible for a borrower, it is taxed on the lender. Back

145   Speech by Economic Secretary to the Treasury, Ed Balls MP, at London Business School, 8 March 2007. Back

146   LBS speech, Back

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