Supplementary memorandum submitted by
The BVCAthe British Private Equity and
Venture Capital Associationis 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
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
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 (http://www.hmrc.gov.uk/stats/capital_gains/menu.htm)
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." 
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.
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.
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.
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
This principle of the tax deductibility
of interest applies to all UK companies (both public and private),
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 normthat 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
The Government is looking specifically at the
extent to which interest can be deducted in the structure of a
"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."
We would make the following points on this:
We have a tax rule alreadyintroduced
in April 2005that 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 capitalthe
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
If taxes were changed to target a
few successful investors, the unintended consequence would be
to damage the enterprise culture that the UK now enjoyshitting
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.
3. THE UK'S
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.
141 Hansard, 25 June 2007, Col 106. Back
P289, Budget 2007, C.54: Back
Economic Impact of Private Equity in the UK, 2006. P6. Back
Incidentally, it is not a tax break, because where interest is
tax deductible for a borrower, it is taxed on the lender. Back
Speech by Economic Secretary to the Treasury, Ed Balls MP, at
London Business School, 8 March 2007. http://www.hm-treasury.gov.uk/newsroom_and_speeches/press/2007/press_27_07.cfm Back
LBS speech, http://www.hm-treasury.gov.uk/newsroom_and_speeches/press/2007/press_27_07.cfm Back