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Taxation: Private Equity Firms

Volume 693: debated on Tuesday 10 July 2007

asked Her Majesty’s Government:

Whether they have any proposals regarding the taxation of private equity firms.

My Lords, there is no specific tax treatment for private equity firms. All taxes are kept under review as part of the Budget process. Two reviews are under way in this area. The first is a review of shareholder debt, announced on 8 March 2007. Another review is looking at the tax treatment of employment-related securities, including carried interest. An update on both reviews will be provided at the Pre-Budget Report 2007.

My Lords, I thank my noble friend. I am sure that he recognises how important it is to be careful here, as this could affect lots of other companies than just private equity firms. There must be hundreds if not thousands of companies borrowing to invest in a way that will help them and the country at large. I declare a small interest in a small company, not a private equity firm. As I am sure he will recognise, it is crucial that we do nothing to endanger that investment—for which a lot of money is borrowed and interest charged—continuing as a tax deduction, otherwise that investment could be jeopardised. Can he assure us that nothing in these reviews will include anything to disallow interest as a tax charge for companies investing for the benefit of themselves and the country at large?

My Lords, I am grateful to my noble friend for introducing a note of balance in what have been some fairly tempestuous times regarding these issues. He is absolutely right that there is no specific tax treatment for private equity firms and that we must be concerned about the taxation of interest, which is accounted as a business cost, in circumstances where all major countries adopt exactly this strategy. It would be very ill advised for this country to adopt a different position.

My Lords, given the importance of the international competitiveness of tax rates on business, will the Minister ensure that the reviews that he mentioned take account of the comparative rates of taxation on private equity investment in other countries? Also, what loss of revenue to the Government might ensue if capital moved overseas as a result of a change in tax rates?

My Lords, I assure the noble Lord that the Treasury review will be comprehensive, covering all aspects. From my answer a moment ago, he will recognise that we are all too well aware of the significance of our taxation regime in terms of international comparators.

My Lords, notwithstanding what the noble Lord, Lord Barnett, said a few minutes ago, is the Minister aware of the statement made over the weekend by Jon Moulton of Alchemy Partners, who knows a thing or two about private equity? He said that every time there was a leveraged buy-out,

“in this country, the exchequer loses out. The chancellor should be thinking again about the tax revenue he loses”,

on interest payments. Would the Minister draw that statement to the attention of his colleagues in the Treasury?

My Lords, it is not necessary to draw the attention of the Chancellor and the Treasury to that statement, because it was included in my notes in preparation for today’s response. We need to have a fully rounded picture of the situation, in circumstances where we recognise public anxiety. The House will appreciate that the private equity industry has a case to answer, which it has not always done advantageously in the recent past. A fully rounded picture will be sought by the Treasury before any decisions are taken.

My Lords, does my noble friend agree that there is something wrong when someone admits that his cleaner pays more tax than he does himself? Surely that needs to be looked at.

My Lords, one of the significant figures in private equity drew attention to that, and it certainly needs to be looked at. As I indicated, we need to look at the question of business taxation in the round. However, my noble friend is absolutely right—there is public anxiety about the present position, which is why the issue is subject to review.

My Lords, does the Minister agree that some of the tax incentives utilised by private equity were designed to support and encourage real venture capital? If he agrees, can he explain why investment in early-stage companies has declined from 10 per cent in 1998 to 2 per cent in 2005?

My Lords, our taxation system is meant to encourage such venture capital and, as the noble Baroness will recognise, aspects of private equity development reflect that. The overall position, which she will be all too well aware of, is that over the last decade investment in business in this country—a reflection of low interest rates and of the strength of the British economy—has led us to produce an economy that is the envy of much of the world.

My Lords, is Jon Moulton right when he says that he is paying less tax than his cleaning lady, or does he mean that he is paying a lower rate of tax? If he is paying at 10 per cent when she is paying at a much higher rate, I suspect that the 10 per cent on which he is paying tax comes to a lot more than his cleaning lady’s tax.

My Lords, we all assume that we are talking about rates of taxation and that the basic returns that Jon Moulton was referring to were somewhat greater than the earning capacity of one of his cleaners.

My Lords, is my noble friend aware that the new Chancellor rightly said recently that there should not be a knee-jerk reaction to some of the rather oversimplified criticism that we have read about? Will the Minister assure us that the reviews will contain no plans that have the unintended consequences referred to by the Chancellor?

My Lords, that is the case. Before the recent furore, the former Economic Secretary, Ed Balls, referred to the need for a balanced position. The private equity industry feels that it has had a bad press in recent weeks, for reasons that we can recognise. It has undertaken to set up an independent working party under Sir David Walker to develop a voluntary comply-or-explain code so that its case can be better presented to the public. At present, only the adverse position has been identified and, as my noble friend indicated, that ought not to lead to immediate reaction from the Government, nor will it.