John Redwood

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Times Private Equity

As soon as something is successful in the UK people pop up to condemn it and demand that it be taxed more. My experience of private equity tells me that there are many good examples where the new owners have backed a business, expanded it, created more jobs and put in new investment. Sometimes they save businesses that otherwise would decline or fall.
Most countries would  be delighted to have the concentration of talent and business skill that the UK has assembled in the private equity area. If we do tax it too much then the industry will move somewhere else more welcoming, but will still be able to bid for UK companies from an overseas base.
 The  enemies of private equity have highlighted two "tax breaks" which they think are "unfair". The first is taper relief on capital gains tax on investments in companies held for a sufficiently long time. The second is the deduction of interest from profits before charging corporation tax.
 The first thing to understand is that there are no special tax deals or arrangements for private equity. Private equity investors and managers have to pay tax in exactly the same way as everyone else. If you  increase taxes on them you increase them on everyone else.
The second thing to understand is that private equity has not found a way to pay 10%  tax instead of 41% Income tax and National Insurance on higher earnings. Their  salaries attract full  income  tax.
If they issue free shares to managers and staff, the people concerned have to pay income tax on the value of the shares granted to them.
The Trade Unions seem to be most concerned about cases where venture capitalists only pay 10% capital gains when their investments are successful. This case arises where  they have put up money to buy the shares in the first place out of taxed income,  where they have held the investment for a long time and where it is profitable. Like everyone else they can use taper relief to pay 10% instead of the 40% standard rate of CGT.
This idea of taper relief was introduced to encourage people to put up money to create new or better businesses. Why stop it when it is working? It would mean ending it for everyone , including individuals and families who work hard over the years to build up a family business. The government does not pay the losses if the investments go wrong.
 The industry does borrow to enable it to invest in substantial companies. Every business is allowed to deduct the interest it pays on its borrowings before paying tax on profits. That is the only way to do it, as interest is a cost of doing business just like paying the wages or the suppliers. If you decided to make venture capitalists pay corporation tax on the interest they pay the banks you would kill private equity in the UK, and would badly damage many  other companies that borrow money to do business and would not have spare cash to pay tax on their interest payments.
The other thing the critics forget is that many people are beneficiaries of private equity success in improving the performance of companies. Anyone who is part of a pension scheme may find their pension plan is invested in private equity funds as well as directly in company shares.
The media concentrate on telling us the industry has been no good at putting its case. That's because they are getting on with investing and growing UK businesses. If the government buys the idea that business has to pay more tax in the UK they simply have lost the plot. We should not be discussing removing some tax "breaks" that allow people to be enterprising here, but discussing how we can lower tax rates on enterprise and saving in additional ways, so we can grow the economy more quickly, creating more jobs and higher incomes. We should be trying to learn what private equity has got right, not queuing up to condemn it for daring to do well.