Private equity argues case for consistent tax treatment,
as Government warns of changes in upcoming PBR
Saturday 6 October 2007
As the Government indicates its intention to close
private equity tax 'loopholes' in the upcoming Pre-Budget Report,
UK private equity houses have forcefully argued the case for
retaining the current tax system in a new survey released today by
Grant Thornton Corporate Finance.
According to the Grant Thornton Private Equity Barometer*, a
quarterly survey of senior private equity executives, changes to
the tax system could damage the level of investment raised by
private equity, and have negative implications on the recruitment
and retention of talent in the industry.
In terms of taper relief, the 10% tax rate on carried interest
recently in the media spotlight, 65% of executives interviewed
argued the tax status should be retained, with another 22% saying
the system should be altered, but only for the largest deals. When
assessing the tax deductibility of interest on shareholder debt,
80% argued for the status quo, with only 8% arguing that the
largest deals should be effected.
Taper relief was identified as a key talent magnet for private
equity, with 50% of executives surveyed claiming recruitment would
be more difficult, and 49% saying the retention would be more of a
challenge if taper relief was reduced. Meanwhile 61% of executives
predicted that restricting the tax deductibility of interest on
shareholder debt would lead to some downturn in investment, with a
further 18% predicting a major downturn in investment should
Chancellor Alistair Darling reduce tax deductibility on
interest.
In verbatim responses, executives labelled the singling out of
private equity as "ridiculous". However, despite the
industry's opposition to change, the survey found only 16% of
private equity executives believed there would be none. More than
half (57%) predicted "tweaks" and 15% expected major changes.
Grant Thornton Corporate Tax Partner, Stephen Quest, said private
equity currently balanced the favourable tax system with the risks
inherent in most deals, often taken on personally by executives
themselves, and therefore a major change could create a far more
risk adverse private equity industry, in which certain UK
businesses that may in the past have been turned around by private
equity investment could no longer secure backing.
"And when you compare tax rates for private equity in the UK with
those in Europe and the US, there is also the danger of very
quickly becoming uncompetitive should the tax environment become
more hostile," Quest continued.
A less publicised aspect of the private equity tax debate was the
raft of unfavourable tax implications for SMEs owned by private
equity. Under current European legislation, small companies do not
qualify for a raft of tax benefits if they are more than 50 percent
owned by private equity houses, which survey respondents believed
was effecting their ability to recruit quality management, foster
research and development, and attract investment in these smaller
companies.
One example is the Enterprise Management Incentive (EMI), which
offers small businesses tax benefits for senior management, so that
the UK management talent pool is not so concentrated in larger
firms, but does not apply to private equity owned businesses.
Another is R&D tax credits, which are very generous for smaller
companies, while PE owned companies only qualify for the lesser tax
benefits offered to large companies.
More than half (52%) of the PE executives surveyed said the lack of
access to the EMI affected their ability to recruit quality
management for smaller companies, while 70% said the lack of tax
credits had a detrimental effect on R&D.
Quest said it was these smaller private equity owned businesses
that would feel a tightening of the general tax environment the
hardest, creating a disincentive to invest in growth businesses,
and possibly creating a more short term view of investing within
the private equity community as long term benefits, including taper
relief, were reduced.
"Darling has indicated he does not want to throw the baby out with
the bathwater, something we feel is worth reminding him of in the
run up to this year's Pre-Budget Report, as a great number of
private equity deals are still happening in the mid-market, and for
these companies in particular it would be a double blow to change
the present tax structure."
Quest said above all, the firm's private equity clients sought
finalisation on the issue, as the climate of uncertainty was
already impacting long term decision making, and there was growing
frustration with the shifting goal posts.
"In many respects, private equity has become a victim of its own
success, but the present tax conditions were put in place initially
to increase entrepreneurial investment, something that is still
being achieved. Therefore the Government must think extremely hard
before jeopardising the entrepreneurial environment it has worked
so hard to create."
Notes to editors:
*Grant Thornton Corporate Finance's Private Equity Barometer
surveyed 79 leading private equity fund directors and managers. In
this particular survey 11% were involved in deals under £5million,
54% were involved in deals £5 - £49, million, 23% in deals of £50 -
£99 million, 5% in deals of £100 - £20 million, and 8% making deals
worth more than £200 million.
Grant Thornton Corporate Finance is a leading provider of
lead advisory, transaction services, capital markets and operations
and post-deal services. During 2006 it advised on 166 deals with a
value in excess of £3.4bn.