Comments on: Tax “breaks” and venture capital

By: ShaneMcC

ShaneMcC — Thu, 21 Jun 2007 08:44:10 +0000

John,

You are misreading my comment.

1. The contentious tax issue is NOT about money invested by PE companies. It is about how their 20% slice of profits is taxed. Is it taxed like an investment or as income. Currently it is taxed as though they have made the investment themselves rather than as a charge made by the company. You are being disingenuous suggesting otherwise. I agree that to change the tax regime to avoid this would be difficult and possibly unfair.

2. I have not suggested closing any “loophole” or treating PE differently. I am saying that the taper relief kicking in at 2 years is too short because it rewards short term money-making as opposed to long term investment that builds businesses. It incentivises people, like venture capitalists, to sell companies too quickly. It is my understanding that taper relief on Capital Gains Tax was introduced to incentivise investment in building businesses.

3. Please don’t be so patronising as to suggest I am motivated by jealousy.

4. I don’t propose a special footballers tax, but I would rather that they did pay tax on their earnings in this country. Do you prefer them to be paid abroad so they avoid tax in the UK simply because they can afford the best accountants?

Finally, thank you for replying to my comment and also on a different note, thank you for speaking out so strongly on the Freedom of Information (amendment) Bill debacle.

Reply: Yes you could lengthen the period for taper relief, but I would

By: Steven_L

Steven_L — Wed, 20 Jun 2007 22:07:13 +0000

Personally I blame Richard Gere’s portrayal of the PE boss in ‘Pretty Woman’.

By: ShaneMcC

ShaneMcC — Wed, 20 Jun 2007 12:05:23 +0000

I think the main issue, as I understand it, is that Private Equity companies have been putting income aside for two years as “carried interest” and then claiming it as a capital gain as their fund grows. That income comes from a 2% (or so) charge on assets invested by their clients and 20% (or so) of the profits they make for their clients. They are not investing their own money and taking risks with it.

I fully agree that you can’t change the rules for private equity alone because they are rich but you can look at whether the rules are doing what they were supposed to do. Taper relief was provided so that people investing in a business would be incentivised to do so. Originally it was ten years and now it is two years before the relief was available.

Two years is too short.

It allows private equity to use the taper relief for their short-term investments that make money instead of for the long term investments that really do build businesses. Raise the taper to relief threshold to five years and we’ll see it being used for the purposes it was created.

By: Geoff Homer

Geoff Homer — Wed, 20 Jun 2007 10:15:10 +0000

Agree 100% with your comments. Part of the problem is the myths surrounding even the words “private equity”. Ask the average person what is a PE business and you will get many varied and incorrect answers. The recent publicity on the risks to both jobs and pensions from PE deals is in grave danger of turning people against such business’s for totally the wrong reasons. If PE is in some way prevented from access to major business purchases or has its real cost of capital increased by tax changes then as you say the free market will simply see predators from such friendly places as Russia, China, the Middle East step in and then the UK’s free market will require new legislation to prevent them doing whatever it is we then decide we dont like!! Free markets are meant to be that and PE should be left to get on with it without further government involvment in new tax laws etc.