Friday, 17 August 2007

Darling plans to tax buyout funds more

Hehe I'm not at all surprised by this one. After some pretty stooopid speculation that Alistair Darling might not touch the taxation of private equity at all, now HMT is briefing the FT that it is thinking about both raising the capital gains tax paid on "business assets" (from 10% to 20%) and increasing the qualifying period for taper relief.

This is all still under review, but you can see the thinking behind it - the industry wil be relieved that CGT didn't go up to 40%, whereas it marks a clear move away from the status quo that most people now agree is flawed. And by increasing the qualifying period for taper relief it looks like HMT is refocusing the incentive on what it was originally supposed to do - helping those making genuinely long-term investments.

Already one firm of tax advisers is saying even this approach will - you guessed it - push entrepeneurs overseas. Well, I suppose that is what they get paid to argue, though notably the BVCA hasn't made the same point this morning (probably because they realise most policy folk are a bit sceptical about it).

Sensible comment in the Lombard column:

Darling can't avoid fall-out from buy-out tax reforms
Published: August 17 2007 03:00 | Last updated: August 17 2007 03:00

Unions claim a "secret memo" between private equity firms and the Treasury enshrines beneficial tax treatment. Alistair Darling must wish it were that simple: find the memo, abolish the tax break, job done.

Instead, the new chancellor of the exchequer has a choice of unpalatable consequences of tax reform. Everyone agrees Something Must Be Done - and so it should - but altering the tax rules for all would whack entrepreneurs, venture capitalists and Aim shareholders, as well as buy-out firm partners. On the other hand, making fine distinctions based on size of fund or deal - a proposal aired by Gordon Brown's friend and confidant Sir Ronald Cohen earlier this year - would add complexity and invite serious gaming of the system. If you could halve your tax bill by legally redefining yourself as a "mid-cap" fund, what would you do?

The only no-brainer is the extension of the qualifying period for the lowest rate of tax relief from two years to five. The shorter period always looked like an incentive to short-termism and most true entrepreneurs are likely to hold their investments for far more than five years. Doubling the lowest band from 10 to 20 per cent only seems a let-off if you are a buy-out partner, relieved that carried interest on your business assets (essentially a performance fee) will not be taxed as income, at 40 per cent. For other investors it could be punitive.

Mr Darling's "no knee-jerk reaction" approach is laudable. But there will be consequences. The important thing is that as many of them as possible are intended and explained. The chancellor needs to take longer, as he has promised, to consult more widely and to prepare for some serious briefing of all those who will be affected.

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