Tax loophole “hands £4bn in private equity”

Data was obtained that revealed private equity executives received tax breaks worth up to £4 billion as a result of the “carried-interest” rules. Labour intends to eliminate these rules if they win the general elections.

The figures show that the lenient treatment of profits of private equity executives has allowed some of Britain’s wealthiest people to lower their tax bills.

Dan Neidle is a tax expert who founded the Tax Policy Associates, a think tank.

Executives from a private equity firm invest with investors in the vehicle, and receive what is called “carry”, or “carried interests” on profits. This is taxed as capital gains at a rate of 28 percent, instead of the combined rate of income tax and national security insurance of 47 percent. This is an important part of executive compensation.

Private equity firms have warned that the change in tax treatment for carried interest may trigger a mass exodus from the UK of financial service workers, and could curb investment. Some claim that this could be just as harmful to the City as Brexit.

According to figures obtained from HM Revenues & Customs via a Freedom of Information Request, private equity executives are liable for capital gains tax of £1.4 billion on declared carried interests in the 2021-22 fiscal year. This is up from £921 millions in the previous tax year.

If carried interest were tied to income taxes and national insurance contributions then private equity executives could be liable for additional tax of £2.3 billion. Neidle estimates that the carried interest of non-domiciled executive could reach £4 billion.

Labour’s promise to bring private equity executives under the tax regime and the national insurance contribution system could generate billions of dollars for the Treasury, at a moment when public finances are already stretched.

In an interview with BBC’s The Sunday Show with Laura Kuenssberg, Rachel Reeves indicated that Labour still supported the policy, despite the intense lobbying by the industry.

On the basis of fairness, it could be argued that tightening up the carried interest regime is a tax measure that would improve efficiency. According to the FoI response, more than 80 percent of those who declared carried interest paid the highest income tax rate, 45 percent, on their regular salaries.

Neidle published a paper in March of last year in British Tax Review (an academic journal) in which he argued for a change in the tax treatment of carried interests. He stated that the “key question is how much tax would be collected from this tax break if the laws changed.” Nobody really knows. Some executives would undoubtedly leave the UK. Some non-doms might leave anyway due to the government’s changes regarding non-doms. Some people wouldn’t leave Britain.

“It is very difficult to justify giving a tax benefit that no one else receives. Coders with high salaries, doctors, lawyers and bankers pay 47 percent tax. Why should private equity differ?”

The British Private Equity and Venture Capital Association stated that it will “work to maintain international competitive arrangements which attract capital and investment professionals in the UK.” We will be looking forward to discussing with the winner of the elections how private capital can continue to partner for growth in the UK.

Labour Party declined comment.