Filed under: Taxation
Private equity and advisory firms have expressed their ‘disappointment’ at the latest tax bonanza announced by the new Chancellor of the Tax Reich, Herr Darling, after he announced that business taper relief on capital gains will be abolished and replaced with a flat capital gains tax rate of 18 per cent from April 2008.
It is a reduction from the previous top rate of 25 per cent but the move abolished the previous 10 per cent reduced rate for investments held more than two years.
The Chancellor’s ‘initiative’ was prompted by a surge of political testosterone on both sides of the Atlantic over the ability of private equity firm partners to have carried interest profits from their funds taxed at favourable rates of capital gains tax rather than as income, at a rate of up to 40 per cent.
Herr Darling announced to Parliament in his Pre-Budget Report: ‘I can tell ze house ze changes I propose to capital gains tax, taken togezer with ze tax loopholes zat I am closing, will ensure zat zose working in private equity pay a fairer share.’ Clicking his heels he then went on to start on non-domicile taxation, but that I shall save for another day.
Simon Walker, chief executive designate of the the British Private Equity & Venture Capital Association (the ‘British Resistance’), says: ‘The BVCA notes that the chancellor has placed emphasis on innovation, enterprise and the need to maintain the UK’s competitive position.
‘However, we are concerned that the elimination of taper relief means all capital gains, including carried interest, will now be taxed at a single rate, no matter how long they have been held.
‘This move will hit not just private equity but thousands of venture capitalists, family businesses and small and medium-sized companies. A rate of 18 per cent means capital gains tax is higher in Britain than France (16 per cent), Italy (12.5 per cent) or the US (15 per cent), let alone countries like Switzerland which have no CGT.
‘The British private equity industry – which accounts for 60 per cent of the European market – is core to maintaining London as the world’s financial capital. We regret the rise in the effective rate our investors will pay, but hope the industry will now be recognised for the contribution it makes to pension funds and the wider economy. Above all, private equity and venture capital need certainty and stability.’
Anneli Collins, head of private equity tax for KPMG in the UK, says: ‘PE bosses will indeed now pay the same tax rate as their cleaners. But entrepreneurs who have built up businesses over their lifetimes and were perhaps looking forward to selling up to fund retirement will find that unless they can do it before next April, they will pay eight per cent more tax than they were expecting to.
‘True, the changes mean a single rate will be in force, but the playing field has not been levelled at all. UK private equity will be taxed at 18 per cent, while non-UK domiciled private equity will be subject to a flat tax of £30,000 per year – and then only after seven years.’
It is obvious that there will now be a stampede of business sales before April 6th next year as business owners seek to avoid the tax, for those suffering the problems of the credit crunch this will just exacerbate the situation.
According to Grant Thornton corporate tax partner Stephen Quest, the increase in capital gains tax represents in effect an 80 per cent rise from what is currently paid. It may act as a major disincentive for private equity executives to take the risks they were currently taking, and is likely to impact negatively the industry’s recruitment and retention rates.
In a cock up of Biblical proportions Herr Darling may have given the industry the kick up the backside it needs to leave the UK. The next 12 months are already set to be extremely difficult for buy-out firms, who reported their most negative forward-looking expectations ever in a survey carried out by Grant Thornton Corporate Finance last week, with 63 per cent of private equity executives predicting a downturn in deal values.
Reassessing business models will be the order of the day for private equity firms and it is plain that the competitiveness of the UK will diminish when this comes in. I believe that Herr Chancellor just made a massive error and may go back on this tax hike.
The Chancellor obviously sat down with his, equally as dim, lieutenants and decided that rich private equity Barons were taking the proverbial out of the tax man and so came up with a half baked scheme that now encompasses people who have worked all their lives to create a business and nearly doubled their tax rate.
Gordon Brown has never been one of my favourite politicians as I believe he is a ‘Pinko Commy’ willing to suck the life out of the UK through stealth taxes. In his time in the cabinet he has made over 85 tax hikes which has equated to £2.3 Billion per week more in tax in the UK than in 1997.
This latest Brown inspired – Darling delivered cock up is by far the most badly timed, ill thought out political vomit to come out of the Tax Reich that I can remember.
Grant Thornton said ‘This is the most negative forecast we have ever seen from the private equity sector and a huge drop in confidence from just three months ago. With the capital gains tax increase announced today, it seems the light at the end of the tunnel is an oncoming train.’
In conclusion, there is one thing I would like to highlight from the above post that you really should pay attention to “…..countries like Switzerland which have no CGT.”
Will the last person to leave the City turn the lights out please and I will meet you at Geneva airport.
Filed under: Taxation
Todays Comment: Key US growth indicators are showing some clear signs of spillover from the housing recession and the related consumption growth slowdown. The ISM Manufacturing PMI fell by more than expected and the ADP private payroll release points to further moderation in employment growth in July. The recent news releases fit our scenario of a protracted US growth slowdown.
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Attack of the two ‘T’s
More than 50,000 people came forward to take advantage of the ‘offshore disclosure facility’ in the UK. They now face the problem of ensuring that they pay the right amount of tax, interest and penalty – and no more – by 26 November.
In a recent PWC survey:
89% support the concept of offering a fixed 10% penalty to people who come forward
82% believe that HMRC will gain access to most UK residents’ offshore bank accounts
82% would have liked HMRC to have publicised the ODF more widely
73% wanted HMRC to extend the 22 June 2007 deadline
The HMRC are on the war path, there can be no doubt about that. The language that is being used is more appropriate for terror activities than tax issues… “HMRC will vigorously seek out further information:… “HMRC are using an elite team of investigators”..”Hit squads will move in after amnesty”…etc
Having discussed this issue some time ago with reference to the European savings directive and its sinister transformation from a passive rule enabling tax collection to an active rule for collecting information on individuals, we still believe that there is something quite wrong with this. We understand the concept behind it, that taxation is being lost through evasion rather than avoidance and the UK government are within their rights to seek out this money. However, the strong arm tactics being employed and the abuse of EU rulings just makes it all seem a little seedy and underhanded to us.
Recently a number of banks have been accused of not protecting the privacy rights of individuals. The absurdly named ‘Information Commissioner’ Richard Thomas states that “the bosses of these companies must take the security of their customers’ and employees’ personal data more seriously”…. Unless, of course, the government want it for their own purposes.
I am in two minds about all this. On the one hand tax is a foreseeable event which means that planning for it can be done in advance. If the taxpayer does not make the effort to plan correctly for the inevitability of tax then as sure as death and errrr.. taxes… he will be found out at some stage. So we should not really have too much against this latest initiative.
The problem that I have is that the issues of privacy are being eroded everyday. With my eye been scanned at US airports, my banking information being collected by ‘hit squads’ and ‘elite teams’ it is no wonder that some feel that their very existence is being logged and tagged in some Orwellian conspiracy.
In essence, the incorporation of Article 8 of the European Convention on Human Rights into UK law under the Human Rights Act 1998 creates a general right to respect for privacy where none previously existed. Article 8 offers general protection for a person’s private and family life, home and correspondence from arbitrary interference by the State. This clearly has implications for a large number of areas ranging from surveillance to sexual identity. It is important to note that the right to respect for these aspects of privacy under Article 8 is qualified . This means that interferences by the state will be permissible, but only if they satisfy certain conditions. Any interference with the right must be:
• in accordance with the law;
• in pursuit of one of the legitimate objectives spelt out in Article 8(2) ; and
• proportionate – i.e. serve a pressing social need.
So basically if the government decide that they need any information on you, all they have to do is say that it is required for some law or another, taxation being the one we are discussing here.. so our right to privacy under the human rights charter are, pretty much, useless.
What about the Data Protection Act? Same thing, ‘If it is part of a legal process…etc.. etc’ you basically have no rights. But hold on! If you want to stop cold calls and junk mail you have the full weight of the law behind you.. as my son would say in a deeply sarcastic fashion…’Big Wow’
The information age has opened doors previously unthinkable for commerce, for social networking and for a myriad of situations which benefit our society as a whole. However, I am concerned that the two ‘T’s – Tax and Terror will be used as excuses to know everything from our finances to our inner most secrets and frailties. Imagine everything about your life was known to one person, or worse one organisation, lets call them a political party.. Could that information be abused to corral you into voting a certain way…or not voting a certain way?
Ridiculous! I hear you say. May I politely remind your about the Offshore Disclosure Facility, the EU ‘Savings’ Directive and the fact that 50,000 people in the UK just rolled over their personal financial information to the tax man, without being asked….
