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Tories probe private equity gains Tories probe private equity gains
(about 3 hours later)
The Conservatives have begun an inquiry into the huge profits made by partners in private equity firms.The Conservatives have begun an inquiry into the huge profits made by partners in private equity firms.
Under rules introduced by Gordon Brown, these are treated as capital gains, not income, so are only subject to a 10% rate of tax. Under rules introduced by Gordon Brown, these are treated as capital gains, not income, so are subject to only a 10% rate of tax.
Shadow chancellor George Osborne said tax breaks could encourage entrepreneurship but "what looks like income should be taxed like income".Shadow chancellor George Osborne said tax breaks could encourage entrepreneurship but "what looks like income should be taxed like income".
Critics warn private equity firms will move abroad if asked to pay more tax.Critics warn private equity firms will move abroad if asked to pay more tax.
On Wednesday, Prime Minister Tony Blair said the rules governing private equity profits would be reviewed.On Wednesday, Prime Minister Tony Blair said the rules governing private equity profits would be reviewed.
'Genuine risk taking''Genuine risk taking'
Private equity firms buy up and attempt to turn around struggling companies but they have been accused of stripping assets and cutting jobs. Private equity firms buy up and attempt to turn around struggling companies, but they have been accused of stripping assets and cutting jobs.
Alliance Boots is currently being bought by one such firm, KKR.Alliance Boots is currently being bought by one such firm, KKR.
The tax argument centres around "carried interest" - the 20% slice of profits that buyout partners can claim once they have paid back their investors.The tax argument centres around "carried interest" - the 20% slice of profits that buyout partners can claim once they have paid back their investors.
Private equity has tuned around many companies that would otherwise have gone to the wall George OsbornePrivate equity has tuned around many companies that would otherwise have gone to the wall George Osborne
The BBC's business editor, Robert Peston, said partners would be required to pay millions more if the tax breaks were abolished. Partners would be required to pay millions of pounds more if the tax breaks were abolished.
Mr Osborne's inquiry blurs the traditional left-right political divisions, with the Tories appearing to be tougher on the super-rich than Labour, he added. Mr Osborne's inquiry appears to blur the traditional left-right political divisions, with the Tories appearing to be tougher on the super-rich than Labour.
The shadow chancellor told Radio 4's Today programme that "genuine risk taking" by private equity firms should be rewarded by the tax system.The shadow chancellor told Radio 4's Today programme that "genuine risk taking" by private equity firms should be rewarded by the tax system.
"Private equity has tuned around many companies that would otherwise have gone to the wall so we want to keep it in Britain," he said."Private equity has tuned around many companies that would otherwise have gone to the wall so we want to keep it in Britain," he said.
But he argued that the number of new start-up companies had actually fallen since Mr Brown introduced the tax breaks and a review of the system was needed. But he argued that the number of new start-up companies had actually fallen since Mr Brown introduced the tax breaks, and a review of the system was needed.
"I want the tax system to make sure that what looks like income, what walks and talks like income, is taxed like income," Mr Osborne said."I want the tax system to make sure that what looks like income, what walks and talks like income, is taxed like income," Mr Osborne said.
Tax exilesTax exiles
This week, the heads of four leading private equity firms were questioned about the tax breaks by the Commons Treasury Select Committee.This week, the heads of four leading private equity firms were questioned about the tax breaks by the Commons Treasury Select Committee.
They argued that they deserve tax breaks as a reward for risking their own money in buyouts. They argued that they deserved tax breaks as a reward for risking their own money in buyouts.
Jon Moulton, chair of private equity firm Alchemy Partners, said most of those making huge profits were not domiciled in the UK for tax purposes so would not be affected by a rise in the rate. Jon Moulton, chair of private equity advisory firm Alchemy Partners, said most of those making huge profits were not domiciled in the UK for tax purposes so would not be affected by a rise in the rate.
He also insisted that private equity firms contributed a lot to the UK economy. "I actually pay a great deal of UK tax," Mr Moulton said.
"Without it our financial services industry would be rubbish," Mr Moulton added. "I'll probably end up paying a great deal more as a result of these discussions, but my competitors largely pay little or no tax.
The whole of the rest of Britain is aware of this problem Vince CableLib Dem Treasury spokesman
"So guess what will happen to the industry if you jack the tax up. More people will move offshore and invest from other countries."
Mr Moulton said that private equity contributed a lot to the UK economy.
"Without it our financial services industry would be rubbish," he said.
The Liberal Democrats said they had been arguing for some time for the tax breaks to be scrapped.
Their Treasury spokesman, Vince Cable, said: "The whole of the rest of Britain is aware of this problem.
"The Tories are completely out of touch with the current debate on economic policy and business."
The Tories' inquiry will be carried out by analysts at the European School of Management.The Tories' inquiry will be carried out by analysts at the European School of Management.