KEY POINTS:
The Treasury select committee conducting an inquiry into the private equity industry in the UK will ask HM Revenue and Customs to give oral evidence explaining why buyout barons enjoy favourable tax treatment, and whether it should do more to police the industry.
That is one of the results of a largely toothless 57-page report by the committee, led by Labour MP John McFall. The interim report comes after contentious public hearings and a fierce campaign waged by unions and some politicians, calling for a regulatory and tax clampdown on the private equity industry.
It has grown from relative anonymity to become a major force in the corporate landscape and controls well-known brands like Alliance Boots.
The committee said, however, that it would not make final recommendations until it collected more evidence at hearings in October.
One of the most controversial aspects of the industry - tax - will again be a primary focus. Private equity professionals, who raise large pools of money to buy, restructure and then sell companies, make most of their money through "carry", or the share of the profits generated when portfolio companies are sold.
Carry is treated as capital gain and is taxed at 10 per cent, rather than the typical 40 per cent income tax rate. This is due to regulations first passed in 1987 to encourage entrepreneurs by rewarding individuals who risk capital to start a new business.
The report stated: "There is a case to answer as to whether carried interest is genuinely a capital gain ... Such relief was originally intended to support business start-ups and venture capital which were seen as high-risk ventures, whereas it is difficult to argue that the takeover of a large, established company poses an equivalent risk to the new owners."
The committee also said it would return to tax relief on debt, on which private equity firms depend heavily to finance takeovers.
The body of the report, however, was mainly a summary of the evidence gathered at the hearings and stopped short of suggesting any significant changes. The buyout industry had feared the committee would recommend an overhaul of the tax and regulatory regime, and will be relieved that it has given a temporary reprieve.
- INDEPENDENT
