Tax rates and who pays what amount is often at the heart of UK policy debate, where the cases of private equity firms add rather volatile fuel to the fire, regardless of the fact that they all reduce their tax bill legally. Put simply, a caveat in the UK tax laws means that the interest on debts is tax deductable against profits. So GPs astutely load up a target company with just enough debt which is paid off using the profits from current investments, hence eradicating a PE company’s liability to pay tax. In terms of personal tax rates for the very wealthy GPs, carried interest (the 20% GPs make from an investment) is classed as capital gains tax and hence, given the current laws, we would expect this to incur a 28% tax. However, there are many reasons why they won’t pay this amount. One reason is that they can potentially claim a relief to cut their rate down to a figure around the 10% mark, they do this by hiring a very good lawyer to exploit the vagueness in some clauses set out by HMRC regarding who is entitled to what. Here is a brief extract from the HMRC website; ‘If you own your business, are a partner in a business, or own shares in a business, you may be entitled to tax reliefs that reduce your Capital Gains Tax bill. Capital Gains Tax is due when you sell, give away, exchange or otherwise dispose of business assets’ 5 . However, the main reason why GPs end up not paying very much tax in the UK is because they have their accounts set up offshore. As John Moulton, an influential venture capitalist, told the Treasury Select Committee in 2007; ‘we have large amounts of debt providers having their interest deducted in the UK and the people who receive that interest are being taxed somewhere else, that is a statement of fact’ . Some people would characterize this as demonstrating the fiscal failures of the UK’s relatively liberal view towards capitalism, others would say that this monetary incentive encourages the ultra-wealthy to increase their capital investments hence reducing unemployment. There are many interpretations of economic theory that would lead to different conclusions being drawn about what effect this would have on the UK economy. One line of reasoning would be that the economy could suffer (given the Chancellor doesn’t decrease public spending) as there is effectively a transfer of wealth from the taxpayer to the rich investors, where the investors lower marginal propensity to consume goods than the average man means less money would be spent and hence the level of aggregate demand in the economy decreases. On the contrary, the increased savings the investor makes may increase investment in an economy; either through the increased liquidity of banks (where the money is saved) or more directly through an increase in capital spending by the investor himself stemming from the ‘wealth effect’. There is no denying the fact that GPs have the expertise to improve the efficiency and productivity of firms, so is there a way that this can be used to perhaps enhance the image of private equity whilst providing some more tangible benefits for the British population? There are 2 types of firms in the UK that are often targeted for operating well below their productive capacity; monopolies and public organizations. For example, Thames Water has an almost complete monopoly over all water supplies to the capital and it has a well-documented history of pipe leakages and mismanagement. It has also recently been estimated that the public sector tendering inefficiencies (inefficiencies in awarding contracts to private companies) has cost the UK £22bn over the last 5 years 6 . Profit motivated management would lead to improvements in both these sectors and hence would improve the welfare of the average UK citizen. A possible problem with employing GPs/executives to guide these underperforming companies to their productive potential would be the source of their profit or income when dealing with public Prospects and Policy Recommendations
5 http://www.hmrc.gov.uk/cgt/businesses/reliefs.htm 6 http://www.publicprocurementinsider.com/2014/03/11/economy-starved-of-22bn-thanks-to-inefficiency-of-public- sector-tendering-system/
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