Tax Policy Associates founder, Dan Neidle has published new analysis suggesting that carried interest should be taxed as income rather than as capital.
The current treatment, which sees private equity fund managers pay CGT at 28% on their ‘income’, dates back to an agreement between the private equity industry and the Revenue in 1987. That agreement was based on the assumption that private equity funds were not trading for tax purposes, and so carried interest was taxed as capital. As Neidle points out, the UK government had been under pressure to retain the industry within the UK, rather than see it move offshore.
Neidle takes the view that the law as it stands does not create any loophole for carried interest; many private equity funds are likely to be trading for tax purposes and so carried interest should be treated as income and taxed accordingly. The thrust of the research is that most funds involve buying a business with a view to maximising and ultimately extracting value from it, and then repeating the activity. And, of course, following Wilkinson, HMRC has very limited discretion in its application of the law.
Macfarlanes, who currently chair the British Private Equity & Venture Capital Association (BVCA) via partner Mark Baldwin, disagree, noting that ‘the position that private equity funds are investing rather than trading is well-established in the market and has been accepted by HMRC since limited partnerships were first used for private equity funds in the UK in the 1980s.’
The firm distinguishes between a short-term, speculative ‘dealing’ or ‘trading’ approach with a view to profiting from market fluctuations, and a longer-term appreciation in value where carried interest is a share of investment return rather than trading income. Although, the firm also notes that ‘trading versus investing determinations are rarely black or white and most cases are in the grey zone: a tax no-man’s land if you like.’
Macfarlanes also point out that a material increase in the taxation of carried interest would put the UK in an uncompetitive position by comparison with neighbouring jurisdictions (e.g. France and Germany) and would likely result in reduced tax revenues for the UK – a point to note for policymakers.
Neidle’s principal observation, and where there would possibly be agreement, is that the law should be clarified one way or the other, to put the tax treatment of carried interest onto a formal legal footing and beyond any doubt. Meanwhile, the Good Law Project is taking advice on whether to bring a judicial review of the current arrangement ‘to force HMRC to apply the law properly – with no special favours for the private equity industry’.
Tax Policy Associates founder, Dan Neidle has published new analysis suggesting that carried interest should be taxed as income rather than as capital.
The current treatment, which sees private equity fund managers pay CGT at 28% on their ‘income’, dates back to an agreement between the private equity industry and the Revenue in 1987. That agreement was based on the assumption that private equity funds were not trading for tax purposes, and so carried interest was taxed as capital. As Neidle points out, the UK government had been under pressure to retain the industry within the UK, rather than see it move offshore.
Neidle takes the view that the law as it stands does not create any loophole for carried interest; many private equity funds are likely to be trading for tax purposes and so carried interest should be treated as income and taxed accordingly. The thrust of the research is that most funds involve buying a business with a view to maximising and ultimately extracting value from it, and then repeating the activity. And, of course, following Wilkinson, HMRC has very limited discretion in its application of the law.
Macfarlanes, who currently chair the British Private Equity & Venture Capital Association (BVCA) via partner Mark Baldwin, disagree, noting that ‘the position that private equity funds are investing rather than trading is well-established in the market and has been accepted by HMRC since limited partnerships were first used for private equity funds in the UK in the 1980s.’
The firm distinguishes between a short-term, speculative ‘dealing’ or ‘trading’ approach with a view to profiting from market fluctuations, and a longer-term appreciation in value where carried interest is a share of investment return rather than trading income. Although, the firm also notes that ‘trading versus investing determinations are rarely black or white and most cases are in the grey zone: a tax no-man’s land if you like.’
Macfarlanes also point out that a material increase in the taxation of carried interest would put the UK in an uncompetitive position by comparison with neighbouring jurisdictions (e.g. France and Germany) and would likely result in reduced tax revenues for the UK – a point to note for policymakers.
Neidle’s principal observation, and where there would possibly be agreement, is that the law should be clarified one way or the other, to put the tax treatment of carried interest onto a formal legal footing and beyond any doubt. Meanwhile, the Good Law Project is taking advice on whether to bring a judicial review of the current arrangement ‘to force HMRC to apply the law properly – with no special favours for the private equity industry’.
