Osborne urged to close tax loophole

Campaigners have called on Chancellor George Osborne to use his final Budget of this Parliament to close a tax loophole for private equity firms which they estimate is costing the taxpayer up to £700 million a year.

The arrangement - dubbed the "Mayfair tax loophole" by campaign group 38 Degrees - allows millionaire fund managers to pay tax on much of their income at 28%, and sometimes even 10%, rather than the 45% top rate of income tax.

This gives them a lower tax rate than many middle-income earners, including some teachers or nurses, said the group.

But industry body the British Private Equity & Venture Capital Association (BVCA) dismissed the analysis as "mistaken in almost every dimension", rejecting the £700 million estimate as "ludicrous" and insisting that similar arrangements were "the norm" in most major economies and reflected the personal risk taken on by private equity partners.

A report by 38 Degrees said that the loophole was in operation at a time when private equity bosses have donated a total of more than £7 million to political parties - mainly the Conservatives - while the BVCA was providing thousands of pounds of funding to Labour group Progress.

More than one in six of the Conservative donors to have attended David Cameron's "donor dinners" in 2014 were private equity bosses, said the report

On top of their basic salaries, private equity executives typically also receive a slice of the profits from funds they manage in what is known as "carried interest" or "the carry". This share is subject to capital gains tax at 28%, rather than income tax. In some cases, executives are able to claim an "entrepreneur's relief" tax break bringing the amount payable down to 10%.

Using figures from fund managers' income surveys, 38 Degrees estimated the total amount of tax lost to the Exchequer each year as a result of the loopholes at £700 million.

David Babbs, executive director of 38 Degrees, said: "This Mayfair tax loophole is Government-sponsored tax avoidance on a breathtaking scale.

"Money which should be funding the NHS is going to millionaire fund managers instead. The rest of us pay in our fair share to keep the country going: why should millionaire financiers be treated differently?

"In his last Budget before the election, George Osborne wants to convince the country that he's on the side of hard-working families on average incomes. If he wants us to take him seriously, he's got to close the Mayfair tax loophole."

But BVCA director general Tim Hames said: "The argument made by 38 Degrees is mistaken in almost every dimension.

"This so-called `loophole' is actually entirely standard Capital Gains Tax material. Private equity partners put their own money at risk along with external investors.

"All of them could lose everything and all of them are subject to CGT if there is a return. Furthermore, this is not a curiously British state of affairs but the norm in the OECD, bar Japan.

"Added to which, the UK's CGT rate of 28%, far from being some kind of sweetheart deal, is among the highest such levels in the world.

"The claim of a revenue loss of 'up to' £700 million - on closer inspection the estimate is in the strikingly wide range of £280 million to £700 million - has no serious substance behind it and, crucially, assumes that if CGT were raised to the same rate as the highest rate of income tax ... then it would have no impact on the amount of CGT-related activity.

"This is manifestly ludicrous. Who would make this sort of investment if the worst-case scenario was that you lost all of your money and the best-case outcome was that you were taxed at exactly the same rate as you would have been if you had chosen the far less risky option of salaried employment instead?

"It is precisely for this reason that both Conservative-led and Labour-led governments in the UK have decided that the status quo is the revenue-maximising position."

A Treasury source said: "The treatment of 'carry' was agreed by the previous Labour government but we raised the rate of Capital Gains Tax from 18% to 28%, so this Government has actually increased tax on private equity."

A Tory spokesman said: "All donations to the Conservative Party are properly and transparently declared to the Electoral Commission, published by them, and comply fully with Electoral Commission rules.

"Unlike the Labour Party, donors do not choose our policies, our candidates or our leader."

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