UK: Labour to crack down on private equity managers

A crackdown on alleged tax abuses by private equity managers has been drawn up by Labour as part of a £7.5bn plan to “come down hard on tax avoidance and evasion”, reports the Financial Times.

The party said it would “re-write the rules that allow private equity managers to get away with paying less tax than ordinary working people even when they have not been investing their own money”.

The move was the only previously unannounced aspect of what Labour described as a 10-point plan to deal with tax avoidance and evasion.

It said it would not attack the core principle that private equity profits — known as carried interest — are treated as capital gains, rather than income. But it planned to tighten the carried interest rules so that private equity managers would not pay lower rates of capital gains tax – instead of income tax – in cases where they had little of their own money at stake.

Tim Hames, director general of the BVCA, representing the private equity industry, said it would work with a Labour government to deal with tax avoidance. He said Ed Balls, shadow chancellor, had “made it clear that what is proposed is not a redesignation of the tax status of carried interest from capital gains to income.”

He said the alleged abuse concerned the ability of individuals to secure large sums “despite putting nominal or minimal sums of their own money into a private equity fund and hence not have real “skin in the game” but mere “DNA in the game”.

Labour said it would require the Treasury to draw up a draft finance bill on its first day in government and a report from HMRC on how it tackles tax avoidance and evasion, ahead of a review of its culture and practices.

Mr Balls said he would also ask the Bank of England to focus on risks from the informal economy, including avoidance, evasion and the tax gap, in delivering its objective of financial stability.

The party said the anti-avoidance measures, abolishing the “non-dom” rules that offer a special tax status for people whose permanent home is outside Britain and restricting pension tax relief for the very highest earners would provide extra funds for the health service, abolish the “bedroom tax”, cut tuition fees to £6,000 and reduce the deficit.

The other avoidance measures, which had been previously announced, target hedge funds, offshore finance centres, penalties for avoidance, an exemption for quoted eurobonds, the “shares for rights” scheme, disguised self-employment and the use of dormant companies, as well as include plans to make companies publicly report where they pay tax.

Labour said that under the Conservatives, the tax gap — the difference between the tax actually collected and the tax that could be collected — had been increasing by an average of £1bn a year.

But its figures were criticised as misleading. Jolyon Maugham, a barrister who supports Labour and backed its non-dom proposals last week, said: “It is neither fair – nor accurate – to describe the Tories as having presided over an increase in the tax gap.”

David Gauke, financial secretary to the Treasury, hit back at Labour’s announcement. He said: “Ed Miliband and Ed Balls turned a blind eye to aggressive tax avoiding and evading for 13 years when they were in charge — they were the tax avoiders’ friends.”