It's not often that you hear reports of people complaining that they pay too little tax. However, Nick Ferguson, Chairman of the UK private equity group SVG Capital, admitted that some people involved in this type of investment pay tax at a lower rate than their office cleaners. Nick Ferguson was giving evidence to the Treasury Committee examining aspects of private equity. The Committee's much-discussed interim report which focuses on the highly-leveraged management buy in and buy out sector was published on 30 July.
With an estimated one fifth of the private sector workforce in the UK currently employed by private equity funded companies and with private equity firms generating an estimated £3.3bn in fees for supporting organisations in 2005, the report was always going to be received with interest by both trades unions and business organisations.
As an interim report, there are few firm conclusions. However, the Committee's chairman, John McFall, focused on the fact that large companies purchased through private equity were typically funded by high levels of debt. He said, "No matter how extensive the due diligence conducted, higher levels of leverage may still create additional risk, which becomes more significant the more important highly-leveraged firms become in the economy."
One of the concerns raised during the course of the Committee's investigation was the tax treatment of profits, or "carried interest", received by the private equity partners, many of whom are domiciled off shore. The report recommends that the Treasury and HMRC consider the current tax regime applicable to carried interest. As regards to the tax regime relating to debts, the CBI's chairman, Richard Lambert, said, "We would urge extreme caution in altering the rules…Changing the rules on tax deductibility of interest would be seriously damaging for all businesses, not just those owned by private equity, and jeopardise the UK's international competitiveness."
Responding to the report the TUC General Secretary, Brendon Barber, said, "Even this cautious interim report piles the pressure on private equity…It worries whether private equity makes its returns from financial engineering rather than business success…Most importantly of all it rings a very loud alarm bell about the potential instability caused by the growth of highly-leveraged buy outs…If this [report] is cautious and interim, the final report could well be a humdinger."
In spite of the rhetoric, the report actually concludes that there are both advantages and disadvantages to private equity ownership compared to being listed and that different forms of ownership may be appropriate at different times in a company's history. The Committee recognises that there continue to be areas of concern which deserve continued attention from policy-makers. Although the debate may cool off over the summer, it seems clear that round two in the private equity debate will start in the Autumn. And, of course, Shepherd and Wedderburn will be following the debate with interest.