Labour tax pledge spooks industry

Over the weekend, the UK’s Labour party released a 10-point plan to tackle tax avoidance that has in the time since raised concerns about the tax treatment of carried interest.   

Among the action items is a pledge to stop private equity managers from “get[ting] away with paying less tax than ordinary working people even when they have not been investing their own money.”

In a press release accompanying the plan, the left-leaning party said carry allows private equity managers “to pay lower rates of capital gains tax – instead of income tax – even when they are not investing much of their own money”.

Fund managers speaking to pfm about the proposal said it was unclear if Labour intended to redefine all carry as income, which would be a drastic change in rules, but a call made to the British Private Equity & Venture Capital Association (BVCA) mitigated the concern.

“The status of carry will remain as a capital gain under a Labour administration,” said BVCA director of communications Tom Allchorne.

“What they are proposing to do is conduct an urgent review of the allegation that, in some cases, individuals have been awarded large sums in carry (taxed as capital gains) despite placing a nominal or minimal amount of their own money in a fund.”

In other words, it appears Labour is targeting GP’s “skin in the game” that wasn’t sufficiently financed by their own capital, an area Treasury and HMRC have reviewed before and “is under constant examination regardless of who is in government,” said Allchorne.

Should Labour take power May 7, the BVCA “will actively engage with the relevant people to deal with their concerns on this matter,” he added.

The UK final budget, which in draft form raised similar fears about carry being reclassified as ordinary income, tackled a similar change in policy with respect to co-investments. HM Treasury will treat co-investments as capital gains so long as it’s the fund manager’s own money at stake. Unclear is if “money at stake” includes non-recourse loans made by the fund to junior principals and others who need the cash to finance their contribution.

Private equity executives have watched the UK election with cautious interest, but may take a more active role if further tax concerns arise. Earlier this month, Labour party leader Ed Miliband said he would “abolish” non-dom rules that allow private equity executives and other wealthy UK residents to limit the tax paid on earnings outside the country.

On Monday, a Guardian/ICM poll showed Conservatives leading opposition party Labour by six points, taking Prime Minister’s David Cameron’s party to 39 percent with Labour on 33 percent.