The UK’s opposition government has taken aim at a common private equity tax arrangement in a recently released policy document.
The document said a future Labour government would take action against the use of the Quoted Eurobond Exemption.
When a UK-based business pays interest to an overseas lender, the government usually withholds 20 percent of the payment until various administrative requirements with the UK’s tax authority are complied with, which takes time and money. However, according to existing UK tax legislation, this withholding tax doesn’t apply to any payments in relation to a quoted Eurobond. The exemption allows GPs to lend money to portfolio companies, or other intra-group entities, via an instrument listed on the Channel Islands Stock Exchange without paying the standard withholding tax on overseas payments.
Labour’s proposal specifically looks at the use of quoted Eurobonds between companies in the same group, and indicates that Labour put a stop to the exemption where bonds have been issued to connected parties. Labour also criticized the current government who, in 2012, consulted on whether to remove the Eurobond exemption but decided that it was comfortable with the status quo.
The Eurobond exemption also found the spotlight last October when a report, by Corporate Watch and UK newspaper The Independent, claimed that a number of leading UK retailers – including several private equity-backed businesses – had “cut their taxable profits” by making use of the exemption.
Industry lobby group the British Private Equity & Venture Capital Association director-general Tim Hames criticized the report as “inaccurate and misleading”. He argued that the exemption exists to encourage foreign investment and that removing the exemption would result in “less investment coming into the UK, and into social care providers where it is desperately needed”.