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Private equity firms "paying less tax than a cleaning lady or other low-paid workers": private equity tax loopholes in the spotlight

Finally it seems that action will be taken to close tax loopholes that have allowed private equity firms and their billionaire bosses to get away with paying so little tax. As the debate heats up the comments of Nick Ferguson, creator of the business that became Permira and the chairman of SVG capital, the leading subscriber to Permira’s funds, have hit a nerve: “Any common sense person would say that a highly-paid private equity executive paying less tax than a cleaning lady or other low-paid workers... can’t be right.”
Quoted in Robert Peston, “Private grief”, BBC News - Peston’s Picks, 4 June 2007.

“Tax is a highly emotive issue, especially among people who work hard for a minimum wage and pay hefty percentages of that to outgoing Chancellor Gordon Brown. They take a dim view of those with Croesus-like wealth whose adroit use of the tax regime allows them to pay a few percent on what is often massive capital gains.”
Selwyn Parker, “When private equity players are paying ‘less tax than a cleaning lady’, the question is: are we being taken to the cleaners?”, Sunday Herald, 23 June 2007.

“Gordon Brown has signalled a clampdown on the loophole.... The anomaly is due to rules that Brown himself introduced to encourage entrepreneurship. Those starting their own business or investing in start-ups would be charged capital-gains tax of just 10%, rather than 40%, when they sold their stakes on, provided they held their stakes for two years. Private-equity reward structures have exploited this ‘taper relief’. Partners typically receive a 20% share of the profit from selling firms in the portfolio after a certain threshold has been reached. This so-called “carried interest” is effectively a performance fee, but is treated as a capital gain.” "Private equity bosses pay less tax than cleaners", MoneyWeek, 8 June 2007.

“Some of the City's richest bosses could see their earnings slashed after it emerged they were paying tax at a lower rate than their office cleaners. The Treasury yesterday said it would look at closing a loophole that allows the multi-millionaire chiefs of private equity firms to pay as little as 10 per cent tax on their earnings.” "City fat cats 'paying less tax than cleaners'", Daily Mail, 5 June 2007.

“Top capitalist Nicholas Ferguson went on to condemn this tax avoidance. "Any common sense person would say that a highly paid private equity executive paying less tax than a cleaning lady…can't be right." The 'private equity' people he is talking about are the successors to the asset strippers of the Sixties. Buy a business. Sell the assets it does not need. Close its pension scheme. Get rid of the dead wood. And in two years sell it for twice what you paid. Today it is called 'private equity'; Mr Ferguson and others say it is a Good Thing and overall creates jobs. Whether it does or not the executives, who have bought the business largely with borrowed money, pocket the profit. Then comes the tax trick. These profits are classed not as income but as capital gains. Due to changes introduced to help struggling businesses in 2002, as long as they keep their shares in the business for two years the rate of CGT drops from the normal 40% to just 10%. Someone who earns a million pounds a year – an amount many of them would scoff at – saves more than £300,000 a year in tax. Kerching!” Paul Lewis, “No tax please, we're City-ish”, SAGA, 7 June 2007.

“Some (though far from all) in the industry now argue that they ought to be paying at twice the rate, or 20%. Their largesse seems calculated to deflect demands for more.” “Taxing minds”, The Economist, 21June 2007.

“The widespread dislike of private equity may be a global phenomenon, but taxing it is done one country at a time. And, unless there is a coordinated fiscal attack on private equity, firms will simply move to where the tax treatment is most favourable. Nothing is more globally mobile than capital.” "Taken to the cleaners", The Economist, 12 June 2007.

“Paul Myners, a former chairman of Marks and Spencer, on Monday joined the growing chorus of criticism of the preferential tax treatment of private equity gains.Mr Myners, Low Pay Commission chairman and author of a 2001 government report into fund management, questioned why buy-out executives could earn huge payouts but pay less than 10 per cent tax. His comments follow an outcry from trade unions at the tax breaks enjoyed by buy-out firms and come a few weeks before top private equity chiefs face an influential parliamentary committee looking into the industry.” Kate Burgess and Andrew Taylor, “Myners adds to criticism of buy-out taxes”, FT.com, 4 June 2007.