When the future deputy prime minister Angela Rayner walked the floor of a bespoke kitchen outfitter’s warehouse in October 2022, she was doing more than gladhanding local workers in her Greater Manchester constituency.
The real reason Rayner had been invited to tour Goyt Kitchen Fabrications in Ashton-under-Lyne was not to see how the firm had fared through the Covid pandemic, but to be sold the benefits of private equity. Goyt’s bosses had taken a £200,000 investment from Welsh-government-backed FW Capital.
It was part of a fresh charm offensive by the British Private Equity and Venture Capital Association (BVCA), which was parading local success stories past politicians, including those who might be in a pole position to temper Labour’s plans to raise taxes on the industry’s lucrative payouts.
A year earlier, at the Labour party’s annual conference, shadow chancellor Rachel Reeves had dropped a bombshell on this small but influential corner of the City when she pledged to raise about £500m a year by closing a tax “loophole” in the private equity industry. “Private equity bosses who strip the assets of British businesses pay a lower rate of tax on their bonuses than workers do on their wages,” she said. “That is indefensible so we will abolish it.”
Reeves was referring to the discounted tax rate applied to the share of profits that senior fund managers make on successful deals, which typically involve buying up, turning around and eventually selling on a business.
Delighted we could help organise this visit for the Deputy Leader of the Labour Party, showcasing the power of #privatecapital investment across the UK.
Goyt Kitchen Fabrications is backed by BVCA member @FWCapital who have supported the business to innovate and grow since 2018 https://t.co/28dlQLWUR9
— BVCA (@BVCA) October 11, 2022
Those deal-based profits, known as “carried interest”, make up the bulk of the sector’s payouts, but are currently taxed as a capital gain – in effect a return on an investment – rather than income. That means they are typically taxed at a rate of 28%, rather than the 45% income tax applied to higher earners in the UK.
It seemed an easy target, given the tax rate only benefits a few thousand City executives each year – the latest figures from HMRC show 3,000 private equity executives received a total of £5bn of carried interest in the 2022 financial year. Now in power, Labour is more keen than ever to raise cash to plug what it says is a £22bn black hole in the public finances.
However, the BVCA has been “laser focused” on the carried interest issue, its chief executive, the former Lib Dem MP Michael Moore, told the Observer. That has meant highlighting private equity’s role in the UK economy, including the fact that businesses they back account for 6% of UK GDP and 2.2m jobs. Those include companies in sectors such as biotech and clean energy, which are key to the government’s growth agenda, and will be vying for a portion of the £178bn of so-called “dry powder” capital that the BVCA says firms are poised to invest over the next three to five years. Historically, half of the sector’s investment is directed to the UK.
Those arguments will be all the louder as senior private equity figures from across the world converge on London on Monday for the government’s first international investment summit, with less than three weeks until Reeves’s maiden budget on 30 October.
Moore has also tried to counter what he says is the sector’s “out of date” reputation for asset-stripping, where private equity firms heap companies with debt, sell off their assets, and flip them on for a profit. Moore says this kind of “financial engineering” can only get fund managers so far, and insists most are encouraging real growth that can boost a business’s value by the time it is sold on or listed.
The BVCA’s lobbying efforts have involved numerous media rounds, a litany of roundtable meetings with ministers, and orchestrating more than 50 MP visits to private equity-backed businesses over the past 12 months alone. Moore told the Observer it had all been part of “very grown up and mature engagement” with policymakers.
In March, a leading London private equity lawyer, Neel Sachdev, made headlines by warning that a tax increase on carried interest could do more harm to London’s status as a dealmaking centre than Brexit, and that an exodus of wealthy executives could have a damaging ripple effect across the City, with consultants, law firms, and banks all losing out on valuable fees. About 140,000 people work in the “private capital ecosystem” in the UK, according to the BVCA.
The previous government ordered the Treasury to model the potential impact of raising tax on carried interest to 45%. Moore, instead, stressed that Labour would have to consider whether a 45% rate would keep London competitive. “Nowhere else taxes at that rate,” he said. France, Italy and Germany tax carried interest at anywhere between 26% and 34%.
There are signs that Labour is wavering amid the lobbying onslaught. Its plan was to raise £565m a year by increasing carried-interest tax. But Treasury analysis reported by the Times last week suggested a tax increase that caused wealthy private equity bosses to flee would come at a “net cost to the exchequer” worth up to £350m a year.
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The lawyer Jonathan Blake, who is known as the “father of private equity funds” and helped create the current tax treatment of carried interest in 1987, said his clients were concerned.
The decision to tax carried interest as a capital gain 40 years ago, which followed discussions between Blake and future chancellor Norman Lamont, was meant to ensure that the burgeoning private equity industry would set up in the UK, rather than in low-tax structures offshore.
“As is quite common with incoming governments, they start off thinking that the whole industry are parasites on society or whatever, and asset strippers … and they come to realise that actually they’re fulfilling an extremely valuable function,” Blake, who now works for Herbert Smith Freehills, said.
His message to Reeves? “Although here we’re talking about some tax that is less than one might want it to be in different circumstances, it is contributing a huge amount to the economy: both in taxation and in value creation. And, you know, be cautious of playing with fire here.”
The Treasury said: “The budget will deliver on commitments set out in the manifesto. That includes reforming the tax treatment of carried interest to deliver fairness in this area while recognising the vital role that our world-leading asset management industry plays in channelling investment across the UK.”
Moore played down the impact that the BVCA’s lobbying had had on the chancellor. “It would be ludicrous and boastful on our part to say that’s thanks to us,” he said.
But with just two weeks until a decision is due to be announced at the 30 October budget, the BVCA boss says the hardest work is over. “It is a fatal thing for anybody in my line of work to say that our job is done,” he said. “We’ll keep making the case for the industry, but we are respectful of the fact that the government has a whole set of decisions to take.”
The private equity bosses may be about to have the last laugh.