AN extraordinary last-minute alteration to Gordon Brown’s April Budget is under way to spare some of the country’s richest financiers from having to pay millions of pounds in income tax.
The Chancellor accidentally caught bosses of venture capital companies as he tried to tighten the law on taxing share options in mainstream businesses.
The new rules threatened to treat a large slice of the profits made by wealthy venture capitalists as income, which would attract tax at 40 per cent.
That would have torn up a deal struck in 1987 under which all venture capital profitshare payouts come under Capital Gains Tax, currently just ten per cent. Several of the biggest private equity firms have said they will try to move operations offshore if Brown removes their income tax exemption.
The affair is doubly embarrassing for the Chancellor. Not only does he routinely praise venture capitalists and call for more risktaking, but many Labour backbenchers are likely to be alarmed by such strenuous efforts to shield wealthy people from a rate of tax paid by millions of ordinary wage earners.
Venture capital funds typically raise a large sum from backers, known as limited partners, and invest it in a range of companies. As these investments generate returns, the limited partners are first in the queue. They are paid their stake money plus interest, usually about eight per cent.
After this, the executives managing the fund take their own profit, known as ‘carried interest’, typically 20 per cent of all future returns, with 80 per cent going to the backers. It is not unusual for a successful team to share tens of millions of pounds a year in ‘carried interest’.
Before the Budget, this would have been taxed as capital gain, at ten per cent. But as the new rules stand, much of the ‘carried interest’ would be taxed, upfront, as income.
The British Venture Capital Association said it was holding ‘constructive’ talks with the Treasury and Inland Revenue.
Despite the political difficulties for Brown, a deal to continue the tax breaks for venture capitalists is seen as likely.
