Michael Moore's Outlook returns to a taxing question
The new Prime Minister did not beat about the bush when he kicked off the new political season with a major speech in Downing Street at the end of August: “Things are worse than we ever imagined…Things will get worse before they get better.”
Framing the political conversation before Parliament gets down to business after the summer recess, and in the build up to the Budget at the end of October, is an understandable priority. Even if this was a slightly bleak way of doing it.
But it wasn’t all gloom – Keir Starmer’s speech included references to ‘fixing foundations’ and the need to set the conditions for economic growth. Given that Labour has committed itself ‘to secure the highest sustained growth in the G7’, as one of its five missions for government, it was not a surprise that this was an important part of his speech.
On the other hand, for anyone who had tuned out of the debate in recent times there might have been some surprise, to hear that it is Labour’s expectation that the private capital industry will play an important part in this mission.
But a couple of weeks previously the idea was laid out very clearly: “There's so much money that we think we can unlock for the UK economy and ensure then that British firms start up, firms scale up, firms can grow and access that long term patient capital that private equity and venture can often bring to the table.”
That quote came from no less a figure than the Chancellor of the Exchequer, Rachel Reeves, during a television interview she gave while on a visit to the United States. A visit which included meetings with senior figures at global private equity firms.
Those sessions built on her engagement closer to home before the election, including a meeting with a cross section of private capital leaders in Leeds to discuss how the industry delivers growth and can do more, given the right investment climate.
Which brings us to the issue of tax. Away from the deal front, this August was busier than usual for the industry thanks to the government consultation on the future of carried interest taxation, which follows Labour’s manifesto commitment at the election to close ‘loopholes’.
Helpfully, a key focus of the prospective changes was also set out in the interview the Chancellor gave on the other side of the Atlantic: “if you put in your own capital, if you've got capital at risk, I think it is right that you benefit from a more a more generous form of tax relief. But if it's not your capital at risk, then it's not right that you receive those tax breaks.”
In framing the consultation, Treasury Ministers and officials asked for insights and evidence in three key areas. The first, enquiring about the economic characteristics of the industry provided the opportunity to set out the fundamentals which underpin its success. Indeed, where better to explain the long-term alignment of interests between global institutional investors and private capital firms?
And in so doing set out the dynamic at the heart of the industry – including the well established co-invest practices that offer a range of ways to ensure there is skin in the game for everyone. This is obviously part of a wider system, we pointed out, which ensures that investment managers are incentivised, over a ten-year period, or longer, to deliver exceptional capital growth for the institutional investors in the funds.
From there it was a short step to highlight that the taxation of the capital gains delivered under this arrangement is vitally important and is critical to attracting and retaining the investment managers, a substantial proportion of whom are from outside the UK.
The consultation’s second question about market practices gave us the chance to acknowledge how in the UK we have developed sophisticated fund structures, financial markets and a significant professional ecosystem for private capital, all of which is supported by, and relies on, a competitive regulatory and tax regime.
But the risk that tax changes could alter this was perhaps implicitly recognised in the final question in the consultation about international comparators. This allowed us to line up our well-established argument that the global battle for investment capital and investment managers is fierce, so maintaining the UK’s international competitiveness in all aspects of the regulatory and taxation framework is therefore critical.
Our engagement hasn’t ended now that the submission has been made. We will continue to answer official questions and engage on the detail of the issues through to the Budget.
Michael Moore
Chief Executive, BVCA
This article was originally published on 3 September 2024 on the Private Equity News website here.
