Comment

The UK Government, it would seem, is giving with one hand and taking with the other when it comes to private equity. As the British Venture Capital Association (BVCA) acknowledged, the Budget on March 16 outlined a welcome reduction in the flow of regulation on business in general and on private equity in particular.

Such a move is welcome because it enables UK portfolio companies to compete more effectively on the international stage. That is the step forward, but the Government’s handling of the changes to the transfer pricing laws on March 4 is surely the step back. Perhaps it is even two steps back.

First of all the rules were amended without consultation, even though the changes had been in the wings for some time. Nor was the change actually to correct avoidance, but more specifically to amend a widely known and accepted interpretation, on the basis of which deals had been structured for many years.

Secondly, the amendments came into force on March 4, but the actual legislation was not due to emerge until the Budget at the earliest. That left firms in the process of doing deals trying to guess the impact of the rule change on economics and cash flows. Hardly a scientific way to conduct a complex transaction like a buyout.

Then there is the crux of the matter, application. As the BVCA contests, the Government has the right to change the law and the buyouts business must operate as best it can within that law, but advance warning or consultation would have been welcome and appropriate. Then again there is an election looming, and tax windfalls from large public to privates, like many of the potential deals in the retail sector, would surely find favour with voters.

You also have to wonder at the Revenue’s dealing with the BVCA. The organisation has always strived to work effectively with the Government and to maintain a cordial and productive relationship. Prior to the changes, the BVCA obtained some kind of reassurance that, for the purposes of transfer pricing, a partnership would not be regarded as a person. Without that it would not have manifested its interpretation, which has been the basis for deal structuring since 1998.

It now seems the assurance was not as clear cut as it might have been. The BVCA went back to the Revenue to confirm the interpretation when the transfer rules were extended to cover UK/UK transactions earlier this year. After a number of meetings, the Revenue went ahead and dropped its bombshell.

Of course 1998 is a long time ago and policies change. Having said that, the Revenue should have given the association some kind of advance warning that could have been passed on to those in the process of doing deals. It takes two sides to maintain a productive relationship.