Pipe dreams

The doom mongers are saying the dream is over and proclaiming the end of the private equity world is nigh. The unlikely cause of all this wailing and gnashing of teeth is softly spoken Scot, Alistair Darling, who announced in his first Pre-Budget Report that the effective rate of taxation for most successful entrepreneurs will increase by 80%, from 10% to 18%. The change to capital gains tax comes at the end of a tough year for private equity and looks like a knee jerk reaction to the braying hounds in the media and the unions.

There are some exaggerated visions of a mass exodus of private equity investors and entrepreneurs from the UK to more favourable shores. But the changes are unlikely to have such a marked effect, and are in fact bang on in terms of competing European market tax regimes and calculated to have very little overall impact on the tax paid on carried interest by private equity professionals.

The reality is that, despite all the fuss in the press, private equity professionals did not pay 10% tax on their carried interest, they paid somewhere between 10% and 40%, and the fiendishly complicated calculations and negotiations that went on were a bonanza for tax accountants but not always so great for anyone else. Once the hype has died down, private equity investors will accept this clarification and simplification of a regime that has been expected for some time.

Of more concern for the industry in the long term is a dampening of the entrepreneurial spirit in the UK, something which is already apparent among young businesses seeking funding, which are being strangled with red tape – see news analysis, page 9 this issue. The taper relief regime (which allowed capital gains tax bills to fall from 40% to 10%) had been credited with fostering an enterprise culture within the UK. But the removal of this taper relief will have less of an impact on the fat cats it intended to bowl over and will instead hit the thousands of, often privately owned, small and medium sized businesses across the UK.