Private equity benefits in pre-Budget report

In his pre-Budget report, the Chancellor has given a positive outlook for the UK economy in spite of difficult market conditions. This is good news for the private equity market which looks set to benefit from proposals announced which will take effect from next April.

Among these is an exemption for gains on sales by trading companies of 20 per cent or more in other trading companies. It is hoped this reform will unlock buyout opportunities in the UK. It is also positive that the effective rate of capital gains tax on business assets will from next April be ten per cent after only two years, reduced from the current four-year period.

In its pre-Budget submission, the British Venture Capital Association (BVCA) called for a simplification of the capital gains tax regime, the wider use of share option schemes and clarification of the financial promotion regime, specified in the new Financial Services and Markets Act.

In response to the Chancellor’s pre-Budget statement John Mackie, chief executive of the BVCA, said: “I welcome much of what the Chancellor had to say. In particular I welcome the initiatives on research and development, the capital gains tax cut, VAT simplification and the share options scheme expansion. These are all welcome assistance in what is a difficult economic environment.”

The BVCA has for some time urged the Government to reduce the basic rate of capital gains tax for individuals and corporations. This, according to the BVCA, would incentivise private investors to acquire shares in growing companies, with little impact on the Government’s net take.

Mackie said: “I regret that he didn’t abolish CGT altogether, but these changes are heading in the right direction.”

Regarding the wider use of share options schemes, the BVCA sees share options as vital in aligning the interests of employees and shareholders to help stimulate the growth of enterprises in the UK. The extension of the Enterprise Management Incentive Scheme to companies with gross assets of up to GBP30 million will therefore be welcomed by the private equity community. However, for approved share options schemes, the BVCA considers the GBP30,000 limit specified in the pre-Budget report too low to attract and retain senior management and had proposed an increase of the limit on the market value of approved company share options from GBP30,000 to GBP100,000.

The BVCA had also expressed concerns about the impact of the financial promotion regime on ordinary investment activity, particularly by unauthorised firms and was seeking a clarification of the exemptions drafted by the FSA. A source close to the industry said the BVCA was disappointed that the pre-Budget report did not touch upon the financial promotion regime at all and expects this will be an issue that the BVCA will continue to campaign on.

The main concern is that firms that have been advised they do not need authorisation for their activities will find it impossible to operate because most of their communications will need approval by an authorised person.

John Mackie said clarification regarding routine correspondence is needed: “At the moment, there is uncertainty with regards to the financial promotion regime and we need that clarified. The way the guide is presently framed suggests all documentation would be monitored, including every letter and draft of shareholder agreements. We can’t believe that was what was intended. If it is the case, transactions would become very difficult to manage.”