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Chancellor pledges justice on tax rates

By Andrew Taylor and James Blitz

Published: June 5 2007 22:39 | Last updated: June 5 2007 22:39

Gordon Brown raised union hopes on Tuesday that the government might make tax changes affecting the private equity industry later this year by pledging to “make sure there is justice and equity in the treatment of tax arrangements in that area”.

Amid a growing public debate over the rates of tax which companies and people involved in private equity should pay, Mr Brown said a government review established three months ago was designed to “find out what loopholes were being used and then to take action to deal with it”.

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The chancellor, at the GMB annual conference in Brighton, was responding to remarks earlier this week by Nicholas Ferguson, a leading figure in the private equity industry. He told the FT: “Any common sense person would say that a highly paid private equity executive paying less tax than a cleaning lady can’t be right.”

Treasury officials said on Tuesday the chancellor had not expressly intended to signal a shift in government policy towards higher taxation of the sector.

However, it would be surprising if ministers did not begin to take note of the growing media criticism of the sector’s tax treatment.

If the outcry continues, Gordon Brown’s successor as chancellor could be forced to look seriously at the issue in this autumn’s pre-Budget report.

“You may well see something significant emerging from this, given the way the media debate has been going recently,“ said one Labour MP.

Ahead of the pre-Budget report, two separate reviews have been launched by the government. One, set up last year, is examining personal tax rules which allow executives to enjoy tax rates as low as 10 per cent. The other, launched in March, is into the tax treatment of equity-style debt instruments.

Paul Kenny, GMB general secretary, welcomed the chancellor’s comments, suggesting Mr Brown had adopted a new tone.

He said: “From what Gordon Brown told conference, the GMB concludes that the fat cats are losing the argument on tax and it was very noticeable that he did not leap to the defence of the industry which he has done before.” The union has demanded the removal of tax advantages and the imposition of a windfall tax on private equity companies, which they accuse of cutting jobs and destroying pension benefits.

But in his speech Mr Brown swept aside union complaints over public sector pay, private investment in hospitals and schools and nuclear weapons.

Mr Brown has insisted that public sector pay rises should be in line with the Treasury’s inflation target of 2 per cent as measured by the consumer price index.

He said: “Everything that we have done over the last 10 years to keep inflation and interest rates low is the best protection against people seeing their standards of living fall and I will continue to pursue that policy.”

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Isn't this just the non-domicile tax break, where foreign earnings are not taxed?

http://www.guardian.co.uk/uk_news/story/0,,682157,00.html' rel="external nofollow">
"And normally a UK resident is required to pay tax on any income or capital gain which arises in the UK or anywhere else in the world. But, say Rausing's advisers, while this may be his home, legally it is not his "domicile". With this one vital, verbal distinction, he escapes paying UK tax on all his income and on all his capital gains in all the world outside the UK, if he so chooses."

The government are scared of changing this unfair tax rule, as it attracts wealthy individuals here... which is part of the reason for the booming City of London.

Nothing will change.

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Isn't this just the non-domicile tax break, where foreign earnings are not taxed?

http://www.guardian.co.uk/uk_news/story/0,,682157,00.html' rel="external nofollow">
"And normally a UK resident is required to pay tax on any income or capital gain which arises in the UK or anywhere else in the world. But, say Rausing's advisers, while this may be his home, legally it is not his "domicile". With this one vital, verbal distinction, he escapes paying UK tax on all his income and on all his capital gains in all the world outside the UK, if he so chooses."

The government are scared of changing this unfair tax rule, as it attracts wealthy individuals here... which is part of the reason for the booming City of London.

Nothing will change.

No I don't think so. The non domicile issue is politically sensitive and I am sure has skewed the London market to an extent (50% of properties over £2m bought by foreigners etc.). However private equity is much bigger and about the low tax liability private backers have on profits generated from increasing company valuations.

Simply put (as I understand it) if you have a few million sitting in the bank and want to invest you can put it into shares or funds and have a standard capital gain liability, alternatively you can back companies through the private equity channels with only a 10% liability. I personally believe this has had by far the greatest impact on London's buoyancy even more than the US compliance regulations (Sarbanes Oxley).

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I think it is refering to taper relief. The idea is that if you start or buy into a private company then when you come to sell the shares you get 'taper relief' so rather than paying 40% on the gains you only get 10% (75% relief) if you have had the shares more than 2 years. Fine for private companies, where people risk their own money and work in the company (and stops entrepraneurs leaving the UK when they sell to avoid gains tax as they used to). But the same rules are apparently being used by private equity firms to avoid gains tax on the profits they make from financial engineering.

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