Business Minister Jonathan Reynolds said before the election it was “absolutely right” to abolish the scheme, but private equity bosses hope that now that they are in power they can persuade Labor to reconsider.
Gordon Brown promised to crack down on carried interest tax when he was chancellor but never followed through, while in the US an attempt to change carried interest rules was blocked by senators in 2022.
Intense lobbying from the private equity industry is heating up ahead of the budget on October 30, with bigwigs in the business planning cotillions with leading politicians at this week’s Labour Party conference and next month’s investment summit.
Industry sources say private equity firms are “cramming the length and breadth of Whitehall” trying to persuade chancellors to back down from the proposal, highlighting the economic benefits the investment would bring.
The government estimates it could raise more than £500 million from around 2,000 people who receive carried interest each year, but there are fears among City insiders that taxing these individuals at 45% would lead to a flight of cash and talent, reducing rather than bringing in funds for the Treasury.
The private equity bosses’ action plan at this week’s Labour conference is to highlight to MPs which companies in their constituencies are backed by private equity, one attendee said, adding that the list included “Hovis bread, Tangle Teezers, go-karts, biotech companies and people who make doors, hairbrushes and bread”.
British companies receiving industry backing include supermarkets Asda and Morrisons, cafe chain Pret a Manger, defence company Cobham and Legoland operator Merlin.
The pitch to ministers is that private equity makes a big contribution to the British economy and any changes could give rivals in the European Union a competitive advantage. France, Italy and Germany all impose taxes on carried interest at rates between 26% and 34%.
The industry’s leader, the British Venture Capital Association (BVCA), told the Treasury that 12,000 companies backed by private capital will generate £137 billion in GDP in 2023, and private equity directly employs 140,000 people.
BVCA president Michael Moore argues the work is “risky” and tax benefits only apply if earnings reach a high threshold.
Some private equity executives are banding together to hire politically connected outside consultants to fight the fight, according to sources, but despite their efforts, industry veterans believe the lobbying effort has already failed.
“A lot of people believe the battle is already lost and will vote with their feet,” said John Moulton, president of private equity firm Better Capital.
“A lot of private equity professionals are actively looking to get out of UK tax territory,” he said. “For people based in the UK who work across Europe, it’s not that much of a stretch to move their tax base to Ireland or Luxembourg or somewhere like that.”
Sir Michael Spencer, a City tycoon and Conservative donor, suspects the government will merge capital gains tax with income tax and “completely abolish the current carried interest tax benefits”. He predicts that this will lead to private equity bigwigs moving abroad, especially those with few ties to the UK.
