(Bloomberg) -- The UK’s private equity industry has offered support for some aspects of the government’s potential plan to remove a tax break but is still seeking to limit the fallout from the proposal.
A plan to require dealmakers to invest their own money in funds in order to qualify for a lower tax rate could work, Michael Moore, chief executive of the British Private Equity & Venture Capital Association, said in a letter to the Treasury. But any changes should be forward-looking and not applied on funds already in operation, he added.
Otherwise, the proposal “may be viewed as a form of retrospective taxation,” Moore said in his letter. “This could be damaging to the attractiveness of the UK as a place to invest and grow business and harm confidence in the system more generally.”
The new Labour government has said it will announce plans to reform the carried interest regime when it unveils its budget on October 30. Moore’s letter comes as the government gave the industry and other interested parties the month of August to submit views on possible changes.
That has triggered a wave of anxiety among private equity firms about how drastic Labour’s plans may be and when the government plans to implement those changes.
Potential measures range from smaller tweaks in line with other countries to bigger changes like boosting the tax rate for carried interest — fund managers’ portion of profits on asset sales — to 45% from the current level of 28%.
The high-stakes situation has prompted senior individuals in the industry to seek better relations with the new government. Labour believes it could raise £565 million in additional tax revenue annually by treating more carry as income, according to its manifesto.
“We are committed to reforming the tax treatment of carried interest, delivering fairness in this area of the tax system while recognizing the vital role that our world-leading asset management industry plays in channelling investment across the UK,” a spokesperson for the Treasury said in a statement.
Prime Minister Keir Starmer laid the groundwork this week that tougher measures would be included in the budget, saying it would be painful for those “with the broadest shoulders.” Chancellor Rachel Reeves has also repeatedly warned about the dire state of the public finances, raising expectations for a range of new wealth taxes.
Moore said introducing a co-investment rule could help the government achieve its objective of fostering long-term investment and growth. But he also argued the government should consult the industry on any proposals and offer “extensive” and “flexible” transitional arrangements.
Other countries such as France and Italy already require dealmakers to put their own money at risk in order to benefit from carried interest relief. In the UK, many funds do, with levels varying from about 0.5% to 2%, according to the BVCA.
There should also be flexibility for new managers or those from diverse backgrounds who may not have the wealth upfront to make the investment, the BVCA said.
Venture capital figures are meanwhile pushing to be kept out of any carried interest changes. Haakon Overli, a general partner at Dawn Capital, said hitting early-stage investors with the same tax rises could stifle investment and yet only raises about £45 million a year.
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