Goodbye Mr Moulton

Posted on

I have to say I thought John Moulton's contribution to the Private Equity debate this weekend was amsuing, it was so counter-prodcutive. Writing in the Telepgraph on Saturday (because I suspect he could find no one else to take the piece) he said:

It's been a bad week for private equity. The industry has done an inadequate job of defending itself and is in danger from rushed and politically-motivated regulatory and taxation measures.

How naive can he be? In this case the rush would simply be to ensure that those working in this sector pay tax in accordance with the law of the country. Right now they don't pay tax by concession, as I demonstrated with the aid of the Sunday Times yesterday.

But that's not OK for Moulton. He says:

[L]et's talk about the taxman. First, the use of debt to finance deals means that interest deductions reduce the tax payable by companies. This is undeniable but to the extent that someone receives the interest in the UK then the interest is taxed in the UK for no net loss. (There is some loss as overseas lenders may pay no UK tax).

Second, it can be said that the 10pc capital gains tax payable on the share of the gains (so-called "carried interest") that the private equity people pay is a "tax-break". Well, no one in private equity asked for the 10pc rate. Gordon Brown gave it to us and other entrepreneurs benefit from it.

Actually many in the megafunds do not even pay the 10pc rate. They are "non-domiciled", typically born elsewhere, living in the UK and not liable to UK capital gains tax at all. This is a long-running anomaly - but again not of private equity's creation.

We would probably be better off with a simple 20pc rate and if Ireland is anything to go by the Treasury would get more.

So Moulton

1) Recognises offshore costs the UK government cash on debt finance (and most of it comes from offshore);

2) Says the industry did not ask for 10%. This is untrue as the BVCA deal with the government proves (see the Sunday Times again - they did very definitely asked for this), and if MPs do not make this the focus of their questioning this week they have missed the most obvious trick in town;

3) He recognises that the domicile rules are an abuse that means most private equity is not taxed at all;

4) He then argues for a further special tax deal or flat tax, it's not quite clear which. Either is wholly unacceptable.

And how does he end his article? Like this:

A tax rate of 10pc may be too low but by moving to Switzerland (or lots of other places) this rate can be nil. Taxing private equity hard would result in a move offshore and the loss of a valuable and constructive industry to Britain. Doubtless other financial services benefiting from the UK's strong position in private equity would also move overseas.

Please tread carefully, Mr Brown.

Blackmail seems to be his only bargaining position. How endearing. How inappropriate too. Because the truth is that private equity cannot really go offshore. The businesses it wants are here. And if wealth opts out and seeks to leave you can be sure that in the end the governments of the populous countries of the world will not accept this. Definitions of residence, control, and where capital gains arise will all change. The tax net is as capable of adapting to change as the private equity market is to seeking loopholes in it. And maybe a tipping point is coming where the very apparent abuse of the wealthy that Moulton promotes will trigger such a change.

I think that may not be far off. Switzerland will be welcome to you Mr Moulton. But I suspect we'll capture your tax. Which, as you suggest, is more than we do now for many in this sector. Which is a compelling reason for changing the domicile and other rules all at the same time.