Funding of Private Equity Portfolio Companies

Introduction

This paper is a reminder that the grandfathering provisions introduced as part of the amendments to the tax treatment of shareholder debt announced in 2005 will shortly end. It should be read in conjunction with the paper issued by this committee in December 2005 describing the changes introduced in Finance (No2) Act 2005. Those changes potentially impacted both the quantum of debt on which tax deductions for interest might be allowed, as well of the timing of such deductions.

Neither the December 2005 paper nor this short update are intended as a technical analysis of the new legislation and is not a substitute for BVCA member firms obtaining their own professional advice in respect of existing and future investments.

Update

The changes introduced in Finance (No2) Act 2005 contained transitional rules in respect of loans in place on 4 March 2005 and not varied after that date. Those transitional rules expire on 31 March 2007. For portfolio companies whose accounting period straddles that date, for the purpose of applying the rules, they will be treated as having a tax accounting period that ends on 31 March 2007 and a new one that starts on 1 April 2007.

With effect from 1 April 2007, the new rules outlined in the December 2005 paper with respect to:

• The impact of the transfer pricing rules on the amount of allowable debt; and

• The so-called "late-paid interest" rules on the timing of interest deductions, will apply.

Member firms are strongly encouraged to discuss with their tax advisers the impact of the end of the transitional rules on the tax profile of their portfolio companies and any action that it may be appropriate to take either to substantiate the level of tax deduction available or otherwise to optimise the tax position of their portfolio companies.