01 Nov 2013

Private equity is about investment not tax avoidance


The Independent’s investigation into the tax affairs of private equity-backed UK companies is inaccurate and misleading. It describes the Quoted Eurobond Exemption (QEE) as a tax avoidance loophole, when in fact it is a there to attract international investors to the UK by allowing them to pay tax only once on their investment.

In 2012 around £5.7bn was invested into 820 UK companies by private equity. Over the past five years around £33bn has been invested into 4515 companies based in the UK. Many of our investors, such as international pension funds, are not eligible or required to pay tax in the United Kingdom. The benefit we get from them is in investment, growth and jobs.

How does a typical private equity fund investment work?

  • We invest capital on behalf of multiple investors, large and small, by investing it into businesses to help them grow – our typical investment period is around five years. We return profits to our investors provided we have expanded and grown the businesses we invest in.
  • When we invest we do so with a mix of debt and equity. This is determined primarily by whatever gives the lowest cost of capital for the business concerned (but the nature of our investors may also be a factor).
  • When capital flows back to our investors some are subject to tax and some, such as pension funds, are exempt. The QEE allows international investors to commit capital to our funds and in turn into UK companies, thus only paying tax where it is due.
  • The alternative, alluded to by the Independent, is for HMRC to apply a 20% withholding tax on these investors and for them to claim it back – imposing a significant administrative burden, delay and thus cost, thereby reducing returns to pension funds and with no gain to the Exchequer
  • When HMRC rightly consulted on this issue in 2012 feedback from our investors suggested the administrative burden would be disproportionate and punitive and would make the UK a less attractive destination for investment as most European countries do not operate withholding tax on interest - currently only Italy does so it would put the UK at a severe competitive disadvantage. Read more here.
  • Accordingly it would be harder for private equity to raise capital and this would mean less investment for UK companies.
  • A separate issue, confused throughout the coverage, is that all the interest costs shown in the portfolio company's accounts are tax deductible. This is factually incorrect. HMRC only allows a deduction for interest on borrowings which it adjudges to be on an arm's length basis. This is to prevent any abusive practice.


  • Notes to editor

    The British Private Equity and Venture Capital Association (BVCA) is the industry body for the UK private equity and venture capital industry. The BVCA has over 500 member firms, representing the vast majority of UK-based private equity and venture capital firms and their advisers.


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