The UK's Inland Revenue has made what some view as an embarrassing climbdown on a tax change that could have forced leading private-equity players overseas.
The tax would have cost specialists such as Guy Hands and Ronald Cohen millions and could have driven them abroad. "If taxation were too high, it would stifle entrepreneurial activity and might result in private-equity houses moving abroad. You don't have to work in the UK," says Edmund Truell, chief executive of Duke Street Capital. "Wasting time on whizzo schemes, paying thousands to lawyers and accountants trying to minimize your tax - it is so unproductive."
Will Schmidt of Advent International adds: "This tax could have put the UK at a competitive disadvantage and had serious implications for the location of private-equity funds. You could have seen a brain drain."
The British Venture Capital Association lobbied the Inland Revenue to find a way round the changes, which became law when the Finance Act was passed in July. By July 25, the IR issued a statement clarifying the targets of the increased tax and, effectively, excluding private-equity executives from it.
Since 1987, the UK government has permitted a favourable tax treatment for senior executives of private-equity houses, ostensibly to encourage entrepreneurial activity.