A tax raid on private equity would be a disaster for UK financial services, the City minister has warned.
Labour’s plans to hit buyout bosses’ carried interest payments should they come to power are causing concern among firms, Bim Afolami told Financial News’s latest Leadership Roundtable.
“It is obvious that if Labour were to win the election later this year they are seeking to raise a lot of money from people in the City, whether that be private equity, whether that be others, that’s their policy,” Afolami, a former lawyer at Freshfields Bruckhaus Deringer and banker in HSBC’s group corporate strategy and restructuring team, told FN. “That, I think, has the potential to really upset the very fine, balanced ecosystem that we have, that is facing a lot of challenge. Now they may disagree, and that’s fine. But if they speak to people in the industry, I think the industry is worried.”
The debate about how to tax private equity firms on carried interest — buyout executives’ gains on the sale of assets — has been thrust into the spotlight in recent weeks.
Currently taxed as capital gains at 28%, Labour says it can raise revenue by aligning that level with the additional rate of income tax at 45%.
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After the 6 March Budget, the Treasury produced an analysis that the UK could lose more than £3bn in tax revenue over four years thanks to capital flight if the policy comes into force next year.
“You’re talking about an industry that’s international,” another City lawyer who works with private equity houses told FN. “A lot of people will hesitate to move because they don’t want to lose what the City has to offer, but others will be tempted.”
“That requires very careful analysis, which I don’t think has been done. It’s more back of the envelope. If you keep adding obstacles people will say ‘enough is enough’,” they added. “Private equity is growing. Assets are growing. The trend is upwards. Politicians should be thinking how do we maintain our top position in the marketplace?”
However, Labour has disputed the figures, saying they lacked credibility as they were produced by the government’s own special advisers.
Dan Neidle, a former tax partner at City law firm Clifford Chance, also questioned the figures, noting that if a policy started from the date it was brought in, private equity firms would be unable to defer disposals or exit the UK to mitigate the effect.
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A Labour spokesperson said: “The financial services industry is one of Britain’s greatest assets and Labour’s plan promises to build on this success, unlock investment and drive growth. The only risk to the UK economy is five more years of this tired Tory government who have taken a sledgehammer to the UK economy and plan to unleash further chaos with the chancellor’s £46bn unfunded tax cut.”
Afolami told FN’s roundtable that he stood by the need to proceed with caution around the tax.
“The thing about ecosystems is it’s a bit like reputation,” Afolami said. “You’ve just got to be very, very careful. I just think that there is a lot of delicate stuff here and tax and the broader approach to financial services is one. I think the financial services sector knows that with me, the chancellor, the prime minister, with people who understand what they do, all people from the private sector in government, they’ve got people who want to see them be successful.”
Big Bang 2.0
Since Afolami took over as City minister last November, he has become the face of a raft of government plans to boost London’s status as a financial hub as the City has come under pressure from resurgent global markets and a dearth of deal flow.
The Edinburgh Reforms contain some 30 proposals to overhaul everything from investment research and prospectus rules to giving regulators growth objectives and launching a new trading venue for private company shares.
Also speaking on FN’s panel, former Financial Conduct Authority chair John Griffith-Jones and KPMG Regulatory Insight Centre director Michelle Adcock said the City should not expect overnight results.
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“The regulators will definitely be up for working with the government,” said Griffith-Jones. “The equal question is are they up to it? I’ve got issues that niggle and probably won’t go away, and one of them is the volume of change. It’s a dynamic world. We come up with what we need to do, but the next day the Europeans come up with something they are going to do which could change what we need to do.”
Adcock added: “We do have a regime in the UK that is renowned for being robust. It’s one of its strengths. Firms recognise that… It takes a long time to get from discussion paper to consultation to policy statement and actually to implementation.”
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