Gordon Brown and private equity firms

Time to be wary. Gordon Brown is promising 'justice and equity' in the tax affairs of the private equity industry.

There has been much outcry of late about how the private equity sector is taxed favourably. And from even within the industry. Nicholas Ferguson, the chairman of a SVG Capital, a private equity investor, recently made the point that there was something wrong about the fact that a private equity executive was paying less tax than a cleaner.

I agree with Mr Ferguson that there is something wrong about that. But this is like comparing two different taxes: the cleaner's income tax, and the executive's capital gains tax. The cleaner pays income tax at the basic rate of 22 per cent. The executive makes a lot his money from selling off capital assets, and after claiming the available reliefs, he benefits from a much-reduced capital gains tax rate, in some cases, as low as an effective tax rate of 10 per cent.

This reduced capital gains tax rate is not available only to the private equity sector. It is available  to any taxpayer who has held a 'business' asset for at least two years. Such a taxpayer is entitled to 'taper relief' of 75 per cent, which means that only 25 per cent of the gain is chargeable to tax. In the case of a higher rate tax payer (paying tax at 40 per cent), the availability of taper relief reduces his tax rate to an effective rate of ten per cent.

So this is the so-called favourable ten per cent tax that we are being informed is enjoyed by private equity. However, what the critics do not add is that this relief is available to any one who holds for at least two years, and then disposes of, a 'business asset' as defined by the tax legislation.

So yes, while there is something wrong with a ten per cent rate for an executive versus a 22 per cent rate for a cleaner, one should not ignore the point that there are two different taxes at play here. In any case, I think the argument should not be about denying the executive his legitimate ten per cent tax rate, or the opportunity to arrange his tax affairs in the most favourable way for him. Rather, the argument should be about whether the cleaner is paying too much tax.

The Chancellor should not be penalising the executive because he has arranged his affairs so as to pay as little tax as he can legally pay. Tax avoidance is, after all, not (yet) a crime, and in any case, what the executive is doing, is just simple, straightforward tax planning. What the Chancellor should instead do, if he wants to introduce 'justice and equity' into the tax system, is to enable to lower earners to keep more of their money. That shouldn't be too hard to do. What about a more generous personal allowance, say £10,000, to take out of taxation the lowest earners, and to encourage more people into work?