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Zero tax for Saga and AA

Robert Peston | 07:30 UK time, Tuesday, 3 July 2007

It is standard practice at all private-equity owned businesses to load up with debt, cut their taxable profits and therefore reduce their liability to corporation tax.

So the zero tax liability incurred by the AA and Saga – which collectively made earnings before interest, tax, depreciation and amortisation last year of £430m – is par for the course.

Nor are they likely to pay any corporation tax after they are merged later this year: interest payments by the enlarged business will probably wipe out taxable profits, since it is borrowing £4.8bn, significantly more than the combined debt of the individual companies of £3.3bn.

The impact of this kind of behaviour is to reduce the Government’s receipts of corporation tax – and the trends suggest that there could be a significant undermining of corporation tax.

Here’s why.

First, private equity firms are tending to own the firms they buy for longer than hitherto.

Second, public companies are slightly aping private-equity owned firms by borrowing more to increase returns to investors.

And you can dismiss the private-equity argument that the tax liability is merely transferred to those who lend to their companies. Some of these lenders pay tax in the UK, but in a globalised financial world most don’t.

Comments   Post your comment

  • 1.
  • At 08:10 AM on 03 Jul 2007,
  • paul birtwistle wrote:

you seem to be overlooking the fact that the interest paid by AA and Saga to the lending banks will have been and will be subject to corporation tax. where you need to look to find the true scale of the loss of revenue to the exchequer is interest paid by companies such as these to non-uk taxpayers.

this is impossible to get at via published data so you/treasury select committee/exchequer would need to ask the private equity industry to disclose this information. perhaps nottingham university business unit would be able to estimate.

a subject worth pursuing in my opinion but you need to put the record straight on the interest paid to banks and the substantial amount of tax payable by them.

paul birtwistle

  • 2.
  • At 08:26 AM on 03 Jul 2007,
  • Dalrymple01 wrote:

In assessing the tax impact of using debt to run companies why are you ignoring the tax that will be paid on their capital gains from the sale? And in talking about globalised finance, why do you not mention that many UK companies generate profits for themselves by investing abroad, through debt and equity, themselves. Usually your reports are excellent, but these two omissions leave me wondering if you are jumping on the "private equity is a bad thing" bandwagon yourself?

Debt has always been used by companies to finance businessess. The reason is that it is cheaper than equity and the reason that it is cheaper is that it gets repaid before the owners i.e. debt takes less risk. In using debt, efficiencies are pursued which are then recycled elsewhere in the (global) economy.

I appreciate that the impact of private equity on individuals can be awful but the best remedy for that is a fluid efficient (global and local) economy not to attack those pursuing such efficiencies.

  • 3.
  • At 08:36 AM on 03 Jul 2007,
  • Dick wrote:

Great - And who has to make up the difference?

Well of course it's UK taxpayers and of course smaller companies which could explain why Brown raised corporation tax for SMEs at the last budget.

Something has to give here.

  • 4.
  • At 08:43 AM on 03 Jul 2007,
  • TerryB wrote:

Why do you have to jump on the "evil private equity" bandwagon.

you mention, but gloss over, the global scale of business and focus on the fact that corporation tax is not being paid by these companies. However, many profitable companies do not pay CT for perfectly legal reasons. The private equity industry does not set its own rules but operates under those prepared by our government.

You also state that AA/SAGA make profits before Depreciation /Amortisation /Interest. These are all costs of doing business which MUST be deducted in arriving at profit before tax. So what profit did they make at that level.

The article is biased and the argument poorly presented.

  • 5.
  • At 09:07 AM on 03 Jul 2007,
  • Ian Kemmish wrote:

This is beginning to have the appearance of turning from journalism into an obsession.

A cynic might wonder if some culture secretary or their shadow is wondering aloud if private equity might not be a better way to fund the BBC in future, and the endless repetition of this single argument against private equity (and in my opinion it is the least weighty of any of them) is some clumsy attempt to forestall that possibility....

Fundamentally they will pay tax somewhere. Surely the approach is not to get annoyed about the tax loss, but to create an environment where the lending institutions have their taxable base in the UK.

Essentially the UK and its media has to get over its jealousy and 'fairness' issues and realise it is competing for tax revenues with the rest of the world.

The answer is either a tax cartel, or raw tax competition.

  • 7.
  • At 09:57 AM on 03 Jul 2007,
  • Paul wrote:

You're focusing on points in a PE context which are in fact common to all companies. Any company can take on more debt and obtain tax deductions for the interest on that debt subject to constraints such as thin capitalisation rules, it's just that there is more appetite for higher levels of gearing in PE-owned businesses than there tends to be in publicly owned companies. Equally, the fact that interest paid by a UK company to a lender which doesn't pay UK tax generates a deduction but no corresponding taxable receipt for the UK treasury is just an inevitable result of a globalised financial services market. The flip side of the coin is that UK tax paying banks lending to overseas borrowers are taxed on the interest they receive from those overseas borrowers. This just isn't a PE issue: these companies are only structuring their businesses in compliance with rules which apply equally to everyone. They would be failing in their duties to their investors if they didn't.

  • 8.
  • At 10:17 AM on 03 Jul 2007,
  • Kerr Finlayson wrote:

Please change the record. These attacks on private equity are becoming repetitive and, frankly, boring. It is this kind of sloppy tabloid reporting that will eventually compel PE firms to leave the UK for lower tax (and press intrusion) elsewhere.

Its quite tricky situation, if we don’t give any sort of financial relief to debt ridden companies, we may ended up having lots of insolvencies i.e. loss of many jobs. However, if companies are taking money from the market to pay investors then we may have to have regulation around??

  • 10.
  • At 10:30 AM on 03 Jul 2007,
  • Tomo wrote:

"..And you can dismiss the private-equity argument that the tax liability is merely transferred to those who lend to their companies. Some of these lenders pay tax in the UK, but in a globalised financial world most don’t"

Where do you get these half baked ideas of the taxation of interest receipts in the UK?

Corporation tax is payable in the UK on ALL income earned in the UK by all organisations whether they are UK based, UK listed, foreign based, foreign listed, partnerships, unincorporated associations etc. Banks and others that earn interest in the UK must pay tax in the UK. That is the rule whether you are in a globalised world or not.

You have to get over your jealously and envy

  • 11.
  • At 10:32 AM on 03 Jul 2007,
  • Kendrick Curtis wrote:

Of course, every employee that they hire pays income tax, national insurance and so on, and the company will have to pay it's NI contributions. Also, in the insurance industry there's an "insurance tax", isn't there?

So the government is collecting a fair amount of receipts from those sources, albeit not from corporation tax or (substantially) from capital gains.

Should the government, therefore, be taxing consumption more, and taxing companies less? It's people that end up paying the taxes either way.

  • 12.
  • At 11:09 AM on 03 Jul 2007,
  • Alan Brooke wrote:

A bit deceptive to imply that a company's taxes should be calculated on earnings before interest. If the company makes a loss after interest expense, that is a real loss and, quite correctly, the company should pay no tax.

What seems to be missing here is why companies (and not just those owned by private-equity firms) increase their debt. It's to increase the returns to shareholders! When those shareholders receive higher dividends (or capital gains from selling their shares at increased value), the gain is taxed at the shareholder's marginal rate. And, because the gain is sourced from the UK, the tax applies whether the taxpayer is a UK resident or not.

  • 13.
  • At 11:27 AM on 03 Jul 2007,
  • Michael Orton wrote:

Why all these complaints about money being taxed twice? I get taxed on what I earn and again when I spend it, so there is evidently nothing wrong with being taxed twice. I do not understand why interest payments should be tax deductable, for companies or individuals buying to let. Debt is not always a bad thing, but too much in the system makes it unstable. Of course a sudden change could cause chaos, so let's phase out the relief. Could the system stand it going at 20%/year over 5 years? Perhaps it ought to be smoothed out at 10%/year over 10 years. Yes, the banks will scream, but if the people they lend to can't pay so much interest they will just have to cut their interest rates. This will lead to lower interest rates for savers, who then buy more shares, replacing the debt with equity and a new balance point will be achieved. It could be done: the tricky bit is to manage a smooth transition.

  • 14.
  • At 11:38 AM on 03 Jul 2007,
  • Lawrie Holmes wrote:

Hi Robert,

Thanks for following up the Sunday Express story from last weekend.

Lawrie Holmes
Business Editor
Sunday Express

  • 15.
  • At 11:47 AM on 03 Jul 2007,
  • Graeme wrote:

Robert, I feel your presentation of this is deeply misleading. All incorporated entities of any size get a tax deduction for debt. The size of the debt they have on their balance sheet is a function of what a bank will lend and what risk the equity holders are willing to take. These deals are no different in principle.

To present this as a private equity issue is misleading.

  • 16.
  • At 12:07 PM on 03 Jul 2007,
  • andrew wrote:

I have a small business for which I am hounded by HMRC constantly for taxes, payments etc.
These private equity companies are nothing better than parasites.
Of course they take advantage of rules laid down by the Government, but we all know civil servants are imbeciles and have no conception of the real world or the pariahs that now control the commercial world.
Private equity buyouts are based on debt, so what we need is a substantial increase in interest rates to cool the heels of these avaricious men/women.

  • 17.
  • At 12:22 PM on 03 Jul 2007,
  • kzzz1369 wrote:

@ tomo

what if the lender is not based in the UK? is the tax liability then not moved overseas also?

I'm surprised at the amount of PE merchants here. I would have thought that this "bandwagon" is merely highlighting the huge gains to be made by PE management (albeit for their investors) just by playing the system. how does racking up several billion ponds of debt, and sacking thousands of technical staff give me a better service when i'm in need of roadside assistance?

this situation is untenable. these PE deals are getting bigger and bigger and riskier and riskier. what will happen when one goes awry? customers without a service they paid for, and worse thousands of employees without a job.

  • 18.
  • At 12:33 PM on 03 Jul 2007,
  • James Evans wrote:

I believe there was a study recently in which the effective tax rate for both debt and equity were studied, for the US, in which it was concluded that the current system actually subsidises debt investments (i.e. the effective tax rate is negative on debt), but heavily taxes equity (around 35%). I guess this arises because a lot of lending comes from offshore tax havens?

In addition, this method actually rewards safety and penalises entrepreneural risk, as less debt can be taken on in these circumstances. Innovation could be actively harmed by this balance.

Perhaps there should be a sensible discussion on whether there should be a reform of some sort?

  • 19.
  • At 12:37 PM on 03 Jul 2007,
  • Mark Jones wrote:

is this problem less to do with Private Equity and more to do with the availability of massive credit available to private equity. The private Equity buy outs will end when the run on credit ends.

Secondly why are people seeing this as an attack on Private Equity? It is an explanation of the situation from what I can see.

  • 20.
  • At 12:55 PM on 03 Jul 2007,
  • John Roe wrote:

We need to be very careful where this argument takes us. I've recently set up a small company which has borrowed to get going. If the interest payments were NOT tax deductible then I would have to find the extra cash to pay the increased corporation tax every year at the end of January on the due date without fail. As a start up that would prove difficult. It's not just the big boys who could be charged. It would be a further disincentive to start a business.And there are already plenty of those coming out of this government!

  • 21.
  • At 01:03 PM on 03 Jul 2007,
  • peabop wrote:

At its very essence, your beef seems to be with the whole tax system. You complain if companies make no taxable profit, and complain if they make large gains taxed at low rates. You complain if foreign companies, attracted by low rates of tax, chose to invest in the country.

As others have said earlier, the money earned pops out somewhere (either an income or capital gain) and will be subject to tax according to the Treasury's own rules. They spend an eternity revising these each year whenever they don't like the current set-up.

The problem is that each time they do this, the tax system becomes ever more unintelligible, and more loopholes are thrown up (another classic example is the 'simplifying' Companies Act, which is the longest piece of legislation in history!)

We'll only ever solve this problem if we can all agree on a conceptual framework which addresses the equity of to whom, on what, and when tax should be applied. Of course you'd never be able to persuade politicians or civil servants to do this, because if you did, they'd all have nothing to do...

  • 22.
  • At 01:26 PM on 03 Jul 2007,
  • Matt Swift wrote:

Seems like a lot of the contributors are from PE companies, have your bosses got the whips out ?.

The nonsense of we are just playing by the rules is laughable, PE companies rather than normal corporations use this loop hole to prevent paying tax pure and simple, it's also argueable what value PE companies give, but the rewards far out weight the risks and there the problem lies.

Stopping the gravy train will always upset a few pigs in the trough.

  • 23.
  • At 01:34 PM on 03 Jul 2007,
  • Adam wrote:

It seems entirely fair and reasonable that interest payments should be deducted from the profits before calculating a tax figure. After all, they do need to be paid.

The question is, and one which I still don't entirely understand, is to whom do they pay the interest? If it's to someone who legitimately lent the money, I can't see anything wrong with it. However, if the money was lent articifically as a tax dodge, then that seems something that the government needs to clamp down on. Could you explain a little more on that, please?

However, even if this is a 100% scam, I can't imagine that the government under Brown is going to be too worried about it: they will no doubt be far to busy going after small businesses.

  • 24.
  • At 01:36 PM on 03 Jul 2007,
  • Adam wrote:

It seems entirely fair and reasonable that interest payments should be deducted from the profits before calculating a tax figure. After all, they do need to be paid.

The question is, and one which I still don't entirely understand, is to whom do they pay the interest? If it's to someone who legitimately lent the money, I can't see anything wrong with it. However, if the money was lent articifically as a tax dodge, then that seems something that the government needs to clamp down on. Could you explain a little more on that, please?

However, even if this is a 100% scam, I can't imagine that the government under Brown is going to be too worried about it: they will no doubt be far too busy going after small businesses.

  • 25.
  • At 01:41 PM on 03 Jul 2007,
  • PhilT wrote:

Take a look at Private Eye's reporting around this topic and you'll find many companies in the same boat. Various newspaper groups I recall pay next to no tax, and Barclays Bank own a gas pipeline in order to reduce their tax bill.

This is UK corporate finance 101 really, you strive to make as much cash as possible and pay as little tax as possible - money splashed up the wall on "skools'n'hospitals" does nothing to help a company grow or reward its risk taking shareholders and it is right that taxation charges be minimised where possible (but not at the expense of reduced cash generation, as no tax rate is 100%).

  • 26.
  • At 01:41 PM on 03 Jul 2007,
  • Michael Orton wrote:

Reading the posts more carefully, I see TerryB (post 4) and Alan Brooke (post 12) are stating that interest payments should come before tax, but it still reads like a "proof by blatant assertion". Taking on debt is optional. If a company takes on too much debt and then can't service it, why is it the tax-man's problem? Individuals are not allowed to offset interest on their home mortages against their income tax anymore, and they certainly can't offset interest on their credit card bills. Why should the rules be different for a corporate body?

  • 27.
  • At 01:53 PM on 03 Jul 2007,
  • Nicholas A wrote:

Robert - you have simplified an extraordinarily complex topic to the extent that your message is becoming misleading.
1. Interest on bank debt will be taxed in the hands of the lending banks - and probably in the UK (which is where most of the banks' lending offices are based). There might be an element of shareholder debt - but any deduction for this would be subject to the UK's thin capitalisation rules. As a practical matter, the banks are unlikely to allow any cash to be paid to shareholders in respect of any shareholder debt until the bank loan is substantially repaid - so any deduction for shareholder debt is largely of academic interest only. Whether the shareholder debt is subject to UK withholding tax or suffers some other tax is a complex issue which can't be addressed in a brief comment.
2. Replacing debt with equity is unlikely to make a significant difference to the overall tax take. Although dividends on shares are not deductible for tax purposes, the receipts (in the hands of institutional investors) will be tax free - so there is no difference in the overall tax position.
3. In any event, the profit made by PE funds principally takes the form of capital gains. As the investors in these funds are mainly pension funds (and as a matter of policy we don't tax capital gains realised by pension funds), the gain will be tax free - whether or not the company is funded by debt or equity.

Some interesting observations here but I suspect given our history that any tinkering with the tax relief of business loans will lead to money exiting the UK quickly.

I also suspect that small and medium sizes businesses will carry the bulk of the liability as was seen at the last budget.

Take your humble buy to let investor. They can easily sell up in the UK and buy a house (another buy to let) in France, Italy, etc and get favourable tax treatment. For example property purchase in Poland is currently CGT exempt on sale profits if owned for 5 years plus and still set interest payments against rent received.

The same appies to It consultants, mangements consultants and specialists from the film industry. Many of these live in Italy and France but still operate in the UK. The decision was taken purely on taxation issues. Once it became unattractive they moved.

Taxation is becoming an EU issue and is only going to expand. If HMRC starts hitting business loans and buy to lets do not be surprised at the consequences.

Sadly HMRC and Government depts/ministers tend to look at short term results only and not the wider picture. This is particularly true of the treasury in my experience.

  • 29.
  • At 01:57 PM on 03 Jul 2007,
  • Warren wrote:


Why is everyone so angry about private equity all of a sudden?

Throughout my investing life, since the 1980's, Private Equity firms have been plying their trade. t is only recently that so much vitriol has come to the surface.

The last time people noticed these firms was in the late 1980's when LBO's (leveraged buyout's as they were then called) were doing the exact same things. Right up until the stockmarket crash of the time.

Debt is dangarous in the wrong hands (thats not to say i'm against debt pre-se, just excessive debt).

Debt is needed just as equity is - i'd just rather have more equity than debt.

very interesting. companys do business on borrowed funds with limited capital. pay very high dividends. Is it tax planning on a globalised economy.Whether corporate tax as a source decling for govt.SErvice tax is galloping as a source. It is collected from public and passed on to the govt.Public finance( govt.revenue) taxation policy} is changiung.just read .

  • 31.
  • At 02:23 PM on 03 Jul 2007,
  • Simon Allum wrote:

Michael Orton (Post 26) - the reason that individuals don't get tax relief for their mortgages or credit cards is simply that they don't pay the interest in the course of a trade. In order to be deductible, an expense has to be incurred wholly and exclusively for the purposes of a trade. The interest paid by the companies falls within that requirement, as would interest paid by an individual for business purposes. Interest paid for a non-business purpose isn't deductible, whether paid by an individual or by a company.

  • 32.
  • At 02:25 PM on 03 Jul 2007,
  • David Russell wrote:

I agree with the point made by Michael Orton at 01.41. As an individual I would love to be able to take on lots of debt and claim the interest as a legitimate "life " expense which could then be offset against my income tax.But I cannot. So why should a business be able to take on lots of debt and claim the interest as a legitimate "business" expense? Adam at 01.36 talks about fair and reasonable. Fair and reasonable to me is the same rules for all.

  • 33.
  • At 02:38 PM on 03 Jul 2007,
  • James wrote:


The logic of interest being deductible from profits is distinct from the issue of home ownership, and there is a clear rationale for it.

The tax regime's objective is to appropriate some of the company's profits for the government, without reducing the company's incentives to innovate, invest and grow. As such, costs which should grow the business are deductible.

If I were to borrow to buy a home, the cost of owning my home (the mortgage repayments and interest payments) do not in any real sense enable me to increase my income (i.e., my salary). Therefore, it makes no sense for interest on my mortgage to be deductible against my salary. However, if I were self-employed, the cost of my PC would help my business grow, and therefore should be (and is) deductible.

In the case of a business - the principal purpose of which is to generate cash for shareholders - borrowing to build a factory, or to pay your workers more, or any other legitimate business purpose, should help generate more cash profits. As such, the cost of borrowing, should be treated like any other cost for the business - i.e., set-off against profits for tax purposes. Otherwise, companies would have a dis-incentive to invest and grow.

Taking on debt, for many companies, is optional, but it is only optional in the same way that giving a pay rise to your staff, or paying for the electricity in your offices is optional - i.e., it is a cost associated with running and growing the business.

In the case of private equity, the logic/rationale for using debt to finance an acquisition is somewhat more complicated, but the principle is the same - PE firms borrow money to finance the acquisition of a company to help it grow. The debt is a legitimate activity of the company because it allows the company to return more money, more quickly to its shareholders, which is the purpose of all business activity.

  • 34.
  • At 02:42 PM on 03 Jul 2007,
  • Richard Simmons wrote:

Tax may be an issue but have you noticed how the motorist is being squeezed. Until recently my experience was that the AA would generally respond to calls in London within 45 mins. Twice in recent weeks the call out time has been 2 hours imagine what this reduction in service level is doing for short-term profitability.

  • 35.
  • At 03:47 PM on 03 Jul 2007,
  • steve thompson wrote:

yawn - wow PE companies dont pay any corporation tax......

there are more than 20 taxes in the UK which companies(PE owned or not) are subject to - why dont you actually add to the debate and find out how much in all taxes these pe companies pay - business rates, irrecoverable VAT,employers national insurance etc etc

the constant attacks on the PE industry without any factual basis is very lazy journalism.

the heart of the matter is that the government set the tax rules, and the pe funds and large multinationals use the rules to reduce their tax bills - its a govt policy argument at the end of the day.

  • 36.
  • At 04:11 PM on 03 Jul 2007,
  • tomo wrote:

kzzz1369: No it makes no difference if the lender if overseas based If the income is earned in the UK, the tax on interest receipts is payable in the UK.

Most worrying that you should receive praise from the Sunday Distress of all people - think most of the other comments make valid points.
To my mind the question has to be not how do PE firms pay so little tax but why do the rest of us pay so much. Look at how hard those low-tax payers work to make their fortunes - imagine if everyone had a similar incentive.

We should set a statutory maximum tax take of 30% of GDP and then prioritise how to spend it - not take as much as is possible and then simply waste it on cock-eyed government initiatives (as we currently do).

  • 38.
  • At 04:35 PM on 03 Jul 2007,
  • Adrian Clare wrote:

This article is powerful support for those who believe that the BBC has a bias. As a tax lawyer, I think Tomo is right to say that UK sources income is always taxed in the UK. But it seems to me that seen in the context of several articles on this subject from Mr Peston, they add up to a crusade against the PE equity business. If you want to attack the industry on strong grounds, email me. there are much better arguments then these, Mr Peston

  • 39.
  • At 04:57 PM on 03 Jul 2007,
  • Jacques Cartier wrote:

Let me try to get this straight. Democracies use tax money to maintain the social system, and they depend on business to generate the tax in the first place. That is the contract that sets us apart from cavemen.

So some merchants have found nooks and crannies to hide in. But surely the idea must be to plug those up, else we’ll all be fully entitled to say “screw tax, like that private equity lot over there”, and where would that lead?

So the plan would be to optimise the way we treat business to squeeze the most out of it for _us_ Brits. Too little and they get a free lunch at our expense, but squeeze them too much and they loose their greed, which is not what we want. The trick is to allow business to operate here only if they are pumping money into _our_ tax machine, not somebody else’s.

  • 40.
  • At 04:59 PM on 03 Jul 2007,
  • Tony Ridge wrote:

Of course, as a general rule the recipient of interest paid in the UK suffers UK tax on it, even if the recipient is a non-UK resident person. Once income is outside the country it is effectively impossible to recover tax on it, so the rule is bolstered by the rule that the UK-payer must deduct the tax at source and hand it over to HMRC, leaving it to the non-UK recipient to claim it back if it thinks it was over-charged. However, when I used to practice in this field there were certain well-known routes whereby interest could be paid without deduction of tax, and I suspect this is still the case. This would constitute an effective legal 'alchemy' for turning taxable profits into tax-free ones and with PE-owned companies' profits being swallowed up in interest payments, I wonder how much of those interest payments actually suffer UK tax?

  • 41.
  • At 05:38 PM on 03 Jul 2007,
  • Dick wrote:

The argument is simple.. The more companies there are that go the PE route the less tax ends up in Treasury. I don't care if it's legal/illegal or otherwise but the fact remains that if the corporation tax take or any other forms of taxation are down then someone else will have to make up the difference. As far as I'm aware Gordon isn't planning to cut spending simply to accommodate the PE industry..

However, I agree with Adrian Clare that there are much better grounds on which to attach the PE culture.

I have long argued that PE companies create nothing new..

Interestingly the DG of the CBI Richard Lambert said this recently: "In today's rapidly changing economic world order, we must create more global enterprises if we want the UK to remain in the top tier of world economies. Yet in the past 20 years the number we have built from scratch has been low."


  • 42.
  • At 06:00 PM on 03 Jul 2007,
  • Paul wrote:

There have been a few comments that interest paid by a UK borrower will always be taxed in the UK, even if paid to an overseas lender. That simply isn't the case in practice.

Where the lender is a company resident in another country and not acting out of a branch in the UK, there is no liability to UK corporation tax at all. Although there is a prima facie liability to income tax which is deducted by withholding, in practice in a commercial lending situation the interest will either fall under one of the numerous exemptions from withholding under UK law, or the lender will be able to benefit from a treaty between the UK and its country of residence which provides for 0% withholding on interest payments between these countries (in both directions). Neither of these features are anything to do with private equity at all, they apply across the entire UK corporate tax system (and indeed feature in the tax systems of a large number of other countries as well). Nor are they examples of companies exploiting loopholes for their own benefit, these are the result of deliberate policy decisions taken by successive UK governments.

As other posters have commented, there are some perfectly good arguments against the proliferation of PE deals in recent years, but this isn't one of them.

  • 43.
  • At 10:13 PM on 03 Jul 2007,
  • John G wrote:

Easy to see what makes PE firms and their leaders the punch-bag de jour: They earns lots, use lots of debt, pay no/low tax, and are unafraid to make tough decisions etc etc.

What govts and journalists seem to forget is that the vast majority of the profits generated by the PE firms are paid over to their limited partners. These are often institutional investors like pension funds that need to invest their funds to generate returns. If you have a pension, the likelihood is that some of your money is indirectly in this industry.

Socialistically it is easy to argue that paying the leaders of the PE firms millions is not justified, but they are like many other captains of industry, they play within the law and play to win. The successful ones do well, others do not.

We live in a global economy and if UK plc cannot compete within it, once we have spent our colonial wealth we will be in real trouble. PE firms have a place in driving efficiency in their firms, just as charities have a place in our social structure. As with everything, the question is balance.

If PE firms are able to buy public companies from the stock market at a premium to their current value in the market, give them more aggressive capital structures (which they invariably can support) and increase operational efficiency, the bigger question is why are they not doing it anyway? Why are the public fund managers (who manage your and my ISAs and pension funds) not pushing their firms to do the same? You and I are paying these managers to pursue the same model they have forever even though their performance rarely beats the index.

By the way, everyone that has bought a buy-to-let property with a large mortgage is just taking on a personal LBO. Let's see if they think it is easy to make money in 5 yrs from now!

  • 44.
  • At 09:55 AM on 04 Jul 2007,
  • Rob wrote:

I watched this story on the BBC News last night with disbelief. The facts as described completely and utterly missed the point. The level of debt in a company is irrelevant as long as the interest is chargable to UK tax in the hands of the debt provider, or witholding tax paid by the company itself. The loophole may be that private equity is dressing up "equity" as debt, and managing to avoid tax on the interest earned. However, that is a completely different point from the one you are making.

Stating a companies operating profit, and then showing disbelief at the level of tax paid compared to the operating profit, shows an astounding lack of knowledge of how just about every company in the UK is funded. I challenge you to find one sizeable company in the UK that pays corporation tax equal to 30% of their operating profit.

  • 45.
  • At 10:12 AM on 04 Jul 2007,
  • kankerot wrote:

The real issue is that PE companies are not operating much different perspectve from a home owner. They use debt to buy a company (like a home owner) they do some changes to the company (nothing major as they buy companies with predictable income streams not rnd based companies like pharma or high tech) and then sell in a rising market. They have simnply taken advantage of the rising asset prices. The vast majority of the debt was used to purchase the company and not invest so I would not consider it as a legitimate business expense as others have argued that a home owner cannot consider the interest payments as an expense as it does not form part of a trade.

At the the heart of the issue is the Government, they set the tax laws and create a vast tax industry that adds not even £0.01 to the productivity of the UK economy.

What about only beng able to offset only 50% of the interest payments against tax?

  • 46.
  • At 10:30 AM on 04 Jul 2007,
  • Edward C.Forster wrote:

Our tax system is totally misunderstood. Who bears the burden of tax? It is obviously the consumer. Without his money no one could pay taxes. The cost of taxation has to be included in every consumer purchase and any company accountant could tell you that it is. Who else could possibly be providing the money for your employment and taxes?

So called taxpayers are simply proxies financed by consumers. By the convoluted complexity of current taxation government largely hides its cost. In the UK VAT is 17.5%, but the actual cost to the consumer hidden in consumer prices is four times that. We are taxed whenever we spend and no one escapes not even the poor.

Whatever tax system we dream up it will inevitably tax consumption. We should end our delusions and just tax consumption. We would all be so much better off.

  • 47.
  • At 01:58 PM on 04 Jul 2007,
  • Michael Orton wrote:

James, thank you for your explanation in post 33.

I'm glad to learn there is some underlying logic to tax not being payable on the interest.

However, if I borrow money simply to buy an existing company and then shift that debt into the company I have bought, then the debt is not being used to grow that business and your argument does not apply.

It would seem the problem is not with the debt itself, but with the ability to move debt into the company which was bought with the money raised.

I'm also less than convinced by your argument that an individual should not be able to deduct interest from tax. After all, the whole UK taxation system exists for my benefit as a subject of the UK. Having somewhere to live, clothes to wear, food to eat, a school down the road, a hospital near enough, plus the odd luxury item or two, is in fact the whole point of the exercise.

Taxes need to be raised to pay for things the individual members of the community need, but which make more sense to pay for as a community. There is no other justification for their existance.

I did study economics some decades ago, but the course did not include anything on the theories underlying taxation. However, every economic theory which was covered was eventually shown to be valid to the degree that certain conditions were met in the economy. In a real economy these conditions would never be 100% true or false, and, worse, vary over time. I suspect tax theory is at least as complex.

  • 48.
  • At 11:41 AM on 05 Jul 2007,
  • Nicholas A wrote:

I think Michael Orton's comment (47) illustrates the difficulties of simplifying a complex topic. As a matter of English law you cannot just "move" debt used to finance the acquisition of shares down into the company being acquired. That would amount (i) to illegal financial assistance (which is an imprisonable offence) and (ii) could be an illegal reduction in the capital of the company. There are procedures that are available to achieve similar results - but they turn on the precise facts and circumstances.

Fundamentally, I think the press focus on the deductibility of bank debt is misplaced. Although the interest may well be deductible in the hands of the borrower - it will usually be taxable in the hands of the lender - with an overall neutral tax effect. There are exceptions to these rules - but the exceptions are there as a matter of public policy (nothing to do with PE), where Parliament considered that the exception provides overall benefits to the UK economy (for example under bilateral tax treaties, in respect of pension funds or charities, or in respect of quoted eurobonds).

There are economic and fiscal issues that are worthy of debate in relation to private equity - but the tax deductibility of bank debt is not one of them.

  • 49.
  • At 10:02 AM on 06 Jul 2007,
  • keith morris wrote:

A report by the BBC recently showed the Corporation was systematically biased against business.

This article by their so called Business Editor illustrates this. As many posts here have stated this headline grabbing storey ignores the full reality, including the fact that the interest paid is taxed in the hands of recipents (at least those that are UK tax payers).

When in anothe context the Metropolitan Police is described as instatutionally racist major steps are taked to adress this. What, if anything, is the BBC doing about its own daming report on its bias against business ?

  • 50.
  • At 12:49 PM on 06 Jul 2007,
  • peter wrote:

Its quite simple £0.00 profit means £0.00 tax. It's the same for all businesses.

To make corporate interest payments tax deductible, is absurd and sounds like something the Daily Mail might say. What better way to stifle investment.

As one Gordon Brown might say, "borrowing to invest is a good thing"

  • 51.
  • At 09:56 AM on 07 Jul 2007,
  • Barry Ojar wrote:

There should be a limit to the amount of interest that is tax deductible .

The tax on capital gains at 10/20% should be limited to a proportion .

ALL income earned here should be taxable irrespective of where teh person or company resides .

The Tax burden should be shared by all those who earn money from the UK and not only by those who or not clever enough to be domiciled oveseas or clever enough to work out the tax loopholes or uncaring enough to be domiciled overseas .

The problem is the people who avoid paying tax tend to cleverer than those who set up the tax rules !!!!

  • 52.
  • At 03:54 PM on 09 Jul 2007,
  • Mark Catterall wrote:

Passing over the fairly complex arguments concerning the UK's tax regime as it applies / does not apply to PE business - principally because I am not qualified to comment - I would like to take issue with the suggestion that if the governement comes down any harder on the private equity companies they will switch their attentions elsewhere. Where precisely would they look; a France, Spain or Germany perhaps where state erected obstacles to foreign ownership, coupled with restrictive labour laws, plus far more punitive tax rates make those countries SUCH attractive investment propositions? Or maybe one of the smaller European countries because they represent a market which may, in some cases, be as much as 20% of the UK? I would suggest the governement could increase tax revenue from PE because tax is surely only one of a number of factors attracting investment here, and maybe not even the most important.

  • 53.
  • At 07:19 AM on 12 Jul 2007,
  • James wrote:

Mark -

It is important to separate the considerations about where PE firms make their individual investments, and where the firms themselves are domiciled. All of your points are correct, in respect of PE firms' investments in other countries - there are tougher rules on foreign ownership, restrictive labour laws and harsher taxes in countries like Germany and France. Each of these makes it (potentially) harder for a PE firm to invest in other countries.

However, a PE firm doesn't have to be based (and its executives do not have to live) in the country where it invests. Many UK-based firms own businesses all over the world.

The suggestion in earlier posts/articles is that if the UK clamps down hard on the tax treatment of UK PE executives, they may choose to move their firms to other countries, e.g., Switzerland. The union laws and the size of the country wouldn't really matters as they would still make investments wherever they chose.

The key assumption is that there would be some degree of 'competition' between countries to get PE firms to base themselves there. Countries would 'compete' by offering more favourable tax rates than the UK, just like Monaco, Luxembourg and the Channel Islands have done for other reasons.

It's important to keep in mind the 'economy' which sits beneath private equity firms. Sure, there are a small number - approx. 100 - of very highly paid senior executives who pay little or no tax (although, 10% of £50m is still £5m, which is equivalent to the tax of 1,000 'average' workers in the UK). However, the investment firms these people run indirectly employ thousands and thousands of very well paid advisors (lawyers, accountants, consultants, bankers) who help them to buy and sell companies. Most of these advisors are based in the UK, and virtually all of them pay a full 40% tax bill. If PE firms move abroad because the UK tax environment changes, there would be a risk that London would become less of a centre for deals to happen, and the government would not only lose whatever taxes the PE executives pay, but also the taxes of large numbers of advisors who would inevitably gravitate to be close to their clients.

  • 54.
  • At 08:13 AM on 18 Jul 2007,
  • jim evans wrote:

Dear Robert

British industry is being bought up by Foreign Venture Capitalists.This is Globalisation on the march, capitalism, and greed.This is all going to end in tears, and when the plug is pulled on Debt, there is going to be only one looser, the British Public.

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