Friday, June 22, 2007

British tax dodging - again

There is a good article in the London Evening Standard about how only a sixth of of Britain's wealthiest citizens seem to be paying their taxes properly. The rest, it says, "use a battery of sophisticated but legal techniques to avoid paying." Blog comments underneath the article indicate the indignation that ordinary people feel about this. As The Independent put it recently: One rule for the super-rich, another for everyone else. The latter article continues the furore over private equity in Britain and the United States (which we have covered already) and which continues to rumble on. A letter in the Financial Times exposed some weasel words from private equity practitioner Guy Hands, who had tried to defend the idea of private equity billionaires paying less tax than their office cleaners by saying that this money "is risk capital and should be taxed as such." As the letter in response to this claptrap explained:

As little as 0.01 per cent of the fund value is subscribed as capital into a limited liability partnership. The managing partners contribute 20 per cent of that capital sum. The remaining 99.99 per cent of the fund's de facto investment capital is loaned on an interest-free basis by the primary investors. The managing partners do not subscribe (risk) any further funds as loans, but they ultimately receive 20 per cent of the final profits of the fund, if it is successful.For a $1bn fund which returns $1.5bn after management and other charges and costs, this implies that a $100m profit can be obtained for a nominal investment of $20,000 in the "carry". Mr Hands may call that a reward for "risk capital", but most people would call it a very, very large employee bonus.

The sentiment was echoed by Adair Turner, former director-general of the Confederation of British Industry, and the thought was extended by Lord Parry Mitchell, whose own company was bought out by a private equity company recently. As he explained, in another letter to the FT:

This is only half the story. Many of the principals in UK private equity are also non-domiciled residents and as such pay no tax on non-UK income. Combine taper relief with non-dom status and in a jiffy any good tax adviser will be able to devise a structure that will leave some of the richest people in this country paying some of the lowest tax rates. Surely that can't be right?

And as for the claims that if the tax regime is tightened, these peripatetic entrepreneurs will be off to Switzerland, Monaco or Luxembourg, my response is simple - get on the M4, exit at Junction 4 - at the end of the road you will find Heathrow. You know what to do.


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