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Latest 10 March 2023

HMRC and the £600m tax loophole

Steven May / Alamy Stock Photo

One of Britain’s most controversial tax loopholes might not even exist at all. It’s time for HMRC to apply the law properly.

As we await the details of Chancellor Jeremy Hunt’s second budget announcement, we’re warned that there will be no big ‘giveaways’ for the average consumer. The cost of living crisis will carry on getting worse for those on the average income. Many of us will face even higher energy bills and higher council tax from April.

Yet whilst the income of the average person carries tax at around 40% – once you include employer’s and employee’s national insurance contributions – private equity fund managers earning seven or eight figure salaries pay just 28% – thanks to a tax break from HMRC.  

‘Private equity firms’ are a controversial type of investment firm where managers buy businesses, with a goal of increasing their value, before eventually selling the company at a profit. Often they do this by loading the company up with debt and making widespread redundancies.

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Private equity executives take a share in the profits of the funds that they manage – called ‘carried interest’. Whilst they pay nothing for this stake, they often stand to get hundreds of millions of pounds, shared between a small number of executives. Carried interest can therefore make you seriously wealthy. But most private equity execs pay just 28% tax on this income – much less than, say, the average head teacher does on their income.

This is because of the ‘carried interest’ loophole, which means that private equity executives’ returns are taxed as capital gains, at only 28%, rather than trading income, at 48%. This loophole wasn’t made by Parliament  – but by HMRC after successful lobbying from the private equity industry in 1987. 

A new peer-reviewed analysis by Dan Neidle, former head of tax at one of the largest law firms in the world, argues that agreement is unlawful. Whilst, for years, people have been arguing about whether the carried interest loophole should be abolished, Neidle says it never existed at all. HMRC isn’t allowed to give sweetheart deals. And, were this loophole to be closed, HMRC would collect an estimated £600 million more in revenue each year, from just a couple of thousand people. To put that into context, it would cost the Government £544 million to expand free school meals for children from lower-income families in the UK. 

Good Law Project has been looking at this issue for some time. We are taking advice from a leading KC on whether to bring judicial review proceedings to force HMRC to apply the law properly – with no special favours for the private equity industry. 

If you agree that HMRC should be applying the law properly, please help our campaign by adding your name to our petition.