Win: Private equity managers could face £420m annual bill after legal challenge

Legal action by Good Law Project and the Ecotricity founder, Dale Vince, has forced UK tax authorities to abandon a deal that we believe led to some private equity fund managers paying tax at the wrong rate for more than 35 years.

Since 1987, HMRC has taxed the money managers receive from private equity funds as capital gains – at a rate of 28% – instead of as trading income, which is taxed at 47%. This has seen Government losing hundreds of millions of pounds a year – enough to pay the salaries of more than 10,000 nurses.

Good Law Project and Dale Vince warned the tax authorities in May of an impending legal challenge, arguing that this practice is unlawful in the case of buyout funds. These funds buy mature companies with borrowed money, using the company’s assets and income to pay off the debt before selling them on. This practice has crippled important economic sectors such as nursing homes.

HMRC has now conceded the key argument raised by Vince and Good Law Project, accepting that the money managers receive from buyout funds – known in the trade as their “carried interest” –  where appropriate “would be taxable as trading income in the hands of UK tax resident individuals. HMRC would expect such individuals to file their self-assessment returns accordingly.”

With buyout funds making up an estimated 70% of the private equity industry, this recharacterisation would net the Government a further £420m a year in tax.

Vince welcomed the tax authority’s admission that “private equity funds can be subject to the same tax rules as nurses and teachers”.

“The position until now has been driven by consecutive Conservative governments,” he said, “which is clear from the material that HMRC has disclosed.”

The £420m that could now be recovered represents a “significant sum”, Vince added, enough “to make sure our schools are safe from collapsing ceilings”.

“Private equity fund managers have been grossly undertaxed since 1987,” said the Executive Director of Good Law Project, Jo Maugham, “not because of the law but because of the political pressure put on HMRC by Government.”

“This stance could be easily reversed, without any change in legislation, and should be,” said Maugham, who is also a leading tax KC. “I hope a future Government takes that step.”

• This article was amended on 22 November 2023 to clarify that, following our legal action, UK tax authorities have abandoned the sweetheart deal for private equity fund managers.

• Good Law Project is thrilled to have achieved this win with Dale Vince and is grateful for the support of Phil White from Patriotic Millionaires, who helped to fund the legal counsel we needed. We’re also thankful to Dan Neidle at Tax Policy Associates, whose research sparked the idea for this legal action.
  

• This legal action was sparked by research from Tax Policy Associate’s Dan Neidle, published in British Tax Review.

• Letter from Good Law Project to HMRC (PDF), giving notice of a legal challenge.

• HMRC response to Good Law Project’s letter (PDF).

• 1987 statement from the British Venture Capital Association (BVCA) (PDF).

• Response to Dan Neidle’s paper from the BVCA (PDF).

• FT: UK loses £600mn a year by under-taxing private equity executives, says lawyer

• HMRC response (PDF)  to a Freedom of Information request for the aggregate amount of carried interest gains.