I wrote this Tweet last night after a conversation with Jo Maugham, the tax KC who is the director of the Good Law Project who wrote the Tweet I was promoting:
As Jo notes, this is a story about how the British Venture Capital Association managed to strike a 'sweetheart' deal with HMRC (or rather, its predecessor, the Inland Revenue) back in the 1980s as a result of which much of the income of those engaged in the venture capital industry has been charged to capital gains tax ever since when it should have been classified, in Jo's opinion, as arising from trade and so be subject to income tax.
It is clear from the evidence that the Inland Revenue shared Jo's doubts on this issue back in the 80s, as do I.
It is also clear that the extra-statutory deal on taxing this inc0me as capital gains was reached as a result of political pressure from then Chancellor Nigel Lawson.
I will, in the Taxing Wealth Report 2024, be continuing my recommendations for the reform of HM Revenue & Customs in due course. It is precisely to root out and end such abuses that I am making such suggestions.
There is no room for those with privilege in the UK to be taxed on a non-statutory basis, but as Jo notes, although the Good Law Project has now won a case on this issue, suggesting that this arrangement may not be legal, the issue is being ignored by HM Revenue & Customs and the media, for reasons that are hard to explain.
What is needed from HMRC now is clarity on this issue. If they think they have been right all along, they should state their reasons and then suggest how the matter will be put on a statutory footing.
If the argument cannot be sustained, then it is clear that the arrangement must be brought to an end, and back taxes should be collected if the law has been inappropriately applied.
But what is not possible is that there be radio silence from HMRC on what they are going to do. Tax justice demands that they suggest what their next step will be.
There is more on this on the Good Law Project website.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
When I was raising capital for a startup in 1986, the VCs who provided the finance could have had no expectation of getting it back if the company was not successful. That was my understanding of venture capital, and I continue to have enormous respect for those people who take these difficult and risky investment decisions, true risk investment so vital to enable commercialisation of early stage technologies.
There is a world of difference when comparing such true venture investors to the asset-stripping private equity funds.
That point is made in the work to which Jo refers
I suspect the reason the story about the lack of statutory basis for hedge fund taxation is abundantly clear. The close linkage of those with money to the levers of power in the UK is clear. It includes the control of many media outlets.
Universal suffrage came with the availability of printed leaflets to all. Social media is doing the same, as as before the response of those who want to maintain status quo, is to disassemble and claim equity will result in mass starvation, despite exactly that happened in the great famine in Ireland, under their unfair system. The rising mortality in UK away from London and SE suggests, wealth haorders have learnt nothing from history.
Didn’t Nigel Lawson also align CGT rates with income tax rates? In which case at the time the arrangement was agreed it wouldn’t have had quite so much impact as it does now?
I promise you it would: CGT allowances were high and there was no NIC
“But what is not possible is that there be radio silence from HMRC on what they are going to do”
HMRC has not been silent. They sent a lengthy response to The Good Law Practice setting out their position. It’s worth reading and gives a more balanced understanding of the position than does the article above. There is no “non-statutory sweetheart deal”. A private equity fund must be able to demonstrate that it is investing and not trading in order to fall within the ambit of the BVCA agreement and that there never was any blanket concession for the industry as a whole.
So Jo and Dan Neidle are both wrong?
I am really not convinced
It is, of course, possible HMRC are telling the truth. Do they comment on whether the agreement was properly implemented oor just applied as a sweetheart deal ‘in error’?
You say..,
“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” – “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.””
Turns out though that this is not true as what HMRC actually said was:
“In circumstances where carried interest is generated from an underlying fund which is carrying on a trade, that carried interest 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.”
And it’s the “which is carrying on a trade” bit which is key. As HMRC for the most part don’t think that the buying and selling of a business in the way most private equity firms operate amounts to a trade. Maugham is misquoting what HMRC say by leaving out the first part of the sentence and so changing its meaning.
HMRC conceded nothing. In the letter which HMRC wrote to The Good Law Project, they make clear that there is no ‘sweetheart deal’, no blanket concession and no extra-statutory treatment. Their position remains exactly as it was prior to the ‘challenge’.
Maugham’s co-conspirator in this challenge to HMRC is Dale Vince. HMRC finish their letter by suggesting:
“Finally, if Mr Vince is truly concerned with tax collection, HMRC respectfully suggests that he should reconsider the Proposed Challenge. For the reasons given, it lacks any legal merit. Furthermore responding to it is using up substantial amounts of scarce resources which could otherwise be deployed in service of HMRC’s statutory function of collecting tax.”
You are disingenuous how you present the facts here Richard.
I have spent quite a lot of time in my life finding HMRC making claims that are wrong.
Jo and Dan Neidle have carefully assembled evidence here.
And it is commonly known this is how carried interest is actually taxed.
I am happy with Jo’s claims. You have not given any actual evidence as to why you disagree. But I note trolls are saying much the same as you are here. Who is feeding you the lines?
If private equity firms and venture capitalists are engaged in the business of making money (why else do they exist?), why should they not be considered to be engaging in trade?
The glairngly obvious question, appropriately asked
I’m no expert but the thing is this:
If the tax regime is used to mitigate risk, then the ‘venture’ bit of ‘venture capital’ ceases to exist.
It also becomes a flag of convenience for asset strippers?
I think you’ll find this an all too true story of the Thatcher ‘boom’ (it was not a boom, it was a huge transfer of wealth within British society) from the 80’s onwards. Lawson & Lamont were looking after their hinterland. Why, of course they were!