The British government is being urged to take a light-touch approach to enforcing a new tax regime set to hit VCs’ earnings hard, ahead of a key consultation deadline.
The Labour Party pledged to close the carried interest “loophole” in its 2024 election manifesto, promising to raid the lucrative sums partners in private equity and VC firms receive based on their performance, known as “carried interest”.
At present, carried interest is taxed at 28%. From April that figure will rise to 32%, before jumping anywhere up to 47% in 2026.
But Labour has extended an olive branch to investors, promising to limit taxes to closer to 34% if certain conditions are met, such as a minimum holding period for investments or requiring managers to make further co-investments.
“Many details remain to be worked out,” says James Ross, a corporate tax expert and partner at global law firm Taylor Wessing. “For example, it’s not yet clear how the new regime will apply where managers of UK-based funds reside abroad, and how this will interact with tax treaties.”
So while the tax hike is coming, who it applies to and how it’s enforced remains up for debate. The government has been seeking views from stakeholders through a technical consultation, which closes Friday.
A disincentive to remain in the UK
John Darling, founding partner at Creative Capital Ventures, an early-stage VC based in London and Lisbon, says the new tax could undermine investment in British companies. “It’s a massive jump and a serious disincentive for investors to base themselves in the UK,” he told Sifted.
“Instead of taxing carried interest like salary, we should be thinking about incentives that keep investors and entrepreneurs in the UK, so we can continue building world-class companies right here.”
Supporters of the reform say it’s a question of fairness: why shouldn’t private equity and VC firms have their earnings taxed in line with most of the population?
Asked about the benefits of the changes, Elena Rowlands, a tax expert at London-based law firm Travers Smith, tells Sifted the new regime simplified existing rules. She adds: “Given the pre-election fears that Labour could opt for a more radical approach tax carried interest at full income tax rates, this is clearly a better result than many feared.”
But this has been a small comfort to many investors based in the UK.
“The idea that increasing taxes will bolster public finances is true in a narrow sense, but it overlooks the broader economic impact on the UK’s investment and startup ecosystem,” says Sam Hields, partner at deeptech VC OpenOcean, which has offices in London and Helsinki.
“Now more than ever, the UK needs to incentivise investors and business owners to take risks in building the next generation of startups,” he adds.
“We must give these individuals a reason to make calculated risks if we want to drive business growth, create jobs and foster innovation.”
Sifted approached the Treasury for comment.
Read the orginal article: https://sifted.eu/articles/vc-carried-interest-uk-consultation/
