Taxman eyes ‘secret city’s’ cash

Just as regulators are seeking to monitor their activities more closely, the
taxman wants his share of the spoils.

A review of private equity management charges was in some respects not
surprising then. The fact that the managers appear to have won the first battle
is, however.

The tax authorities admitted late last month that they would not be pursuing
managers for an income tax charge on ‘ratchets’.

Private equity bosses often acquire shares at the same price as other
shareholders but see their holding ratcheted up to give them an entitlement to a
higher percentage of the company than they first paid for.

HMRC has released its view on the subject, accepting that its attempt to
charge income tax on managers’ gains was untenable in law. But, according to
experts, that will not be the end of it.

Paul Megson, private equity tax expert at KPMG, said: ‘It is good news, but
it is not entirely clear that the Revenue wouldn’t want to legislate to get back
to the position it had before.’ That is also part of a broader look at private
equity earnings.

Hedge funds also face scrutiny at the moment. The practice, in particular, of
channelling management fees to offshore jurisdictions is being examined by the
UK tax authorities. The fees, for marketing or other services, have to be
justified by being paid for at arm’s-length prices.

The taxman sometimes denies casting a jealous eye over the mind-boggling
amounts of money that go through private equity and hedge funds.

But it would be a brave adviser who told such clients that, in the long run,
they shouldn’t expect a higher tax bill.

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