Private equity tax breaks 'could end'

There has been gowing criticism of the industry after claims that some of the buyout millionaires pay less to the taxman than their cleaners pay.

Sir Ronald Cohen, the Prime Minister-elect's close business ally and a founder of the UK's private equity industry, yesterday joined the row by saying partners of the multi-million-pound funds have to pay more to the Treasury.

An aide to the Chancellor described Sir Ronald's comments as an "interesting" sign that there was a growing "consensus" in the industry on the issue.

The chief executive of Britain's leading private equity lobby group resigned yesterday as the pressure escalated.

Peter Linthwaite stood down with immediate effect from the British Venture Capital Association just two days after being hauled over the coals by MPs on the Treasury Select Committee.

The MPs attacked Mr Linthwaite and his colleagues for abusing the system which allows them to pay only ten per cent capital gains tax on the sale of shares, instead of income tax at 40 per cent, which is normally paid by all those earning more than £34,600.

At the start of a major parliamentary inquiry into private equity, MPs said the tycoons used the capital gains loophole - meant to encourage business start-ups - until they had "money coming out of their ears".

In an interview with the Financial Times yesterday, Sir Ronald, the founder of private equity giant Apax Partners and former chairman of the BVCA, said: "Maybe the ten per cent rate needs to be raised to something more reasonable.

"The rules that are in place today were designed to attract venture capitalists to a nascent sector and the initiatives that were provided at the time were very well justified in my view and continue to be justified for smaller firms.

"But what has happened over the last few years is that the industry has been transformed by mega-funds." Taper relief reduces the amount of capital gains tax paid on the sale of shares by five per cent every year, provided the asset is held for two years.

Until now, the Chancellor has been resisting pressure to end the relief in case it hits other business taxpayers.

But comments on an industry consensus by an aide to Mr Brown were the clearest signal yet that after he becomes Prime Minister on June 27 he will ask the next Chancellor to shakeup the system.

Mr Linthwaite's resignation was attributed to his weak defence of the industry at the parliamentary session on Tuesday.

Private equity firms borrow money to buy businesses and, after attempting to make them more efficient and profitable, sell them on.

However, unions accuse them of asset-stripping, breaking up companies and laying off hundreds of workers.

Last week one of the industry's leading figures Nicholas Ferguson, chairman of SVG Capital, admitted that executives pay less tax than their cleaners.

Yesterday BVCA chairman Wol Kolade said of Mr Linthwaite: "The BVCA and the industry appreciates and is grateful for Peter's hard work over the last two years in a very challenging environment.

"Our job now with the industry is to promote the private equity and venture capital industry as the force for good which it is."