Private equity enters the general election debate

Tax evasion has been one of Labour's biggest political footballs in recent weeks, with the party's manifesto even pointing the finger at private equity. According to a Labour spokesperson, speaking to unquote", the party would rewrite the memorandum of understanding between HMRC and BVCA, which currently outlines how carried interest is taxed. The changes would "restrict the amount that private equity managers can claim is a gain on their investment when they are only investing small amounts of their own money."

While Labour's plans may appear sensational at first glance, on deeper inspection, the proposal is fair and essentially seeks to deepen alignment in the industry – hardly a bad thing. Whichever way the industry reacts to the party's economic plans, and whatever the outcome of the election, one thing is clear – heavier tax burdens for the wealthy and large corporates seem unavoidable.

At an election debate held by Grant Thornton, Labour, Conservative and Liberal Democrat representatives appealed to audience members that comprised a wide spectrum of advisers, private equity practitioners and bankers. Speaking on the panel, Labour representative Chuka Umunna, shadow secretary of state for business, innovation and skills, continued to tow the party line – asserting it is fair to ask wealthy people to contribute more tax. He pointed out that while there is political distrust, there is also distrust of business. He said it is an unattractive sales pitch to customers that businesses will avoid paying tax simply because it is legal to do so. "This issue makes constituents angry – that there is one rule for big business and another for them."

Nick Boles, candidate for Grantham and Stamford, representing the Conservative party, agreed with this sentiment. "It's about social responsibility," he said. Boles also pointed out that people will always find ways to avoid tax and that government needs to clamp down on this issue, and has much further to go.

The Lib Dems' Vince Cable, secretary of state for business, innovation and skills, believes the public record of ownership (a new rule that will support the HMRC in finding tax evaders) is already a step in the right direction. Furthermore, it will soon be illegal for banks and accountants to advise clients on abusing tax schemes.

Blurred lines
While the three parties appear resolute on introducing more draconian measures in order to deal with tax evasion, what seems to be a more pressing issue at this point is clearly defining what constitutes tax evasion and what is avoidance. Umanna asserted that those in the accounting profession are well aware of the differences, having recently lunched with heads of the big four. However, after a member of the audience raised the issue of blurred lines between tax avoidance and evasion, a quick poll of the room was conducted. A show of hands suggested around half of the audience was not clear on the differences between the two.

Another audience member raised the issue of the UK's skill gap – that one of the biggest challenges to growth is the lacking availability of technical skills. Cable agreed the skill gap is potentially the biggest constraint on the country's growth. He said that while efforts are being made to boost apprenticeships at higher levels, as well as plans that are underway to establish a digital college, in the short term there does need to be a more flexible approach towards immigration to bring in skills from outside the EU.

Indeed, productivity is perhaps one of the deeper issues being overlooked as political campaigns so far have tended to focus on tax, immigration and living standards – ronically, all issues that could be addressed by improving productivity. In February, the OECD warned the UK's poor record on productivity "since 2007 has been holding back real wages and well-being. The sustainability of economic expansion and further progress in living standards rest on boosting productivity growth, which is a key challenge for the coming years."

While the private equity industry and business leaders alike want the next UK government to provide the most conducive environment for growing the economy, perhaps business should be thinking more carefully about growing output, rather than griping over adjustments to the tax regime.

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