The UK Treasury announced its financial outlook and policy changes for the next year during the Autumn Statement. Chancellor of Exchequer, George Osborne, announced quite a few changes, but hedge fund and private equity fund management teams were most focused on the new measures to crack down fees.
Focus on Tax Avoidance
Once again, there was strong focus on tax avoidance in the Autumn Statement. Tax avoidance has been a political hot potato for a few years now and once again, the speech was filled with policy changes aimed to tackle the increasing tax avoidance (The Financial Times Adviser).
One of the policies will also influence private equity firms, as the UK Government is going after the ‘investment fund manager’ fee income. This will see both hedge fun and private equity managers hit the hardest.
Going After the Fee Structure
Investment managers are currently able to file the income they receive from fees as capital gains, which allows them to avoid paying income tax. Wealth Manager gave the example where “an annual management fee could be set between 1-2% of assets under management, but the manager claims there is a variable performance-related aspect to the fees and the income they receive should therefore be taxed as capital gains.”
Private equity firms have been re-thinking the fee structure in recent days, as many big private equity firms are looking into moving to ‘core’ investments.
Furthermore, the Treasure is thought to estimate that around 5,000 individuals are currently utilising this LLP fund structure to cut their tax bills (Wealth Manager). For many experts, this is a clear indication there is a strong lack of transparency, something the US authorities have been keen to address as well.
The Autumn Statement read: “Historically, these fees were charged to tax as income; however over the last few years private equity funds in particular have structured themselves in ways to avoid tax by enabling these fees to be charged to CGT.”
The Government Hopes to Raise £360 Million
The authorities are expecting the new measure will help raise £360 million in the next four years. The UK Treasury believes the private equity fund fees aren’t liquid, as management often argues, but should be treated as fixed and therefore, taxed as income.
Money Marketing quoted the statement’s assessment of the fees, which said the fees applied, “represent work undertaken to manage the investment and are not dependent on investment performance,” and therefore must be taxed as income.
According to the UK Treasury, the new rules won’t influence any performance fees, such as the so-called ‘carried interest’, and it won’t affect “returns which are exclusively from investments by partners” (Investment Week). The legislation will be effective from 6 April 2015.
Overall, the Autumn Statement received a mixed welcome and some measures were seen more favourable to others. It remains to be seen how the legislative changes influence UK private equity firms and whether companies will change the way they structure fees.