ICAEW’s tax and corporate finance faculties have responded to the government’s call for evidence on the tax treatment of carried interest. Carried interest is received by fund managers, mainly within the PE industry, and depends on the performance of the underlying businesses that the funds have invested in.  

Currently, carried interest is taxed at capital gains tax rates. This is based on the memoranda of understanding dated 25 July 2003 between the then Inland Revenue (now HMRC) and the British Private Equity & Venture Capital Association. Legislation has been enacted since then that makes certain receipts liable to income tax, and in some cases, national insurance contributions. 

The government believes that the tax treatment of carried interest does not appropriately reflect its economic characteristics and has announced its intention to change the rules.  

ICAEW’s view 

ICAEW considers that the current taxation of carried interest in the UK is on a par with taxes charged in other countries, and that any changes could adversely affect the level of investments made in growing UK businesses, as well as delaying new investments. ICAEW is concerned that any disruption to the agreement reached with the industry on taxation of returns from PE could damage this valuable part of the UK economy.   

ICAEW understands that PE firms operating in the UK have a high percentage of non-UK domiciled employees/partners. Therefore, any changes to the taxation of carried interest must be considered in the context of the wider changes that are being made to the taxation of non-UK domiciled individuals and the remittance basis rules. 

If changes are to be made, consideration should be given to the commencement date, and whether any transitional or grandfathering provisions are offered to existing PE structures. Additionally, care should be taken to prevent double taxation where interest is treated as capital in one jurisdiction and income in the UK. 

ICAEW is concerned that the government has described the current tax treatment of carried interest as a ‘loophole’. ICAEW believes that referencing an agreed and long-standing tax treatment as a ‘loophole’ impugns the reputation of professional advisers.