Few surprises for private equity in Budget ’02

The UK Chancellor of the Exchequer has delivered his budget for the coming year, including the anticipated reduction of capital gains tax on business assets to 10 per cent.

Gordon Brown has announced details of the UK government’s financial strategy for the coming year, presenting little that was unexpected for the private equity industry. Many of the proposals, including confirmation of the reduction of capital gains tax on business assets to 10 per cent, had been previously touted by the government.

John Mackie, chief executive of the BVCA, said he welcomed the Chancellor’s initiatives on small company taxation and his confirmation of the reduction of capital gains tax. He added that the BVCA “would continue to press for further improvements, as well as the further simplification of the tax system as it affects growth businesses.'

According to Paul Megson, head of private equity taxation at KPMG, there were a couple of announcements that may prove to be beneficial to the private equity investors. “The exemption of purchased goodwill from stamp duty will be welcomed and brings it into line with current intellectual property duties.”

The Chancellor also announced slightly better R&D credit than had been expected. “Until now, existing SMEs relief has been interpreted by the Inland Revenue to be unavailable to typical VC fund investments. This is because a company can't be an SME if controlled by institutional investors including VC funds. The new R&D credit (increased to 125 per cent from 120) will apply to any company.”

On the downside, Megson believes that the one per cent increase in all national insurance contributions could represent a significant increase for VC firms.  “The extra one per cent is also levied on income above the upper limit. For a typical VC [under schedule E] a 2 per cent additional cost on his entire income is quite significant. It makes slightly more attractive the option of converting the VC adviser/manager company into an LLP.”