Private Equity - Good News for Managers!HM Revenue & Customs (HMRC HMRC Her Majesty's Revenue and Customs (UK) HMRC Health Management Research Center (University of Michigan) HMRC Helicopter Multi-Role Computer HMRC Hierarchical Maximal Ratio Combining ) has finally admitted that its interpretation of parts of the income tax legislation in relation to ratchets and sweet equity were wrong, removing a large part of the doubt over the tax treatment for managers on private equity transactions. Soon after the income tax regime for employees owning shares was changed in 2003, HMRC agreed a memorandum of understanding A Memorandum of Understanding (MoU) is a legal document describing a bilateral or multilateral agreement between parties. It expresses a convergence of will between the parties, indicating an intended common line of action and may not imply a legal commitment. (MOU (Minutes Of Usage) A metric used to compute billing and/or statistics for telephone calls or other network use. ) with the British Venture Capital Association (BVCA BVCA British Private Equity and Venture Capital Association (London, England) ) setting out safe harbours for private equity transactions, whereby deals complying with the conditions set out in the MOU would not result in an income tax charge for managers in respect of their shares. Although the MOU dealt principally with the tax treatment at the time of acquisition of the shares it did provide some comfort in relation to the tax position on a subsequent exit, especially in relation to ratchets. Since then HMRC had appeared to be trying to undermine the MOU by arguing that, notwithstanding the MOU, the operation of a ratchet could trigger an income tax liability under the provisions of Chapter 4 ITEPA 2003 (commonly known as the special benefits charge). They also began to argue that even though the conditions of the MOU were satisfied, if the managers had invested almost all their investment in shares (so called sweet equity) rather than investing the same proportion in loan capital or preference shares as the institutions and the company was highly geared, they were receiving a benefit and this 'thin capitalisation' could give rise to a proportion of any gain realised on an exit being subject to income tax not capital gains tax. Although practitioners disagreed with HMRC's interpretation of the legislation, this led to a large degree of uncertainty as to the tax treatment of managers' investments in private equity transactions. Since any income tax liabilities would be due from Newco under PAYE PAYE abbr. 1. pay as you earn 2. pay as you enter PAYE (in Britain, Australia and New Zealand) pay as you earn; a system by which income tax is deducted by employers and paid directly to the and national insurance liabilities could fall on Newco, this was a concern for the institutions as well as the managers. > The good news In a statement on their website, issued this month, HMRC has now confirmed that having taken legal advice, their previous interpretation of the legislation was incorrect and the special benefits charge cannot apply where the benefit to the shareholder arising on the operation of the ratchet, reflected rights inherent in the shares at the time they were acquired. HMRC has also been advised that the thin capitalisation A company said to be thinly capitalised when its capital is made up of a much greater proportion of debt than equity, ie. its gearing is too high. This is perceived to create problems for two classes of people. argument was not sustainable. Is this the end of the story? Whilst this statement gives comfort in relation to current and past transactions, HMRC has announced that they are reviewing the tax treatment of management equity and carried interest funds. It is likely therefore that there will be future changes in legislation which may make the tax treatment of management equity less attractive. Other issues on private equity deals Since the 2005 changes in legislation, transfer pricing Transfer pricing refers to the pricing of goods and services within a multi-divisional organization, particularly in regard to cross-border transactions. For example, goods from the production division may be sold to the marketing division, or goods from a parent company may be remains an issue on private equity transactions, meaning that Newco is unlikely to be able to deduct de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. all the interest it pays on the debt to the institutions. HMRC is also still contesting the pre 2005 position in relation to transfer pricing on private equity transactions so uncertainty remains as to the tax treatment of interest paid on institutional debt prior to this date. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or . Ms Liz Morgan Pinsent Masons Pinsent Masons is a full service commercial law firm. The firm ranked amongst the top 15 law firms in the UK and internationally ranks in the Global 100. Pinsent Masons has over 275 partners, a total legal team of around 950 and more than 1,500 staff in the UK and Dashwood House 69 Old Broad Street London EC2M 1NR UNITED KINGDOM Tel: 2074187000 Fax: 2074187050 E-mail: clare.turnbull@pinsentmasons.com URL URL in full Uniform Resource Locator Address of a resource on the Internet. The resource can be any type of file stored on a server, such as a Web page, a text file, a graphics file, or an application program. : www.pinsentmasons.com Click Here for related articles (c) Mondaq Ltd, 2006 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com |
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