They kicked and screamed.
They threatened to up sticks and move offshore, taking their millions and the finely attuned capitalist minds that they went to great lengths to point out bring so much to Britain's economy, with them. They lobbied until they turned blue. All to avoid being hit with a new, punitive tax regime that they said would lead to massive outward migration from an industry that has become an indispensable cog in the country's economic machine.
In the end, Britain's buyout barons came off relatively unscathed. It could have been much worse. In his pre-Budget report the Chancellor of the Exchequer finally did away with the tax loophole that allowed buyout executives, among the most well-remunerated financial operators in the country, to pay just 10 per cent tax on most of their income. That was no great surprise. The so-called "taper relief" used to such great effect by the industry was after all among the most controversial aspects to come to light in a series of damaging public hearings that were conducted into private equity before the Treasury Select Committee in summer.
In its place Alistair Darling introduced a flat 18 per cent capital gains tax, hardly the crackdown feared. Given that most in the industry had, one, already acknowledged that an end to their highly favourable treatment was a fait accompli, and, two, that some in the industry were suggesting a 20 per cent flat rate as a workable alternative, the industry was breathing a collective sigh of relief yesterday.
Witness Ian Armitage, boss of Hg Capital. "If it's an 18 per cent tax for everybody, regardless of whether securities are quoted or unquoted, regardless of how long they are held, then I think it's fantastic," he said, before adding a note of caution. "On the face of it, it looks very good, but the devil will be in the details."
Private equity firms raise large pools of capital that they use to buy companies, restructure them, and then sell them on. The size and influence of the industry in Britain has absolutely exploded within the past five years. What were once just a few scattered firms focused on buying and selling small, uninteresting industrial companies has grown to a massive force that employs one in every five British workers and last year contributed £26bn to the Exchequer.
Britain is the unquestioned centre of the European industry, accounting for nearly two-thirds of the European market, and is second in the world only to America. A few companies that are now under the control of these groups include Alliance Boots, the high street chemist, the AA, the roadside assistance giant, and EMI, the music publisher. The outlandish sums reaped by the industry's professionals, who often push through massive jobs cuts in their efforts to spruce of their portfolio companies, has inspired a vicious campaign from unions, who have labelled them "asset strippers". One politician referred to them "casino capitalists."
Calls for a regulatory and tax clampdown on the industry reached a fever pitch this year. In explanation of his rejigging of the capital gains tax, Mr Darling made his intentions clear. "I propose to reform capital gains tax also, and taken together with the tax loopholes that I am closing, will ensure that those working in private equity pay a fairer share," he said.
As it stands now most private equity professionals pay just 10 per cent tax on most of their income, which comes in the form of "carry", or their share of the profit – usually 20 per cent – generated when they sell a portfolio company.
This is thanks to "taper relief", a condition that was introduced by Gordon Brown a decade ago to foment entrepreneurialism by giving tax benefits to those who risk their cash on starting new businesses. If an investor holds on to an investment in a company for more than two years, they need only pay 10 per cent when they sell, rather than the standard 40 per cent.
Critics said that buyout executives were taking advantage of the law that was not meant for them. Mr Armitage agreed: "We were beneficiaries of that set of arrangements. Disproportionately so. It was difficult to justify. We have been saying for a long time now that what we need was an internationally competitive capital gains tax."
The British Private Equity and Venture Capital Association was less complimentary about the change. Simon Walker, its chief executive and a former communications director for the Queen, who was recently hired to lead a renewed lobbying effort for the industry, said: "We are concerned that the elimination of taper relief means all capital gains, including carried interest, will now be taxed at a single rate no matter how long they have been held. This move will hit not just private equity but thousands of venture capitalists, family businesses and small and medium-sized companies. A rate of 18 per cent means capital gains tax is higher in Britain than France [16 per cent], Italy [12.5 per cent] or the US [15 per cent]."
Mr Darling's proposal to charge £30,000 annually to non-domiciled workers who have been in the UK for at least seven years, of which there are a fair few in the private equity industry, will have a minor effect. Yet the industry's worst fears – that carry would be taxed as income, that the deductibility of interest payments would be scrapped – were not realised.
Mr Darling had to act, but was keen not to push so hard as to alienate an industry that has not only played a central role in London's rise as the global financial centre of the 21st century, but also has no shortage of Labour donors. He looks to have managed to strike that balance.