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This week the UK’s main political parties are releasing their manifestos, outlining their key proposals before the country goes to the polls on July 4. Yesterday, the incumbent Conservative party laid out its policy platform, which we’ve summarised here.
Tomorrow, the UK’s Labour party will release its manifesto — and the nation’s VCs will be looking for details on one proposed policy change in particular: Labour’s pledge to reform the taxation of “carried interest” (known as “carry”). Carry is essentially a bonus that investment teams receive if their fund performs well. It’s typically 20% of the profits of the fund (after LPs are repaid their original investment) and is usually split between the fund’s general partners and — depending on how generous they are — some or all of the other members of the team.
In the UK it is taxed in the same way as capital gains (profits made on investments) at 28%, rather than in the same way as income tax, which is taxed at 45%.
So far, Labour’s messaging on the policy has centred more around private equity funds, and some VCs are hopeful that earlier stage firms — which can argue they make riskier bets on frontier tech that could spur future economic growth — may not be affected by the changes.
But should they be? Here are the two sides of the argument.
No capital at risk
Some VCs have long argued that they should be paying more tax on carry. New York-based VC Fred Wilson wrote in 2018 that given VCs are not risking their own capital, it doesn’t make sense that they are taxed on the upside in the same way as capital gains tax.
“If you are being paid a fee for managing other people’s money and have no capital at risk on the carried interest, I don’t understand how it can be considered a capital gain,” he wrote. “Capital gains tax rates should only be available to those who put their own capital at risk.”
Wilson adds that the returns on the personal capital VCs invest into funds — known as ‘GP commit’ and usually around 2% of the total fund size — should be treated separately, as capital gains.
Some on X say carry should be taxed in the same way as bonuses, which are taxed at a higher rate than capital gains in the UK. In France and Germany, carry is also taxed at a lower rate than income tax.
Taking risk
But in the UK, local VCs are sounding alarm bells and suggesting the proposed taxation change could negatively impact Europe’s biggest VC ecosystem.
“The UK has benefitted hugely by attracting $100Bs in venture capital over the last decade,” tweeted James Wise, partner at London-based VC firm Balderton.
“If Labour wants to be pro-growth, making the UK among the most expensive places in the world to invest patient capital into high-tech companies seems pretty counterproductive.”
Others have pointed out that — so far — it’s unclear if VC funds will be affected and some say restricting PE gains could be good for startup backers.
TechCrunch editor at large Mike Butcher says clamping down on PE (and not VC) might see tech scaleups list on public markets sooner if there is less private capital available.
“[It's] a policy about largely Private Equity funds who have benefitted from loopholes, NOT Venture Capital. In fact, constraining Big PE might encourage tech scaleups to IPO to raise capital, something London needs. Some PE may leave the UK, but it's unlikely to affect innovation/risk investing,” he says.
What’s your view on taxing carried interest? Drop me a line — and if you’d like to write an opinion piece on the subject, email editor Amy Lewin.
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