Taxation of carried interest: UK government launches consultation

The new Labour government has announced “A call for evidence” on the tax treatment of carried interest - The tax treatment of carried interest – A call for evidence - GOV.UK (www.gov.uk)

Unsurprisingly given its previous rhetoric on the topic, the current tax treatment of carried interest is (incorrectly) described as a “loophole” (as opposed to a tax policy decision taken by successive governments over a period in excess of 40 years).

In making the case for reform, the government states its belief that the current tax regime “does not appropriately reflect the economic characteristics of carried interest and the level of risk assumed by fund managers in receipt of it”. Whilst the government goes on to acknowledge that the government will seek to protect the UK’s position as a world-leading asset management hub, it is nonetheless committed to taking action. It acknowledges that any change will be “impactful”. The purpose of the call for evidence is to gather insights and input from stakeholders.

Whilst officials will meet with a range of stakeholders and experts, it is encouraging written representations to be submitted by 30 August, in particular on the following areas:

Question 1: How can the tax treatment of carried interest most appropriately reflect its economic characteristics? The government notes that there are a range of circumstances in which carried interest is received, and that the characteristics of the reward will not be the same in all cases.

Question 2: What are the different structures and market practices with respect to carried interest? The government is particularly interested to understand how these differences should be taken into account as part of its reforms.

Question 3: Are there lessons that can be learned from approaches taken in other countries? While many other countries have specific regimes for the taxation of carried interest, their detail and conditions for access vary.

In any future decisions on tax policy, the government will be guided by the principle that the tax system should be fair, efficient and minimise distortions, whilst placing a premium on certainty and stability of outcomes and recognising the role tax can play in boosting growth.

Meetings can also be requested by no later than 30 August. Stakeholders should expect a further announcement at the Budget on 30 October.

We plan to respond to the government's call for evidence and will be requesting a meeting with HMRC. If you would like us to make any particular points, please let us know.