The Commons Treasury Committee may not have wiped the floor with the private equity bosses as it did last week with the British Venture Capital Association (BVCA), but MPs certainly didn’t pull their punches.

While grilling the panel on leverage, George Mudie, the Labour MP, was so frustrated at the executives’ obfuscation that he cut across their answers and spelt out the case of Debenhams. It was a company, Mr Mudie said, with debt of only £200 million before it was acquired by private equity. Then, within two months its debt shot up to £1.8 billion.

“I suppose that’s not leverage?” he asked.

With no reply resulting, the MP said: “Your predecessors (the BVCA) got savaged because they treated us like mugs and wouldn’t answer our questions.”

Later, commenting on the sudden resignation of the BVCA chief executive, Peter Linthwaite, after last week’s grilling, John McFall, chairman of the committee, said it was about time the industry got its act together. “The private equity industry does seem to be in a state of chaos,” he said. “It needs to sort itself out.”

Despite their protestations that there were no special tax rules for private equity, Sion Simon, the Labour MP for Birmingham Erdington, told the panel that the public believed that private equity partners were “taking the mick”. Mr Simon added: “They think you’re too rich and you’re not paying enough tax.”

Paul Kenny, general secretary of the GMB trade union, accused the firms of being short-term asset strippers. He said: “They are not in it for the long haul, they’re in it for making money fast and quick and they don’t care who gets hurt in the process.”

Maria Ludkin, the GMB’s legal and political officer, concluded there was “a level of arrogance in the industry where they’ve fallen in love with the idea of themselves”.

Jack Dromey, the deputy general secretary of Britain’s largest union, Unite, was unequivocal. “It is to deny social responsibility to go from a public company to a world of private equity where you have people making fortunes in secret while the workers pay the price,” he said.

Private equity: the case for . . .

John Redwood, MP

As soon as something is successful in Britain, people pop up to condemn it and demand it be taxed more. My experience of private equity tells me there are many good examples where the new owners have backed a business, created jobs and put in investment. Sometimes they save businesses that would otherwise fall.

Most countries would be delighted to have the concentration of business skill that the UK has in private equity. If we tax it too much, the industry will move somewhere more welcoming, but will still be able to bid for UK companies from overseas.

Enemies of private equity highlight two “tax breaks” they think unfair. The first is taper relief on capital gains tax (CGT) on investments in companies held sufficiently long. The deduction of interest from profits before corporation tax is the second.

The first thing to understand is that there are no special tax arrangements for private equity. Private equity investors and managers have to pay tax in exactly the same way as everyone else. If you increase taxes on them, you increase them on everyone.

Secondly, private equity has not found a way to pay 10 per cent tax instead of 41 per cent income tax and national insurance on higher earnings. Their salaries attract full income tax. If they issue free shares to managers and staff, the people concerned have to pay income tax on the value of the shares granted to them.

The unions seem most concerned about cases where venture capitalists pay only 10 per cent CGT when investments are successful. This arises where they have put up money to buy shares out of taxed income, where they have held the investment for a long time and where it is profitable. Like everyone, they can use taper relief to pay 10 per cent instead of the 40 per cent CGT standard rate.

Taper relief was introduced to encourage people to put up money to create businesses. Why stop it when it is working? It would mean ending it for everyone, including individuals who build a family business.

The industry does borrow to invest in companies. Every business is allowed to deduct interest on borrowings before paying tax on profits. Interest is a cost. If you make venture capitalists pay corporation tax on interest, you would kill private equity in the UK, and damage other companies that borrow to do business.

Many people are beneficiaries of private equity’s success in improving companies. Anyone part of a pension scheme may find their plan is in private equity funds as well as in shares.

We should be trying to learn what private equity has got right, not condeming it for daring to do well.

. . . the case against

Michael Meacher, MP

The stupendous gains accruing to Blackstone and its founder, Stephen Schwarzman, inspire a mixture of moral vituperation and ogling envy. Capitalism, however, notoriously has its self-correcting mechanisms, however brutal, and the stage looks set for a denouement.

Two factors are conspiring to bring this about. One is the sheer scale of private equity buyouts, £22 billion last year in the UK. They now employ a fifth of the private sector workforce. The other is the easy-credit environment that has fuelled the explosion, but now seems likely to crash.

Private equity, which began benignly as venture capital pumping investment into start-up businesses, has evolved into a different animal – going after healthy companies, restructuring them to yield huge gains for equity partners at the expense of job losses for employees and crippling the companies with debt.

One example has been the AA. Within months of buying it, the private equity owners Permira and CVC axed 3,400 jobs and reduced services.

The engine for private equity enrichment comes from three tax changes in the past ten years. In 1998 the Government introduced “taper relief” on capital gains, cutting capital gains tax for people owning shares in their own companies or unlisted businesses from 40 per cent to 10 per cent, if they had owned the asset for at least ten years.

The bonanza took off in 2002 when the Government changed the rules again so people needed to own shares only two years for the 10 per cent tax concession. When all companies with highly paid employees started elaborate “share-based” schemes to disguise income as capital gains to get the tax benefit, the Government in 2003 changed the rules to require that shares as part of pay be declared as income.

The private equity gravy train all but collapsed. However, unaccountably, the Government then exempted private equity from the new rules. Never have the super-rich been showered with such lucrative partiality by any Government.

I want to see six changes. First, the taper relief loophole in capital gains tax for private equity should be abolished.

Second, tax incentives should be “staircased” to encourage investment of ten years or more, and discourage asset-stripping.

Third, looting of company pension schemes to increase gains for private equity partners should be blocked.

Fourth, tax relief for leveraged buyouts should end.

Greater transparency is needed from private equity, in particular quarterly reports.

A final key reform is that private equity be required to state expected and intended impacts of a takeover on jobs, debt, investment, and the future of the target company.

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