Gordon Brown indicated for the first time yesterday that the private equity industry could face increased taxes as part of a far-reaching government review.

Speaking at the GMB trade union conference, the Prime Minister-designate responded to calls for an end to private equity tax breaks by saying: “We will make sure there is justice and equity in the treatment of tax arrangements in that area.”

The Chancellor said that a review of private equity, which was launched in March, would report soon and that it would determine whether the industry was exploiting any loopholes.

Mr Brown has come under heavy pressure to raise taxation levels for private equity investment because of concern that the firms, mostly American and British, enjoy a privileged rate. He is also facing calls to make the industry more accountable.

In recent weeks, the argument has begun to centre around the tax relief that the partners gain from the carry, or profits, on their investments, which was at the heart of the government’s March inquiry.

While the private financiers pay taxes on their earnings and bonuses, their biggest profits come from this so-called carried interest, which is the 20 per cent share in the profits that partners take home after they have repaid their investors.

The GMB and other critics argue that carried interest should be taxed as normal income and not as capital gains, which are subject to taper relief, meaning that those involved pay as little at 10p in the pound on their income.

In March, the Treasury separately threatened to crack down on the tax treatment of private equity deals and the super-gearing that traditionally spices up returns for investors.

Ed Balls, the Treasury Minister responsible for the City, said that he would review the tax treatment of debt where it replaces equity in highly leveraged private equity deals. Such debt is, in fact, a form of equity, Mr Balls said. He questioned whether dealmakers should be allowed to treat it as debt for tax purposes.

To date, Mr Brown has been supportive of the industry, which he sees as critical for maintaining London’s leading role in financial services markets. Private equity firms this year have already spent £489 billion on deals, generating huge fees for British banks, lawyers and accountants.

The GMB, which produced a lengthy report this week linking failed pension schemes with private equity, welcomed Mr Brown’s comments as a change of tone.

Paul Kenny, the general secretary, said: “Cleaners in the UK will be delighted to hear that the Treasury is considering whether the multimillionaire elite who run the private equity industry should continue to enjoy a lower tax rate than cleaners and, if so, what is the justification for this.

“From what Gordon Brown told congress, the GMB conclude that the fat cats are losing the argument on tax.”

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