0945BST: Private Equity firms under scrutiny from MPs

The Treasury select committee will take more evidence from the private equity industry on Tuesday morning.

MPs will hear from Sir David Walker, senior adviser at Morgan Stanley International, who is chairing an industry working group into transparency.

The group was set up to create a voluntary code of practice for disclosure by private equity firms and is expected to report in the Autumn.

The committee will also take evidence from the Financial Services Authority.

The view from the firms

Representatives of the private equity firms Blackstone, CVC Capital Partners, Duke Street Capital and Alchemy will appear at around 1045BST.

The heads of several private equity firms appeared before the committee last month to defend the industry claiming it created jobs and supported many people's pension funds.

Damon Buffini of Permira argued that the sector produced "world class returns" for the benefit of 30 million pensioners.

Carlyle Group executive Robert Easton claimed investments were made for the long term but firms had not done enough for employees.

Union chiefs, appearing before the same committee, attacked the industry for asset-stripping and called for tighter regulation.

Earlier in the month, Peter Linthwaite, the head of the body that represents the industry, resigned following what was seen as a weak performance in front of MPs.

Representatives from the British Venture Capital Association (BVCA) were involved in an exchange over the tax breaks given to private equity firms.

Tax status

Thanks to capital gains tax relief, private equity firms pay just 10% tax on gains made on the companies they invest in.

The sector claims that it improves the competitiveness of firms it buys and is good for the UK economy.

Executives are taxed normally on their salary and benefits but a large proportion of their remuneration comes from carried interest, or the 20% cut of profits they claim after paying back their investors.

The capital gains tax relief was designed to help entrepreneurs prosper by taxing returns lower than income to create an enterprise culture.

Analysts argue the tax relief was never designed for massive carried-interest income created by multi-billion private equity funds.

Newspaper reports have said only 40 of the top 200 private equity executives would be affected by tax changes as most are not domiciled in the UK for tax purposes, despite being British.

The industry

Private equity firms have come under the spotlight recently with high-profile purchases of UK firms such as Alliance Boots.

The companies take on heavy debts to buy businesses, the interest payments on which are tax-deductible, making the tax structure of the company very efficient.

The sector says other businesses are bought in order to invest in productivity and innovation and leave companies involved in a better financial footing.

Critics, such as the TUC, argue private equity firms focus on short term savings by cutting jobs and benefit disproportionately from tax breaks.

Members of the industry have threatened to move their companies offshore if the UK tax regime changes.

The committee is also looking at whether the highly-leveraged industry could pose a threat to economic stability.

The Treasury select committee can be seen live on the BBC Parliament iPlayer from 0945BST and will be shown on the BBC Parliament channel at 1100BST on Monday 9 July.