Does anyone in the media know what "loophole" actually means?

A way of escaping a difficulty, especially an omission or ambiguity in the wording of a contract or law that provides a means of evading compliance.

The word loophole is being thrown around in the print and broadcast media a lot at present to describe the ability of private equity bosses to pay tax at a rate of 10% on some of their income.  In fact, it appears to be compulsory to describe this as a loophole.

It's nothing of the sort.  The taxpayers in question are buying businesses, increasing their value and then selling them on at a profit.  The tax system in this country says that if an individual sells a trading company after owning it for two or more years they need only pay tax on 25% of the profit.  That means that a 40% taxpayer effectively pays tax at 10% - of a million pound profit, only £250,000 is taxable, and tax at 40% is £100,000.  This is not a loophole, it's exactly how the system is supposed to work.  If you or I build up and sell on a business, we would certainly expect to take advantage of that rule.

When he introduced the rule, Gordon Brown trumpeted it as an incentive for enterprise.  In this case that appears to be exactly what it's doing.  Admittedly, some people believe that the private equity owners are doing little to improve the condition of the businesses they are buying and selling.  However, the market disagrees.  If someone can buy a business for £50 million and sell it on for £150 million then the market clearly thinks that the business is in a better state than it was.  If part of that process has been job losses then that's clearly sad for the people involved.  But private businesses aren't charities. 

If the government was to cave into pressure and change the rules - surely not, Gordon Brown would never change his mind on something, would he? - then they would appear to have two broad principles they could go with.  Option one, force the private equity owners of businesses to work under a different set of tax rules than the rest of us, because the numbers are bigger in their case.  That doesn't seem very fair to me.  Two, amend the rules so that we all pay more tax, private equity business owners and smaller scale entrepreneurs alike.  That seems unreasonable too.  We will see what the Pre-Budget Review brings this afternoon.

Comments

[Greg Lovett]

Of the two unfair options I set out in the final paragraph, the Chancellor opted for the second one - to clobber everyone. Probably the more unfair of the two.