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Table of Contents

• EDITOR’S RAMBLE 🗣

• FEATURED REPORT 📰

• A BIT OF FUN 😄

• IN OTHER NEWS 🗞

• AROUND THE WEB 🌐

• STUFF THAT MIGHT HELP YOU 👌

EDITOR’S RAMBLE 🗣

Hoping to switch to a 4-day work week?

Well, Greece has something else in mind.

The country’s legally introduced a 6-day working week. 

The (controversial) decision’s been taken to boost Greece’s productivity — population is shrinking and most high-skilled workers are leaving.

I thought it was interesting to see how social factors (like a shrinking population) can result in changes in law in order to protect the economy.

(just don’t let law firm managing partners find out this is an option)

Idin

FEATURED REPORT 📰

🚪 Labour's issue with private equity

What's going on here?

The newly-elected Labour government is planning to close a ‘loophole’ that private equity managers use to pay less tax. Labour claims this will raise £600 million in taxes.

What’s private equity?

Private equity is when investors pool their money into a fund. A fund manager then decides which private companies to buy, and aims to increase their value before selling them for a profit.

If you’re interested, we covered how private equity funds structure their deals to maximise their returns.

Okay, so what’s the ‘loophole’?

If a private equity fund becomes really profitable (which can takes years) it pays out lump sums of cash to its investors.

Most of this will go to the fund’s clients, but a percentage will go to the private equity manager as a bonus, which is called “carried interest”.

The managers receive this bonus as well as their normal salary.

The issue is that carried interest is taxed as capital gains (at 28%) rather than income (taxed at 45%).

How big of an impact can this make?

Well, let’s work through an example.

Jeff is a private equity fund manager.

He successfully raises £100 million from investors to create a new private equity fund.

The investors agree that Jeff will only start earning carried interest (his bonus) if the fund returns more than an 8% annual hurdle rate. This means the fund must grow beyond £108 million (the initial £100 million plus 8% return) before Jeff can earn additional profit.

After this point, Jeff can take 20% of any additional profit — that’s his carried interest.

Jeff and his team invest the £100 million in some promising companies, which grow in value. After several years, Jeff and his team sell the investments, making £150 million.

The fund’s total profit is £50 million (£150 million — the original £100 million).

As agreed, the first £8 million goes to the investors (8% of £100 million).

This leaves £42 million.

Jeff’s entitled to carried interest earned at 20% of £42 million — which is £8.4 million.

How should this money be taxed?

Well, if it’s taxed as capital gains, Jeff pays around £2.3 million in tax (28% of £8.4 million = £2.352 million)

If it’s taxed as income, Jeff pays around £3.8 million in tax (45% of £8.4 million = £3.78 million)

So, if carried interest is considered income, Jeff would pay £1.5 million more in tax.§

Why does Labour want to change this?

They think the way carried interest is taxed unfairly helps wealthy people.

If they make the change, they believe it’ll raise £600 million more in taxes which could be used for something different (for example, the NHS).

What’s the private equity industry saying?

They’re not happy.

They argue the money can be tied up in a risky asset for 10+ years before the managers receive any payout — so it’s not like income. It’s more similar to capital gains you’d make on owning a house.

If the changes go through, a lot of firms are thinking of moving elsewhere in Europe. Countries like France, Germany, Italy and Spain all have friendlier tax conditions for private equity managers (they tax between 25 and 30%).

If this happens, the UK government would lose tax revenue and the country’s private equity industry would see a drain on talent.

Why should law firms care?

Well, law firms won’t want the change to take place if it means private equity funds leave.

Less private equity activity in the UK means less work for corporate law firms (private equity is super lucrative for them).

But if funds actually end up moving abroad, the UK’s loss could be Europe’s gain. The number of deals in more tax-efficient jurisdictions like Spain, Italy and France would increase.

Credit: Antonella Gemmoni

TOGETHER WITH RUNDOWN AI* 🤝

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A BIT OF FUN 😄 

bet.

IN OTHER NEWS 🗞

• 💼 Linklaters hit a record £2.1 billion in revenue this year (a 10% increase). The firm’s US offices performed best, with a 24% revenue increase. The UK offices also saw record growth. Linklaters advised on big deals like VW's $5 billion partnership with Rivian.

• 🇬🇧 Revolut, the London-based fintech, made a record £438 million profit last year and nearly doubled its revenue to £1.8 billion. They hit 45 million customers and aim to be a 'super app.' Higher interest rates boosted their income to £500 million, and they gained 12 million new customers. But they still don't have a UK banking licence because of delays and ownership issues.

• 🤖 Microsoft quits its seat on OpenAI's board, saying it’s no longer needed since OpenAI has improved its governance. Microsoft says that its ‘observer’ seat, which lets them sit in on board discussions but not vote, is no longer needed. This could be due to regulatory pressure on Big Tech’s influence on AI. Despite leaving the board, Microsoft’s $13 billion investment in OpenAI means it still profits from the startup’s performance.

• 👏 Dentons has earned 'menopause friendly' status in the UK, Ireland, and Middle East. This accreditation is because the firm has set clear standards in culture, policies, training, engagement, and work environment. Dentons joins Clifford Chance, Burness Paul, Wrigleys Solicitors and Mewburn Ellis in achieving this status.

AROUND THE WEB 🌐

• 🧠 Fun: Play this free word puzzle which ranks your guess based on how similar it is to the original word (it’ll make sense when you try)

• 🐴 Useless: Can you get to the end of the endless horse?

• 🤐 Lies: The Welsh government pledged to pass a law that would make lying in politics illegal

Credit: r/internetisbeautiful

STUFF THAT MIGHT HELP YOU 👌

• 📹️ Free application help: If you're applying to commercial law firms, check out Idin’s YouTube channel for actionable tips and insights into the lifestyle of a commercial lawyer in London.