Investors set to make a colossal profit on their investments in Qinetiq, the former research arm of the Ministry of Defence, have registered their shareholdings in Guernsey, the offshore tax haven.
According to filings by Qinetiq – which is still 56 per cent owned by the MoD – shares controlled by Carlyle, the US private equity firm, are held in Guernsey-domiciled investment vehicles, as are shares in an employee share plan for the benefit of Qinetiq’s staff.
The disclosure will cause a political storm, given that Carlyle and Qinetiq’s executives are set to make huge gains when the business is floated for around £1.1bn in the autumn.
As disclosed in last week’s Sunday Telegraph, Carlyle will emerge with a shareholding worth around £340m, having made an initial outlay of £4.2m for ordinary shares in Qinetiq and £38m in preference shares just over two years ago.
Yesterday, John McFall, the chairman of the influential Treasury Select Committee, said: “This seems a one-way -offshore ticket to unprecedented spoils. The individuals and the companies involved are obviously much smarter than the Government and it seems a textbook example of an unsophisticated business approach, with the taxpayer appearing to come off a poor second best.”
David Crausby, vice-chair of the Defence Select Committee, said it would be “disgraceful if they didn’t pay tax on such a return”. He added: “It’s rubbing salt in the wound of the taxpayer.”
An executive close to Carlyle said the MoD had approved the way that the investment was structured, including holding the shares in Guernsey.
The executive said the reason for registering the shares in the offshore location was not to avoid the payment of tax but to prevent the funds holding the shares being taxed prior to the individual investors in the relevant funds being taxed. “It’s about avoiding double taxation,” the executive said.
However, the identity of the investors in Carlyle’s funds is not known, so it is impossible to determine whether any of them would pay tax in the UK on their holdings in Qinetiq.
Filings by Qinetiq show that 30.5 per cent of its equity is held by CEP Investment Administration, which is the vehicle for investment in the defence business made by funds managed by Carlyle.
CEP’s address is given as Berkeley Square in London, where Carlyle is based. But it is not registered as a UK company. It is, however, registered with the Guernsey Financial Services Commission as carrying on investment business from St Peter Port on the Channel Island.
It holds shares on behalf of a special fund raised from wealthy investors in early 2003 for the express purpose of investing in Qinetiq. An executive said that every one of those investors had been vetted and approved by the MoD.
Separately, a further 0.9 per cent in Qinetiq is held by New Co-Invest Limited Partnership, whose address is St Sampson in Guernsey. It holds shares on behalf of Carlyle’s partners.
Finally, Qinetiq Employee Share Plans, which owns 3.4 per cent, is based at Albert House, South Esplanade, St Peter Port.
Beneficiaries of the employee scheme will be liable for UK tax, if they are resident in the UK, when they derive income from their Qinetiq investment or enjoy capital gains.
It is standard procedure for private equity firms to structure their investments to minimise tax. However, the chancellor, Gordon Brown, has made it a priority to crack down on tax havens, so it is odd that the Government approved the use of an offshore centre in the Qinetiq deal.
Qinetiq’s senior executives have not used offshore vehicles for holding their direct stakes in the company. Its chief executive, Sir John Chisholm, will emerge with a holding worth £24m, -having made an initial investment of £129,000.
By Robert Peston and Sylvia Pfeifer
Source: Telegraph
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