The political momentum for a clampdown on private equity chiefs gathered pace on Wednesday as Tony Blair highlighted “real issues” about the sector and MPs warned they are targeting the the industry’s generous tax breaks.

MPs said the influential Treasury select committee could recommend that buy-out chiefs be forced to justify favourable tax treatment on a case-by-case basis. The proposal, made during a two-hour grilling of four leading industry figures by the committee, visibly shocked the buy-out chiefs, who accused MPs of making tax policy “on the hoof”.

The Labour-dominated Commons inquiry signalled its clear dissatisfaction with a tax rate of 10 per cent or less paid by “too rich” private equity executives.

The select committee’s report will influence the chancellor’s decision this autumn on how to respond to mounting pressure for higher taxes on the sector.

The prime minister told the Commons the next chancellor would respond to the “real issues” about tax that had been raised “right across the political spectrum and by sensible people within the private equity field itself”.

Labour MPs on the committee warned executives from Permira, Kohlberg Kravis Roberts, 3i and Carlyle Group that they may recommend a more drastic tax shake-up than simply increasing the 10 per cent capital gains rate paid by executives on much of their income.

Angela Eagle said some committee members thought a “good way forward” would be to scrap a 2003 memorandum of understanding between the industry and HM Revenue and Customs. This allows “carried interest” returns to be treated as capital gains rather than income, which would be taxed at 40 per cent.

The Revenue could be told in future to decide, on a case-by-case basis, whether the risk on each deal justified the significantly lower capital gains tax rate, Ms Eagle said.

Philip Yea, chief executive of 3i Group, said the move would set a “very dangerous precedent”, while Damon Buffini, managing partner of Permira, argued against “tax policy on the hoof”.

The industry warned of the wider potential damage to the UK economy of taxing private equity more harshly, saying it could drive executives and deals offshore. Mr Yea told the MPs a tax rise “might just mean that people like us might just invest our funds outside the UK”.

But the MPs appeared unimpressed. Sion Simon, a Labour MP, told the four executives: “There’s a sense you’re taking the mick, you’re too rich and you’re not paying enough tax.”

John McFall, the committee’s Labour chairman, said the sector was in a “state of chaos,” with leading industry figures “fighting like ferrets in a sack” instead of mounting a coherent defence.

The executives refused to give significant ground, defending their industry as being what Dominic Murphy, a partner at KKR, termed a “force for good.”

But they accepted the sector had failed to put its case effectively in public. Robert Easton, managing director of Carlyle Group, admitted to the MPs: “as an industry, we have not done a good enough job with our employees.”

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