by SAM FLEMING

Last updated at 00:46 05 June 2007

Some of the City's richest bosses could see their earnings slashed after it emerged they were paying tax at a lower rate than their office cleaners.

The Treasury yesterday said it would look at closing a loophole that allows the multi-millionaire chiefs of private equity firms to pay as little as 10 per cent tax on their earnings.

Officials made the announcement after one of the industry's biggest players made an extraordinary attack on his fellow bosses.

Nicholas Ferguson, chairman of SVG Capital, said it was wrong that private equity bosses pay tax of only 10 per cent, when the basic income tax rate is 22 per cent and the higher rate is 40 per cent.

"Any commonsense person would say that a highly-paid private equity executive paying less tax than a cleaning lady or other low-paid workers can't be right," Mr Ferguson told the Financial Times.

"I have not heard anyone give a clear explanation of why it is justified."

Private equity firms borrow billions to buy underperforming companies, before cutting costs and putting them back on to the stock market several years later for massive returns.

They have been criticised by trade unions for cutting jobs, stripping assets and riding roughshod over workers' interests in the name of a quick profit.

In recent months private equity firms have been stalking some of Britain's bestknown brands.

Boots fell prey last month to an £11billion takeover by aggressive American firm KKR, while Sainsbury's only narrowly managed to fend off a bid by a consortium of three private equity companies.

Treasury minister Ed Balls has already launched a task force to investigate whether private equity firms are dodging tax. But Mr Ferguson's comments have opened up a new front.

At issue are so-called 'taper relief' rules which reduce the bill on capital gains from the normal 40 per cent rate to as little as 10 per cent the longer an asset is held.

The reform was intended to reward entrepreneurs for sticking by new firms. But private equity bosses also benefit from it, because their pay is heavily based on the profits their firms generate from selling the companies they buy.

Treasury officials said they are examining the loophole and added that an agreement between the industry and HM Revenue made in 2003 had been violated.

Liberal Democrat Treasury spokesman Vince Cable said: "It is scandalous that there are many people on low or middle incomes who are paying more and more tax and yet you have very rich people paying only 10 per cent.

"It is Gordon Brown who has created this, despite supposedly being the father of social justice.

"They never thought through the implications and the way it could be abused."

Paul Myners, the former chairman of Marks & Spencer, said it was "preposterous" for private equity bosses to face such tiny tax bills when "a police sergeant is charged at 40 per cent".

Paul Kenny, general secretary of the GMB union, added: "Top private equity chiefs are freely admitting that the current tax regime allows them to pay less tax than the minimum wage worker. This is an important and significant breaking of the ranks."

A spokesman for the British Venture Capital Association, which represents private equity firms, said Mr Ferguson's views did not represent the industry as a whole.

He added: "It is a matter for government policy to determine the most effective tax regime in which the private equity industry should work."