Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

The U.K. government's effort to wring more tax out of multinationals is creating a headache for leveraged buyout firms.

Buyout Surprise
LBO firms have announced almost $11 billion of U.K. takeovers so far this year
Source: Bloomberg data

Chancellor of the Exchequer George Osborne used his budget on Wednesday to clamp down on global companies that pile debt on their U.K. subsidiaries to fund operations elsewhere. The businesses then set the interest bill against their taxable British earnings and, voila, pay next to no tax in Britain.

His plans involve limiting the amount of interest companies can deduct from taxable earnings to 30 percent of Ebitda for businesses that don't normally run with a high level of debt.

The detail has yet to be revealed, but it's possible the two measures could amount to, in effect, a tax on leverage -- the L in LBO.

Imagine a private equity firm wants to buy out a U.K. company that has 100 million pounds ($141 million) of annual Ebitda. It borrows 500 million pounds, five times Ebitda, against the business. Assume the interest on the debt is 8 percent, or 40 million pounds. Previously that bill could be deducted in full from taxable profit.

This perk, according to the limited details published in the budget, could now be limited. In this example, only 30 million pounds would be deductible from taxable earnings under the 30 percent rule, meaning the company would be liable for tax on another 10 million pounds of earnings.

There are key exemptions: tax experts studying the plans note that if the interest is being paid to unrelated parties then the threshold may not to apply. But that may not help every LBO. Sometimes investors may own both debt and equity in a deal.

Another get-out comes if the private equity firm can demonstrate that high leverage is inherent to the business model of the business. That's a stretch too: many companies have typically trundled along with little gearing before being acquired by private equity firms.

Few LBOs will be caught up in this immediately. With rates at historic lows, interest bills in buyouts may be low relative to Ebitda, but that won't last for ever. Equally some businesses may suffer sudden falls in Ebitda yet remain on the hook for an interest bill that stays fixed: if their interest bill grows as proportion of Ebitda, the ability to benefit from relief would diminish.

Osborne may not have intended to clamp down on the private equity industry -- and leveraged buyout firms will want to be reassured that's the case. He's targeting multinationals. Even so, the Chancellor expects to raise almost 4 billion pounds from the measures over the next five years, and there's a chance some of that will come from buyout firms.

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