Furious MPs rounded on the head of Britain’s private equity industry yesterday, demanding an explanation for tax breaks that allow billionaire buyout partners to pay as little as 10 per cent tax on their earnings.

John McFall, the chairman of the Treasury Select Committee, criticised private equity partners for using taper relief on capital gains for “quick financial engineering” to beef up their personal incomes. In a fierce 45-minute exchange, Mr McFall demanded to know whether Peter Linthwaite, the chief executive of the British Venture Capital Association (BVCA), believed that buyout partners were taking advantage of a tax loophole not available to normal workers who pay 40 per cent tax.

“Are you using it as intended?” the MP asked repeatedly. The issue of taper relief on capital gains tax took centre stage yesterday on the first day of the committee’s hearings into the private equity industry.

In recent weeks billionaire buyout partners have come under intense criticism for what many see as exploiting a loophole that allows them to cream off profits from “carried interest” on their investments by treating them as capital gains, rather than as income, for tax purposes.

Under the rules, if an individual or company holds on to an asset for more than two years, the taxable rate, through taper relief, can fall to 10 per cent or less.

The committee had heard evidence from Brendan Barber, the head of the TUC, the umbrella organisation for trade unions, and several leading business academics.

Mr Barber said that the present tax regime was supporting a frenzy of debt-fuelled buyouts.

“The private equity world is essentially based on increasing the amount of leverage . . . so I think there are concerns about whether it makes sense to incentivise debt financing,” he told the committee.

He also lambasted private equity for its treatment of employees of companies such as the AA and Birds Eye, who he said could “be bought and sold like the cheapest chips at the edge of the roulette table”.

Mr Barber’s comments echoed those of Karel Williams, a leading business academic at the University of Manchester, who told the committee that tax breaks on private equity carried interest were “completely politically indefensible”.

Will Hutton, the chief executive of the Work Foundation and a close ally of Gordon Brown, said that there was a “growing consensus” in Britain for action to be taken on the tax breaks.

Tempers flared when the three top executives of the BVCA answered questions and on several occasions declined to answer MPs’ queries about taxes, excessive leverage and lack of transparency.

“There are no special tax breaks for private equity,” Mr Linthwaite said, adding that tax relief on carried interest had helped to fuel entrepreneurial activity in the UK.

To increase those taxes, the BVCA insisted, “wouldn’t just hurt private equity, it would impact on every business and entrepreneur in the country”.

It added that such changes could also lead to a brain drain of talent away from the UK to countries with a more favourable tax regime.

Mr McFall pointed to comments by Nicholas Ferguson, the founder of SVG Capital and a senior private equity figure, who recently said that tax advantages meant that partners often ended up paying less tax than their cleaners.

“Has he lost his marbles, Mr Linthwaite?” Mr McFall shouted.

A spokesman for the BVCA said: “We expected it to be a really tough and robust environment. It was.

“These are complicated issues and they do not necessarily lend themselves well to that sort of hearing.”