The private equity industry has warned it could quit Britain if the Government clamps down on controversial tax breaks enjoyed by the sector.

The industry’s trade body said private equity firms could leave the UK for countries such France, Italy or Germany if the tax rate is upped significantly.

The British Private Equity and Venture Capital Association said the UK enjoyed only a "fragile" lead over other countries in a submission to the Treasury ahead of its Pre-Budget Report, due later this year.

Private equity firms can pay as little as ten per cent under current UK tax rules, which has led to accusations that the sector is taking advantage of an over-generous tax regime at the expense of jobs and staff in the firms that they buy out.

The industry’s tax regime is now the subject of a Treasury Select Committee inquiry, launched in June to scrutinise private equity regulation and tax relief.

The committee is expected to produce a hard-hitting report when it releases details of its findings and speculation has suggested the Government may seek to use its forthcoming Pre-Budget Report to raise the private equity tax rate. But the BVCA said: "Any substantial change in UK tax rates would make the UK significantly less attractive than other countries and risks significant movement of the private equity industry offshore.

"In view of the higher actual rates paid by the industry such a move clearly would not benefit the UK."

Trade unions – fierce critics of the industry and its tax benefits – were quick to react to the BVCA’s warnings.

Paul Kenny, general secretary of the GMB, said: "If you leave, you can slam the door behind you – and good riddance."

Unite was equally damning of the BVCA’s suggestions it should be allowed to hold on to its tax breaks.

The union’s deputy general secretary, Jack Dromey, said: "It is plain wrong for private equity to claim they should get preferential tax treatment."

Unions claim private equity investors slash jobs and worsen conditions at the firms they buy to drive up profits, while also paying low levels of tax.

Controversy has flared up surrounding the private equity industry and its tax regime after one executive boasted of paying less tax than his cleaner.