Tax changes have left some feeling the UK’s no longer the best place to base their business. But shaking off your tax liabilities isn’t as easy as it sounds. We look at the legal implications of business migration.
Tax changes have left some feeling the UK’s no longer the best place to base their business. Simon Gough and Melissa Beer, partner and professional support lawyer at commercial law firm DLA Piper, look at the legal implications of business migration.
The UK’s corporate tax regime has become increasingly complex in recent years, with the consequence that compliance has become riskier and more costly. This year’s Finance Act brought a raft of anti-avoidance measures concerning financing structures, a decrease in the rate of capital allowances, and a radical overhaul of capital gains tax and the taxation of non-UK domiciled individuals. At the same time, the future taxation regime for foreign profits remains uncertain.
This situation has led multinational groups to consider moving the tax residency of their headquarters to other jurisdictions such as Ireland, the Netherlands and Switzerland. Among those who are already migrating are Shire, the pharmaceuticals giant, financial services group Henderson, and engineering company Charter. Others reported to be migrating or considering migrating are WPP, United Business Media, Brit Insurance, GlaxoSmithKline, Kingfisher and Prudential.
‘To become non-resident, you must move your management outside the UK’
However, escaping the UK tax system isn’t quite as simple as it sounds. The preferred route is to use a court-sanctioned “scheme of arrangement” to put in place a new holding company, incorporated and tax-resident outside the UK, above the existing UK holding company. In the case of quoted companies, this holding company could still be listed on the London Stock Exchange. Provided the shares in the old holding company are cancelled and not transferred, it should be possible to pull this off without incurring the cost of UK stamp duty.
However, there are several catches. In order to become non-resident, you must move your effective management and control outside the UK. Even then, you may incur exit charges as the company will be deemed to have disposed of its capital assets.
For shareholders, there is also the risk of a liability to UK tax on capital gains, especially if they hold more than five per cent of the company’s shares. Following the migration, shareholders will of course be receiving dividends from a non-UK company, which may lead to a lower after-tax return for some of them (although this can be avoided via a “dividend access agreement”, whereby they receive dividends from a UK-headquartered company within the group).
Having put your new holding company in place, you will need to decide whether to move its underlying businesses wholesale or just move selected or new businesses under the new holding company. Whatever the decision, you’ll need to be vigilant to maintain the central management and control of the new holding company outside the UK in order to avoid a challenge from HMRC that the company is really UK resident.
Whatever the complications, there appears to be a swelling tide of companies announcing their intention to migrate. It remains to be seen whether this month’s Pre-Budget Report will encourage them to leave or to stay.