Being in my third decade as a corporate tax adviser, I’ve seen a few Chancellors come and go, and with them, a whole host of tax rate changes. Whilst it’s never been wholly proven, there comes a tipping point for taxpayers (both personal and corporate), when tax rates become so material that it forces individuals and companies to consider (typically) sunnier climes and the attraction of lower tax rates.
If I had a pound for every conversation I’d had with a business owner considering such a move and thinking it’s as simple as setting up shop in Dubai or the Cayman Islands, I’d be moderately well-off.
The last flurry of corporate ‘exits’ from the UK was around 2007/8 with the likes of the high-profile move of Shire Pharmaceuticals to Ireland. The main attraction of that move was Ireland’s 12.5% tax rate. The UK’s main corporate tax rate was 28% at that time, which then slid rapidly downwards over the next decade to 19% (which at that time was the lowest in the G7), only to spike upwards in April this year to 25%. This upwards trend, plus our high personal income tax rates, seems to be stimulating an awful lot of conversations about relocating business activities abroad.
These conversations, plus the recently concluded case of Redevco Properties UK 1 Ltd, heard at the First Tier Tax Tribunal, felt like a timely reminder for those considering relocating their business abroad.
The high-level facts of the case involved Redevco, a member of a fashion chain founded in the Netherlands and incorporated in the UK in November 2004, moving its place of ‘effective management’ from the UK to the Netherlands in 2008, thereby becoming non-resident in the UK for tax purposes.
As a result of this move, Redevco Properties UK 1 Ltd was deemed, under TCGA 1992, s 185, to have disposed of its assets and re-acquired them at market value giving rise to a taxable gain of £139m. It was also considered to have assigned the assets and liabilities that represented its loan relationships for a sum equal to their fair value and immediately re-acquired them for the same amount (FA 1996, Sch 9 para 10A – now rewritten to ss333 and 334 CTA 2009).
Whilst easily forgotten, back in 2008 we were still part of an organisation called the ‘EU’, which presented UK corporates with a potential defence to the UK’s ‘exit charging’ legislation on the basis that they were in breach EU law and specifically Article 43 of the EC Treaty which prohibits (as extended by Article 48) restrictions on the freedom of establishment of natural persons and companies in the EU.
This EU ‘defence’ was generally a last resort (in my opinion) where other more traditional mitigation strategies e.g. sheltering any exit charges with accessible tax losses and / or determining the ‘appropriate’ MV at the point of the deemed disposal, failed to present themselves.
Without going into the precise nuances of this case and the arguments for both the defence and prosecution, Redevco ultimately lost the case and were refused appeal and hence are left with a sizeable tax bill.
The real point I wanted to raise (a point which was accepted and not in dispute in the Redevco case) was the ‘trigger’ event for the UK’s exit-charging legislation, which in this case was the migration (to the Netherlands) of Redevco’s seat of ‘central management and control’.
The tests to be applied in determining the residence of a company incorporated outside the UK for UK tax purposes have evolved through the courts in a number of well-known cases. The principle was established that a company was resident in the place where its central management and control was exercised, often referred to as (the ‘case law test’)
HMRC regard the question of where a company’s central management and control is exercised as being essentially one of fact, and therefore not simply limited to where a company’s board of directors might meet.
No matter the size of a company and its team of directors or senior decision-makers, if control is in fact exercised by a single individual (often the case in large, privately-owned businesses), the place of residence of the company will be the place where that individual exercises their powers.
It’s therefore easy to foresee a scenario whereby the founder of a business (one who’s still very much pulling the strings), ups-sticks and establishes residence outside the of UK, meanwhile still very much making the key decisions in that business.
In this scenario, even if the main board of directors continue to meet and reside in the UK, the power and influence of the founder could still be enough to move that business’ place of ‘central management and control’ to another (non-UK) jurisdiction, thereby potentially triggering said ‘exit charges’.
So, whilst the lure of sunshine and lower tax rates is moving back up the corporate agenda, my message is one of caution and understanding all the potential anti-avoidance which might bite, even if there’s a genuine commercial or personal motivation behind such a move.
