EDITORIAL

Moving SMEs abroad

I’ve written several times in recent months about British public companies relocating to countries with more favourable tax regimes. Could a smaller business achieve the same results?

First of all, let’s look at how a holding company plc in the UK could achieve a tax saving by moving:

• A new holding company is set up in a more favourable tax jurisdiction. For the purposes of this example, let’s say Ireland, where corporation tax is just 12.5%.

• The new holding company acquires all the shares in the UK-based public company on a share-for-share basis. There are no tax implications for the shareholders.

• Any subsidiaries of the UK plc are sold to the new Irish holding company. Again there is no corporation tax due on their disposal.

• UK-based shareholders are in no worse a position. Foreign dividends are treated, for tax purposes, as UK dividends.

The result? The company enjoys a top rate of 12.5% corporation tax and thus its overall value increases. The catch? The control and management of the company must take place outside the UK. It must genuinely be resident overseas or HM Revenue & Customs (HMRC) will look through the arrangement and tax it as though the company were based in the UK.

Of course, the reason many larger public companies are tempted by this is the fact that they will have subsidiaries overseas that are currently suffering high rates of corporation tax by virtue of the fact that the holding company is based in the UK. This advantage, which is key, is not enjoyed by some small to medium sized, privately owned UK businesses (though it is to some). That is not to say that moving an SME overseas couldn’t be beneficial. But to do so with any meaningful result the directors really need to immigrate themselves. It would probably have to be structured differently (one might wind down the UK operation and start a completely new operation overseas). One final point: a UK-based company, branch or agency will always be liable to tax in the UK. There are things that can be done to reduce the liability to tax – but moving the ownership abroad won’t automatically achieve the desired result.

HMRC powers

There was a time when there would have been a national outcry at the idea of HMRC having the sort of extensive powers it has been given by this government. Here are four very recent examples:

• Raids may now be conducted by directly authorised HMRC officers.

• There is a specific power to obtain ‘special procedure material’, such as accountants’ notes.

• HMRC can now intercept and bug letters, phone calls and emails.

• HMRC may visit business premises (including businesses located in a home) at 24 hours’ notice. It is not yet clear whether officers are entitled to search the premises or simply inspect them.

More than this, there is a new and much stricter penalty regime and there are fewer opportunities for taxpayers to appeal against HMRC decisions. For instance, it is increasingly difficult to stop them from seeing your personal bank and credit card statements or visiting your home or business.

I have written several times to relevant Labour and Conservative politicians about the lack of judicial checks in place to control HMRC power. I would urge all our readers to do the same.

Incidentally, on a slightly different but connected subject, I noticed that a survey of HMRC’s staff found that 30% of all employees had no idea that HMRC’s role was to ‘administer the UK’s tax and customs systems’. Another reason to worry.

Update on offshore disclosure facility

HMRC has released the latest statistics in relation to the offshore disclosure facility or – as it has been erroneously called – the offshore tax amnesty. Apparently:

• 64,000 people notified an intention to disclose
• 45,000 people actually made a disclosure
• the total tax yield to date is £400 million
• some 75,000 customers of the high street banks have not come forward.

Those who came forward will now either have been told that their figures (and money) have been accepted or else they will be the subject of further inquiry. Suppose you never came forward? HMRC will be focusing on those that it sees as the highest risk. This presumably means those with the largest balances in their offshore accounts or anyone with, as it were, ‘previous form’.