By an Accident of Birth

The UK tax system is complex. It has the kind of complexity that has developed through years of legislation being devised to deal with old concepts of what is to be taxed. Changing the legislation is often difficult but changing some of the concepts can be agonisingly controversial. But there exists at this time the opportunity to make changes that will reduce the complexity of UK tax legislation, bring parts of it into the modern world and perhaps even encourage investment.

An individual’s liability to tax in the UK has its roots in three concepts: residence, ordinary residence and domicile. Closely linked with domicile is the remittance basis of taxation used to tax those that are not UK domiciled (or not ordinarily resident). Tax residence is to be formalised in legislation next year. The third concept – domicile - the UK tax authorities and I suspect many others, would love to remove.

The legal concept of domicile can be traced back to Roman times. In the UK and in many other countries it is used to identify the laws of which jurisdiction apply to a person in given circumstances. It is a basic essential in the structure of our laws and cannot be removed altogether.

The question before us now is: is domicile and the remittance basis any sensible basis for taxation in modern times?

Further consultation on changes to the tax non-domicile rules will take place later this year. We should seize the opportunity to press for a complete resolution rather than prolong the struggle.

The wind of change

In any time of financial difficulty, governments take the opportunity to point the figure of blame at those that do not pay their “fair share” of taxes. Tax havens, offshore companies and, in the UK, non – domiciled individuals (“non-doms”) all receive attention. Very often, little is done but in 2008, the UK took action that started to bring to an end an anomaly that has been allowed to exist since the earliest days of UK taxation: the right of a tax resident individual without UK domicile (for example because he/she or his/ her father was born in another jurisdiction) to avoid UK tax on certain income and gains earned overseas unless the income or gains are brought into (“remitted to”) the UK: in effect, being taxed according to an accident of birth.

This was not the first time that government had considered this political hot potato. However, each time it is raised, the nightmare of foreign investors disappearing overseas with their wealth has worn down the political will.

A Law Commissioner’s report recommending proposals for modernisation was not acted upon by the Conservative government in the 1990s on the grounds that the practical benefits did not outweigh the risks (presumably of wealthy foreign investors abandoning Britain) of proceeding with the introduction. The tax law, however, was changed to bring non doms into the UK inheritance tax net if they had been tax resident for 17 out of the last 20 years. This really only added to the anomaly as very long term tax residents could suffer inheritance tax on their world wide assets when transferred to others even though any income or gains from those assets escaped UK tax. Such is the nature of inheritance tax that with reasonable advance planning even a charge under this legislation could be prevented.

The hot potato was once again picked up by the Labour governments of 1997 – 2010 which had certain zeal when it came to dealing with tax avoidance. In 2003, a UK Treasury paper reviewing the rules of residence and domicile was issued which set out various principles underpinning modernisation such as fairness, UK competitiveness and clarity.

The political will was strengthened by newspaper reports (perhaps politically orchestrated) when it was revealed that some substantial financial contributors to the major political parties were, in fact, paying less UK tax than one would have expected because of their non–dom status.

Change blows in

And so, to the sound of muffled squealing from the self interested, complex and, in some ways draconian, laws were introduced from April 2008 to widen the tax net on non- doms income and gains. Much of this covered some of the more prevalent tax avoidance techniques and, like so much of such legislation, it impacted on more innocent situations as well. Most significantly the remittance basis of taxation (which only seeks to tax non-doms foreign income and gains if brought into the UK) would be brought to an end if the non-dom taxpayer had been UK tax resident for 7 out of the last 9 tax years.

However, two significant “exceptions” were also introduced for these long-term non- dom tax residents. The first, a de minimis limit on offshore income and gains which would not be taxed (if not remitted) where the burden of collection was considered to outweigh the tax haul. The second, a fixed annual “tariff” of £30,000 that could be paid to allow an individual to continue to benefit from the remittance basis. In short (and rather cynically): one to prevent the burden of additional administration in government departments and the other to benefit the very wealthy. And thus the anomalies increase.

The current Coalition Government has announced it will again review the taxation of non-domiciled individuals. At present it is proposed to:

• exempt from UK tax non-doms foreign income or gains if remitted to the UK for the purpose of commercial investment in UK businesses;

• simplify some aspects of the current rules to reduce administration; and

• increase the £30,000 tariff to £50,000 for non-doms who are UK tax resident for 12 or more years if they wish to make use of the remittance basis of taxation.

Following consultation, there will be the no substantive changes to the non- domicile rules for the remainder of this Parliament. So, an opportunity for change that is not to be missed.

Non-reform: the case against

Those against reform often argue that changing the non – domicile rules and remittance basis will lead to fewer wealthy individuals coming to live in the UK, less investment and fewer jobs. Those already here will leave. Some argue that removing tax non-domicile status is “anti business” as some of our leading entrepreneurs are non- doms. Hence the Government’s current proposal to allow non-doms to remit foreign income and gains tax free if they are used for UK investment.

In support of the non –reformists’ argument it has been claimed – based on some HM Treasury statistics - that the 2008 tax changes may already be leading to an exodus of non-doms. The number of non-doms claiming this status on their tax returns fell by c.16,500 in 2008/09. Only c. £162m was raised from the £30,000 tariff – considerably less than HM Treasury had hoped for.

These figures in isolation prove nothing and there seems to be little more than anecdotal evidence that the changes so far have had a material effect on government revenue or non-doms investment behaviour. The first statistic is based on the numbers of tax returns on which the taxpayer has ticked a box claiming non- domicile status. Many may simply not bother now. The fact that the £30,000 tariff raised less than expected perhaps demonstrates that there is less tax at stake and so less risk to the economy from changing the rules.

The benefits of the UK tax non-domicile rules cannot be the only reason for a person to come to the UK to work or invest. It might help, but a country’s attractiveness to business is only brought about through other factors: the existence of skills, a stable political environment, availability of finance, markets, workforce and infrastructure to name but a few.

The tax system will be part of that mix and business and people need to (and do largely) accept that to support a country’s political, legal and business environment and so enable them to earn money, taxes must be endured. The focus should be on setting tax on money earned by those who benefit from the UK environment at a more acceptable level and ensuring it is collected across the population fairly, reflecting risk and reward.

The Opportunity

It is clear from the 2003 Treasury paper, the 2008 legislation (albeit put in place by a government which took a different point of view) and increased public hostility that the non-dom concept in tax is nearing an end. Currently – and no doubt proposed reforms will advance this - it is gradually being strangled (for most people) by legislation. Rather than prolong its life unnecessarily, perhaps the humane thing would be to dispatch it now.

It is well recognised that this ancient concept of domicile has been much abused by long stay UK tax residents. There are many cases of individuals who were born and raised in the UK who are still able to establish they are non-doms.

With public figures now renouncing their tax non-domicile status (presumably by not claiming the benefit of the relief – and so contributing to the statistics above) and continued political pressure to reform, this surely creates the right opportunity to introduce some modern thinking that will be attractive to globally mobile workers and investors.

The saga in dealing with the UK tax non-domicile rules, the related remittance basis and perceived tax avoidance demonstrates the typical pattern of UK tax legislation. A longstanding anomaly is identified. Papers are prepared and consultations take place. There is much discussion and views are expressed and noted. Changes are made. Complex legislation ensues. More complex legislation on exemptions or exceptions is overlaid where oversights are spotted or political pressure is brought to bear. In time further anti avoidance measures may be added. As Sir Humphrey Appleby (in the TV series “Yes, Prime Minister”) would have put it: “years of fruitful work for government departments”.

And not a few lawyers and accountants in trying to make sense of it all.

Taking the pledge

A pledge made before the last election was to simplify the tax legislation. We have seen some tentative steps taken towards this in other areas. Any changes to the taxation of non-doms now should not only be clear as to purpose but they should also be long term, with little risk of tinkering, to restore the confidence of those coming to add value to the UK economy.

In addition to adding certainty in the law, it is essential to retain the attractiveness of the UK to overseas investors and businesses.

So the Government needs to balance fairness (by taxing all long time tax residents on a similar basis) with the need to encourage newcomers. In addition, they should also be encouraging wealthy individuals to stay in the UK and retain their wealth here rather than return to their country of domicile.

The current remittance basis – with, since 2008, its increasingly complex and very difficult to manage rules – merely means that anyone who can afford to keep foreign income and gains outside the UK will do so. Non-doms are discouraged from bringing wealth to the country by taxing what is brought in and happily ignoring what is not. It would be interesting to compare the tax raised from the remittance basis of taxation with the additional spending and investment power that is being denied.

The proposal to introduce a UK tax exemption for income and gains remitted by non-doms if invested in UK businesses will bring a raft of terms and conditions to ensure there is no tax avoidance. Layered on top of already convoluted legislation we merely create a more complex situation for the UK. Detailed terms and condition and anti avoidance legislation will inevitably form a barrier to investment.

If fairness with other UK resident taxpayers is to be sought any relief offered to tax resident non - doms surely cannot go beyond that offered to others.

Some modern thinking

So, when it comes to consultation later this year on changes to the non-domicile rules, let us press for some common sense.

First, domicile. Remove the domicile rules from the UK tax legislation. Tax individuals in accordance with their temporary tax resident and habitual tax resident status (see below) only.

Second, temporary tax residence. A simple but precise statutory definition and test for tax residence similar to the current “resident” test. There are already proposals to do this but the tests should be mechanical and with limited anti avoidance or exceptions provisions.

Third, habitual tax residence. This should also be defined in legislation along the lines of “ordinarily resident”. It should be automatically obtained where there has been a defined substantial period of tax residence – say 7 out of the last 9 tax years - or sooner if the taxpayer elects or he arrives with the intention of settling in the UK. Habitual tax residence should be the trigger to bring foreign income and gains into the charge to UK tax but only after the assets have been revalued.

Before becoming habitually tax resident, income and gains on foreign assets should be allowed to be remitted to the UK tax free. A UK tax holiday? Not really: it would discourage the hoarding of assets abroad that could be used to benefit the UK economy. It would remove the need for much anti avoidance legislation and for a complex exemption for income and gains remitted for investment in UK businesses; none of which may add substantially to government revenue or the wit and knowledge of mankind.

Fourth, revaluation of foreign assets. A revaluation of foreign assets on the triggering of habitual tax residence status to prevent the taxing of gains made on foreign assets before that status was achieved. Other jurisdictions apply similar rules. Individuals should not be required to contribute to government from gains accumulated until there is an established nexus with the UK.

Fifth, ceasing to be habitually tax resident. The objective of taxation is to raise funds for government and it should be paid by those who enjoy the benefits that government brings. The longer they enjoy them, the more the benefit. So, temporary tax residents only pay tax on money they earn here and habitual tax residents should continue to be liable to UK tax for a period of time once they leave the UK, with of course relief for any foreign taxes paid. If there is a fixed intention to leave for a long period or not to return, that habitual tax resident status should be removed and liability to UK tax also. Just as those coming to the UK who are not habitually resident should be encouraged to remit foreign income and gains, so those going abroad should be encouraged to send money home by making no differences in tax terms as to whether income and gains are remitted or not. There should be alignment between income tax and (existing) capital gains rules on temporary non- residence.

Finally, abandon the remittance basis. As already noted, the above presents the opportunity to remove the complex legislation introduced to charge foreign income and gains and prevent avoidance under the remittance basis. The removal of the £30,000 tariff would also follow. The level of charge has no reason behind it, it is unlikely to be credited against tax suffered in other jurisdictions and, frankly, has the appearance of a “facilitation payment” accepted in some lesser tax havens. (“Just call it 30 grand, mate and we’ll say no more about it.”)

Less is More

Too simplistic? Too difficult to reform? Will mechanical rules make it too easy to avoid UK tax? Is there a high risk of loss of tax revenue on introducing these rules? Will people really bring assets into the UK rather than hiding them offshore? Will it discourage people taking short term assignments overseas or staying longer in the UK?

Perhaps. There is always room for debate but we should never ignore the chance to reform because of fear. Tax is never perfect and we should not try to make it so by complexity. Most of the proposals above are within reach of the current system. But to continue to tax individuals in an increasingly mobile world on the basis of cash (or asset) movements and an advantageous parentage can be justified no longer.

Victor Clarendon

15 May 2011

M & Aaargh....

It is being reported in various M&A news sources that the UK mid-market continues to display a cautious but steady increase in market confidence. Maven Partners’ meetings with our own M&A and private equity contacts are endorsing this.

It appears debt availability is increasing, particularly for those houses that have historically not pushed the envelope of high-leverage.

The healthy amount of deals being done by houses such as ISIS, ECI and LDC (three houses in broadly the same market) suggests that there are more businesses coming to market, which should also ensure price expectations take a longer-term view, again stimulating activity.

It would be ambitious to say that a market recovery is in full swing, as deals are still only at the levels they were in 2009 (circa 500 transactions per quarter, with circa 20% being PE transactions). However, this surge of deals in the lower mid-market will likely start to drive transactions further up the enterprise value scale, as banks once again get an appetite for deals that deliver.

This will naturally have a positive effect on the human capital side of the industry; more funds spent will ensure further funds are raised which, with more opportunities across the desks, will mean there is a need for investment professionals.

Additionally, with some houses utilising interim management in nearly all their deals, and others changing management in half of their portfolio companies, there will be an increased need for financial officers who understand integration and PE strategy.

If you are looking at recruiting into your own fund, or indeed if you are looking to move into private equity or M&A advisory, Maven Partners would be delighted to have a confidential conversation with you to discuss your options. Additionally, we would love to hear your views on the market…please visit our new networking group ‘Maven Partners: The Corporate Finance Network’ and let us know what you are seeing.

Richard Matthews | Associate Partner | Maven Partners

Richard has 8 years of M&A and PE advisory experience, having spent 6 years as an advisor in the M&A team of BDO LLP, a leading mid-market deal team, and the last 2 years as a start-up principal and interim investment manager to private equity and listed businesses.

richardmatthews@mavenpartners.co.uk

Human Capital - How much are you worth?

Since the start of this year we have seen the tax market gradually picking up. However it has been interesting to see that during the recession there has been one area within tax that has stayed stable and is now growing more than many other areas – Human Capital.

In a time where businesses focused on reducing their costs, which has led in some cases to a recruitment freeze, there has still been a need for expatriate tax professionals. This is due, in part, to the global nature of multinationals and large companies with overseas interests. There is an increasing demand for individuals to relocate internationally within these companies which called for a closer look at the processes that were in place and how they could become more cost efficient. In order to ensure efficiency in relocations organisations have needed to have solid expatriation systems in place. This need, combined with the group of professionals who decide to work and/or live in a different country, has seen an increase in the demand for expatriate tax professionals.

Therefore, throughout the recent recession, Human Capital and in particular Expatriate Tax has proven to be one of the more steady areas within tax and we have continued to see a vast majority of vacancies. There are two main reasons for this:

1. The increase in relocating people overseas creates more complex tax and social security implications.
2. The recession has contributed to companies looking for more cost saving opportunities that otherwise would have easily been neglected.

Recognising the benefits of having expert advisors with a solid knowledge of the complex tax rules of the jurisdictions in which their expats work and live has resulted in companies asking additional services from their advisors. Due to this increase of work and the growth of their client base professional services firms have responded by allocating more resources to their human capital teams which includes global mobility and expatriate taxes.

Opportunities for you

The trends as described here have resulted in new opportunities for experienced expatriate tax professionals. There are opportunities on all levels but specifically we have noticed a high demand for professionals at Manager and Senior Manager level.

We are currently recruiting for several challenging and interesting opportunities and would be happy to have a confidential conversation with you to discuss your options and the current market situation.

Please feel free to contact Merijn van der Steen at Maven Partners on +41 (0)20 3178 8854 or emailmerijnvandersteen@mavenpartners.co.uk

Maven Partners has Moved...

London, 4th May 2010

by Rose Bundrock

Maven Partners is Moving…

…onwards and upwards! Maven Partners moved into new offices on Friday 30th April. We can happily say that we grew too big for our old premises and have moved to a larger office space, which is, thankfully, just around the corner.

Since commencing operations in June last year we’ve all witnessed considerable growth here at Maven Partners, in a number of ways. Firstly and most importantly, we’re winning work, developing new and deeper relationships with our clients and recruiting for a number of opportunities in our core markets – Finance, Tax and Financial Advisory. Consequently, our team has grown, we’ve welcomed new staff members and throughout this year and beyond we’ll continue to add experts into the business.

When I asked Matthew Leedham, Managing Partner how he felt about the move, he said he is delighted with Maven Partners progress in the most challenging market conditions. “We have been able to establish traction in our core markets very quickly which is a great testament to the strength of our network and the loyalty of our clients. We are looking forward with confidence to continuing growing the business but will remain very focused on attracting only the very best talent in the industry”.

On a personal note, I’ve witnessed this growth first hand. Joining Maven Partners in December last year, I’ve noticed the volume of our work grow significantly. As a Senior Research Associate, that has meant the number of contacts we’re making with top quality candidates has greatly increased. One of the reasons we’ve been able to grow our candidate pool is because of our research driven methodology; we have invested significant resources into identifying, mapping and connecting with the right people.

While it’s been said many times before, I will say it again - despite the downturn, the very best talent is still hard to come by – these candidates, particularly those operating in specialist and niche areas, expect to be ‘tapped on the shoulder’, rather than apply to a job ad. Headhunting is still a necessity, and I’ve also sensed a change in air in this regard also. In particular, since the beginning of the year it appears the psychology of potential candidates has changed. People are more willing to engage in discussions about potential new roles and are more open to ‘seeing what’s out there’. Employees seem more confident of their position and their options outside of their current workplace. For all of us, this is a good sign.

Hence, all in all, things are moving forward for us at Maven Partners. The ash cloud has dispersed, the sun is shining, we’re moving to newer and bigger offices and our markets all appear to be showing strong signs. What kind of impact the upcoming election will have remains to be seen…

Our new contact details are as follows:

New Address details: 25 Southampton Buildings, London, WC2A 1AL t +44 (0) 20 3178 8846

Contact details of our consultants

Mary Driscoll MANAGING PARTNER
t +44 (0) 20 3178 8848
m +44 (0) 7799 870 948

Rob Stephenson MANAGING PARTNER
t +44 (0) 20 3178 8847
m +44 (0) 7595 372 815

Matthew Leedham MANAGING PARTNER
t +44 (0) 20 3178 8849
m +44 (0) 7787 574 244

Rose Bundrock SENIOR RESEARCH ASSOCIATE
t +44 (0) 20 3178 8851
m +44 (0) 7818 151 876

Licensing Intangibles through the US

Does Anybody Want to License Intangibles "Through" the United States?

London, 19th April 2010

Merriman Capital Transactions Ltd

U.S. Transaction Planning Insights - March 31, 2010

Does Anybody Want to License Intangibles "Through" the United States?

Although what I am proposing may seem counterintuitive, particularly given the reputation of the United States as being somewhat tax unfriendly, there may be discreet circumstances when licensing intangible property ("IP") via a U.S. corporation ("USCo") could make sense. Here's why. As a matter of U.S. federal income tax law, royalties derived from the use of IP "outside" of the U.S constitute non-U.S. source income. As such, if, for example, a non-U.S. person ("NUSP") licensed IP to a USCo, solely for the use "outside" of the U.S., and USCo paid royalties to NUSP from sub-licensing the IP to parties for use "outside" the U.S., royalties paid to NUSP by USCo should in general constitute non-U.S. source income. In this simple scenario, USCo could pay royalties to NUSP free of U.S. withholding tax, even if NUSP was not eligible for U.S. income tax treaty benefits. You may think "so what", but for example, this could be useful to a NUSP resident in a tax haven or for a NUSP resident in a country whose treaty benefits for royalties are generally not as favourable as U.S. treaty benefits for royalties. Further, depending on facts, a USCo may have logistical advantages for a NUSP; no rulings would be necessary for a USCo; and a USCo is automatically a U.S. resident in many U.S. treaties notwithstanding location of management etc. U.S. transfer pricing, U.S. reporting and U.S. state tax all must be addressed, but these issues may be acceptable if non-U.S. withholding taxes are significantly reduced for NUSP.

For further information contact:

Chuck Merriman (Email) cmerriman@merrimantransactions.com / (Telephone) 44 (0)20 7887 1442 (Address) Second Floor, Berkeley Square House, Berkeley Square, London W1J 6BD, United Kingdom

Rob Stephenson is a Founder and Managing Partner of Maven Partners, a specialist taxation recruitment business. For more information please contact Rob on 0207 061 6421 or robstephenson@mavenpartners.co.uk

U.S. Transaction Planning Alert: Economic Substance Doctrine Made Statutory

London, 1st April 2010

Merriman Capital Transactions Ltd

U.S. Transaction Planning Alert - March 31, 2010

Codification of the Economic Substance Doctrine & Related Penalties

On March 30, 2010, the Health Care and Education Reconciliation Act of 2010 (the "Act") became law. The Act includes a provision which codifies, or makes statutory, what is referred to in U.S. federal income tax ("FIT") law as the economic substance doctrine ("ESD"). Over approximately the last 75 years, the ESD was solely a common law doctrine administered by the courts. According to the Act, a transaction(s) will have economic substance only if, apart from FIT benefits, (A) the transaction(s) changes in the meaningful way the taxpayer's economic position, and (B) the taxpayer has a substantial purpose for entering into the transaction(s). Profit potential will be taken into account only if pre-tax profit is substantial when compared to expected net tax benefits. In certain circumstances state income tax and financial statement benefits would not be valid purposes for the transaction(s). Of critical importance, the Act also provides a penalty of 40 per cent for underpayments of FIT relating to undisclosed transactions which do not have economic substance per the ESD. The scope of the ESD is very unclear and raises many unanswered questions. One concern is that transactions outside the realm of "tax shelters" may be negatively impacted. Also, the ESD can be compared to a general anti-avoidance rule, or GAAR. Since the ESD is effective from today taxpayers must evaluate the possible ESD impact on transactions entered into from today, even without the benefit of U.S Internal Revenue Service guidance.

For further information contact:

Chuck Merriman (Email) cmerriman@merrimantransactions.com / (Telephone) 44 (0)20 7887 1442 (Address) Second Floor, Berkeley Square House, Berkeley Square, London W1J 6BD, United Kingdom

Rob Stephenson is a Founder and Managing Partner of Maven Partners, a specialist taxation recruitment business. For more information please contact Rob on 0207 061 6421 or robstephenson@mavenpartners.co.uk

CAN THE NEW CFC PROPOSALS KEEP COMPANIES IN THE UK?

London, 25th March 2010

by Helen Blenkinsop

The trickle of UK PLC headquarters to foreign shores isn't a flood yet, but it's gathering pace. Countries like the Netherlands and Switzerland are actively courting both UK PLCs and high net worth individuals, like hedge fund managers. And it's no wonder that companies and individuals are starting to leave. Switzerland offers an attractive tax and commercial environment, and if you like skiing too, why not take a one-way trip to the Alps? It's against this background that we should view the Government's latest proposals for controlled foreign company ("CFC") reform.

CFC reform - what's it all about?

The proposals are the latest instalment of the Government's changes to the taxation of foreign profits, in other words, the taxation in the UK of profits earned outside the UK by subsidiaries of UK companies. The two earlier instalments were a corporation tax exemption for foreign dividends paid to the UK (UK dividends were already exempt) and rules to restrict tax deductions for interest if a group's borrowings in the UK exceeded the group's worldwide borrowings. The CFC rules already allowed the Government to tax UK companies on unremitted profits of foreign subsidiaries. Although there was broad agreement that change was necessary, there was little agreement on the detail, so the CFC rules had to sit in the "too difficult" pile until the dividend exemption and debt cap were enacted. The current proposals, in the form of a discussion document posted on the Treasury website, were issued by the Treasury and HMRC at the end of January 2010. The document sets out the direction of travel, while recognising that details have yet to be agreed.

The Government is too afraid of losing revenue to scrap the CFC rules altogether. Instead, it wants to simplify them, enhance the UK's competitiveness as a place to do business and ensure the rules comply with EU law. It is debatable whether the existing CFC rules are or ever have been compliant with EU law. Suffice to say that I expect cases on the subject will be keeping lawyers busy for many years to come.

Plus ça change

The Treasury's approach to the CFC proposals is coloured by the Government's desperate need for tax revenues and its desire to make the UK competitive. The current CFC regime broadly says that all UK-owned foreign companies are CFCs and their profits taxable on their UK owners, unless one of a number of a number of exemptions is met. The new CFC rules would take the same approach. The exemptions would be different, but apparently easier to operate. There is, however, a real danger that extra complexities would be layered into the rules to collect more tax.

Small is beautiful

The proposed exemptions are similar to existing ones. Capital gains continue to be ignored. There is an existing de minimis exemption for income under £50,000; it is proposed that this is increased. Life would be even easier if the limit were tested against local accounting profits rather than, as now, by calculating UK taxable profits. That, however, is a matter of detail to be covered in the next phase of the consultation.

A whitelist, but who is good enough?

The existing exemptions for high tax rates and "good" excluded countries both involve analysis and calculations; either a calculation of UK taxable profits or analysis of income to prove that most of it is really sourced in the good excluded country. They would be replaced by a simple white list of good countries. A vast improvement, although HMRC has yet to decide which countries are good enough for the white list.

Good news for traders and treasurers…

The exempt activities test currently removes trading companies and some holding companies from a CFC tax charge. Its replacement, an exemption for trading companies, will be more widely drawn so that treasury companies and "active" intellectual property ("IP") owning companies fall within it as well.

The extension for treasury and active IP operations has arisen as a result of determined lobbying by business, and it is encouraging that the Government has listened. There are pitfalls, though. The definition of qualifying treasury activities is restricted to short term borrowing and lending at a profit, and providing treasury services such as cash pooling. Other financial activities, like lending long term within the group, could attract CFC tax. Here, the options suggested by the Treasury start to look rather complicated. One proposal is to levy UK tax on a deemed interest charge unless the finance company is appropriately debt-capitalised. The Treasury is seeking recommendations for an appropriate debt:equity ratio. The irony here is that, while generally HMRC wants UK companies to minimise debt on their balance sheet (thus keeping tax-deductible interest low), I suspect that in this instance, it would like foreign finance subsidiaries to be capitalised with a high level of debt. Even then, the Treasury is very nervous of overseas subsidiaries lending cash back to the UK, and has suggested further restrictions

...and intellectual property, but there's a sting in the tail

The IP proposals would exempt foreign subsidiaries that receive IP income, as long as they either manage all their IP themselves or their IP has no UK connection; for example, a patent developed by a French company, owned and managed in the Netherlands and licensed to an Australian company. The definition of IP management is comprehensive, covering development, legal protection, negotiation and quality control over licence agreements, and brand management. If any of this is outsourced, an active IP company would be expected to employ knowledgeable staff to supervise the outsourcing.

Because of HMRC's evident reluctance to exempt IP owning companies with any connection to the UK, I fear that groups will be motivated to outsource IP management to third parties and group companies outside the UK. It would be unfortunate if HMRC's caution resulted in less work, and therefore jobs, for patent and trademark specialists in the UK.

The Treasury is also concerned that IP could be transferred from the UK too cheaply, especially in the case of newly developed IP that doesn't generate profits yet. The Treasury's answer is to revalue IP on an earn-out basis several years after the move offshore. If there has been an increase in value, HMRC will collect more tax. Naturally, if the IP has fallen in value, no tax refund will be forthcoming. This one-way bet for HMRC appears to ignore risk inherent in the IP's value when it is transferred, as well as the contribution made outside the UK to the IP's growth in profitability. The measure would introduce uncertainty: when IP was transferred offshore, no one would know if a large tax charge loomed ahead. Perhaps, rather than apply a stick, the Treasury could give a carrot by improving its proposed patent box regime. This initiative already offers low tax rates for patent royalties from 2013.

Loopholes to close

A widely used loophole will be closed. At the moment, exempt trading companies can receive non-trading income without any effect on their CFC position. A common tax planning technique known as swamping involves loading a trading company with low-tax interest or royalties amounting to just less than half of its profits. In future, only incidental non-trading income will be relieved from a CFC tax charge. Comments are being sought on the definition of "incidental". My guess is that we will land somewhere around 10% to 20% of profit before tax.

Holding companies – watch this space

The Treasury admits that it hasn't decided what to do about holding companies, and is open to ideas. The simplest option would be to treat holding companies like trading companies, and refrain from a CFC tax charge if they receive only dividends plus, say, non-dividend income below the de minimis exemption limit.

Are your motives good?

The Government's intention, repeated throughout the discussion document, is to prevent the artificial diversion of profits from the UK. They recognise that, however widely drawn, the specific exemptions may not cover every company established overseas for commercial reasons. It is possible today to claim a motive test exemption in this situation, by persuading HMRC there is no tax avoidance motive and no loss of UK tax. Although my experience of the motive test has been positive, I understand that HMRC hasn't always been persuaded in other cases. A more user-friendly motive test is promised in future. The Government is moving away from the default assumption that all activities that could have been undertaken in the UK would have been undertaken there, were it not for the tax advantages offered overseas. Instead, the focus will be on proving a commercial rationale. There may also be a statutory period of grace for newly acquired companies (HMRC already allows this, but it isn't enshrined in statute) and flexibility where other exemptions are narrowly missed.

Keeping it simple

To summarise, the direction of travel is encouraging. The Government is making a welcome effort to design new CFC rules that are simple and fair. Yet, there is a real danger that they won't be simple enough or fair enough. Concerned taxpayers should give their views to the Treasury by 20th April 2010, the deadline for comments on the discussion document. Equally, HMRC should resist the temptation to collect more tax by adding complexity and retrospective tax charges. Multinationals will vote with their feet otherwise.

"Helen Blenkinsop FCCA, trained and worked as a corporate tax manager in the Big 4 before moving in-house. She spent 12 years heading two international FTSE tax teams and recently completed senior interim assignments in the insurance and packaging industries. The CFC rules have played a bigger part in her life than she cares to mention."

For more information contact Rob Stephenson, Managing Partner of Maven Partners on 0207 061 6421.

“Job prospects looking rosier for senior finance candidates…………..”

Never has spring been so keenly anticipated at Maven Partners as this year. Not only are we looking forward to a general thawing-out to allow us all to return to our normal life activities (let’s face it the novelty of snow & ice soon wore off) but there is also a mounting level of evidence that the economy may be starting to bear more fruit. The recent Deloitte CFO survey (2009: Q4 results) indicated a 2-year high in confidence amongst Senior Finance staff – with many planning to deploy a series of strategies designed to expand market share and increase revenues in 2010. Introducing new products and services was cited among their top three priorities by 46% of respondents. Expanding into new markets and expanding by acquisitions were also widely recorded.

In the meantime a new survey from McKinney Rogers, the leading global business performance consultancy, has highlighted a significant change in the emphasis that Boardrooms are now placing on hiring senior talent – with the cold calculus of financial restructuring and cost management skills falling behind innovation, entrepreneurship and leadership for the year ahead.

Here at Maven Partners we can support these findings with discernible evidence that our clients are once again talking about new ventures, new geographies, taking increased market share; and having the talent in place in order to take advantage of these opportunities. With respect to Senior Finance recruitment - conversations, briefings and written specifications are focusing on bolder and more creative qualities: supporting commercial activities in business development, providing the financial rule over potential corporate transactions and leading and developing finance teams.

Provided that the elephant in the room, namely, the impending election (and let’s hope it comes sooner rather than later) does not trample all over the daffodils, then we are anticipating a much rosier picture this spring than we have seen for the past two years.

Matthew Leedham is a Managing Partner at Maven Partners and has over 20 years experience in recruiting senior finance professionals at the Board level. He can be contacted at matthewleedham@mavenapartners.co.uk or by telephone on 07787-574-244

A Positive Outlook for Private Equity Finance Directors…?

London, 8th February 2010

Last week was a positive week all round in business terms. Not only did we come out of recession, albeit by 0.1%, we also saw some major movement in the Private Equity space; all very encouraging.

The big news in the retail world was of course the sale of Pets At Home to KKR for £955m. With three other notable deals totaling over £900m, it seems that things are really starting to shift. If you listen to the experts then this is only the start, and whether it is because funds are running to the end of their investment periods or due to more stability in the credit market, this can only be positive for those Finance Directors and CFOs looking to take up roles in Private Equity-backed businesses.

For the past 18 months in recruitment terms this market has been fairly stagnant, even for those with proven ability in other similar environments, and practically impossible to break into for those wanting to secure their first move into a portfolio business.

This dynamic should start to change as more deals complete and more Finance Directors get changed or professional interim managers are drafted in to manage change or assess a situation. Competition for these roles will remain incredibly high and relevant industry exposure and specific experience in similar situations will be essential to most firms looking to take on such people.

Mary Driscoll is a Managing Partner at Maven Partners and a specialist in the recruitment of experienced Interim Managers and permanent employees into senior Finance positions often into Private Equity or Retail and Consumer businesses. For a confidential conversation please contact Mary on 020 7061 6489 or email marydriscoll@mavenpartners.co.uk

Cash Pooling - Are you Managing the Tax Issues?

London, 12th January 2010

Cash pooling tools, such as notional pooling and zero balancing, are used to move cash around a group and manage working capital, but different tools have different tax implications that treasurers need to be aware of.

In my previous article Moving Cash Around the Group: Are You Tax Efficient?http://www.mavenpartners.co.uk/recruitment_news/moving_cash_around_301109.html, I took a high level look at how groups move cash around and the associated tax consequences.

In terms of the techniques available, I referred to cash pooling/cash sweeping arrangements, stating that these are common ways for both moving cash around a group as well as securing the efficient management of the group’s day-to-day working capital requirements

While such arrangements may be relatively straightforward from a banking and commercial perspective, they do give rise to a range of tax issues, including transfer pricing, thin capitalisation and related party rules relating to the deductibility of interest

But isn’t cash pooling was straightforward from a tax perspective? Well, it may be.

Ultimately the complexity from a tax perspective depends on both the type of cash pooling arrangement and the jurisdictions involved. While there are many variations, in essence there are two main forms of cash pooling: notional pooling and zero balancing.

Notional pooling

In the case of notional pooling, the debit and credit balances kept by the various members of the pool are added up and interest is calculated on basis of the net result. The balances themselves are, however, not transferred to one separate central entity, but remain with the individual member companies of the pool.

Zero balancing

In the case of zero balancing, also known as sweeping, the balances of the pool members are physically transferred (i.e. swept) to one central entity (the pool leader). At the time of the sweep (normally at the end of the day), positive balances will be transferred to the pool leader. The pool leader will also provide the necessary cash to those entities that are in an overdraft position resulting in the individual companies having a zero balance at the end of the day.

Notional Pooling Versus Zero Balancing

While economically the same, these two forms of cash pooling have substantially different tax aspects. In this regard, the key point from a tax perspective relates to the fact that while with notional pooling the pool members retain their existing balances, with zero balancing intra-group balances are created between the pool members and the pool leader.

What this means in practice is that with notional pooling issues relating to interest deductibility, thin capitalisation and withholding tax remain the same. While some consideration does need to be given to such issues as the interest rates applied within the pool and the transfer price for any financial guarantees, in general notional pooling is relatively straightforward from a tax perspective

With zero balancing, however, new intra-group balances are created and so the rules relating to interest deductibility, thin capitalisation and withholding taxes will all have to be revisited. This is firstly because the rules for intra-group funding may be different from those applying to external funding and secondly because a previously in-jurisdiction balance may have become a cross-border balance. Consideration will also need to be given to the transfer pricing consequences of any financial guarantees associated with the zero balancing arrangements

In summary, therefore, the tax consequences associated with zero balancing are complex and could adversely effect a previously neutral tax position

Conclusion

Cash pooling arrangements exist in many forms and in this article I have focused on:

1. Notional pooling, or interest compensation, where there is no physical transfer of funds and where banks will require a legal right of off-set
2. Zero balancing, where funds are physically transferred and each member of the pool has only one counterparty - the pool leader

The key message for treasury and finance professionals is that there will always be tax issues associated with both the establishment of a new cash pool and the addition of new members to an existing cash pool.

From a tax perspective, the most important piece of initial information your tax colleagues will need will relate to the type of arrangements being used, i.e. notional pooling or zero balancing, as this will determine both the nature and extent of the tax issues that need to be addressed

Martin Bardsley, Senior Director with Alvarez & Marsal Taxand UK, serves as head of the firm's Treasury & Financing Tax practice and also leads Taxand's Global Financing service line. Taxand is a global network of leading tax advisors from independent firms in nearly 50 countries

Martin brings over 20 years of experience in providing corporate and international tax advice to a wide range of multi-national clients and has significant experience in advising on Treasury and Financing transactions, both in the corporate and financial industry sectors. Prior to joining Alvarez & Marsal, Martin spent 17 years with the tax groups of PricewaterhouseCoopers and KPMG, 13 of which were spent in London focusing on Treasury and Financing Tax. Martin also completed a long-term secondment to a major FTSE 100 multinational firm during 1998 and 1999 where he was tax adviser to the Treasury, Corporate Finance and Asset Management teams.

For more information contact Rob Stephenson, Managing Partner of Maven Partners on 0207 061 6421.