Relocation, relocation

The news that United Business Media (UBM) is planning to follow Shire Pharmaceuticals out of the UK might be raising some questions in government at the moment. Both UBM and Shire have put forward tax as their reason for leaving.

However, both UBM and Shire are doing the same thing: they aren't actually leaving the UK at all. Both companies have stressed that there are no plans for any job losses in the UK, and they aren't planning on closing any businesses here in the UK.

Instead, each is putting a new holding company in place on top of the current UK company – and, again, both have picked the same structure: a company incorporated in Jersey, in the Channel Islands, to be listed on the UK Stock Exchange (in place of their existing listing) and tax resident in Ireland.

The existing structure of each group will remain in place – it will merely acquire a new parent company at the top of the group. No companies or assets are immediately expected to be relocated from the UK, although the substantial shareholding exemption may mean that non-UK subsidiaries could be transferred to the new holding company.

The benefits

The reason for this is tax – actually leaving the UK can mean significant immediate tax costs, as the company will be considered to have disposed of all of its assets at market value on leaving the UK, triggering a tax charge on any capital gains that have accumulated in those assets.

Putting a new, non-UK, holding company above the existing group should not trigger any tax charges in the UK – none of the business and assets leave the UK, and none of the UK structure is wound up, so there should be no disposal leading to tax on capital gains. The new holding company can be put in place without a tax charge for UK shareholders – by way of a share-for-share exchange, or by a scheme of reconstruction – so that any gains are deferred until the replacement shares are eventually sold by the shareholder.

The tax benefits of this non-UK holding structure are not short-term: announcements from both companies note that they anticipate benefits only in the medium to long term. Those benefits will primarily relate to new non-UK business, which can be held directly by the new holding company and so will be subject to the Irish tax system, rather than the UK tax system.

Shire and UBM are both acquisitive: Shire considers that most of its growth over the last decade has come through acquisition. UBM has spent over £350 million on 52 acquisitions in the last three years (39 of those outside the UK), and plans to spend another £300 million over the next couple of years.

Why Ireland?

Both companies have chosen to make the new holding company resident in Ireland for tax purposes. Companies are, generally, tax resident either where they are registered – and Jersey has no corporate tax for international holding companies – or where central management and control of the company is located. This is not day-to-day management of the company, but the higher level strategic management. It is something that needs to be carefully managed, particularly where the directors are not principally resident in the country chosen for tax residence – the new Shire holding company's articles of association specifically state, for example, that a board meeting will not be validly held unless the location of that meeting is Ireland.

Ireland's low tax rates might appear to be the immediate attraction: its standard rate of corporate tax is 12.5% (although this rises to 25% for passive investment income), compared with the UK standard rate of 28%. However, UBM's accounts indicate that their group tax rate is 17%, and Shire's financial information indicates that it has paid little or no tax due to losses over the last three years - neither of them is paying tax in the UK at anything like the UK headline rate.

UBM, in particular, cites the 'less complex' Irish tax system as its reason for restructuring. The UK tax system has become progressively more complex over the last couple of decades, with the tax legislation now expanded to around 10,000 pages – with more to come in each Finance Act, apparently. The drive to eliminate tax avoidance has seen HM Revenue & Customs attack structures that were previously considered simply good commercial planning and, in doing so, add more layers of complexity.

Finally, both UBM and Shire rely on intellectual property to a significant degree, generating licence fees and royalties worldwide: this is an area of tax that is particularly uncertain in the UK at the moment, as we await a further consultation paper from HM Revenue & Customs on the taxation of foreign profits. The proposals to reform taxation of foreign profits do include the welcome exemption of foreign dividends from UK corporation tax, but the price to be paid seems likely to be additional tax costs for UK parent companies with overseas finance activities and intellectual property.

Is this something more companies should be thinking about?

Fully packing up and leaving the UK is unlikely to be an option for any business – the costs of doing so for any successful business are likely to be prohibitive, no matter how attractive the tax regime elsewhere.

Inserting a new holding company, as Shire and UBM are doing, will generate its potential benefits only over the medium to long term as new businesses are added, outside the reach of UK tax. Neither Shire nor UBM have suggested that their group tax rate will be reduced in the short term.

It is worth noting that UBM and Shire share a number of important characteristics: they are large, acquisitive, with substantial proportions of their business overseas, utilising intellectual property, and regularly developing new products. Smaller businesses are unlikely to be able to justify the resources required to support a non-UK holding company, and unlikely to have the level of non-UK business to justify the costs of setting up and maintaining such a holding company.

Multinationals sharing some or all of UBM and Shire's characteristics have undoubtedly already been considering their options for some time; these two high-profile moves should bring those options back to the board agenda for consideration again.