I am bringing you this month’s Newsletter in this, my last month before I go on maternity leave. It is, I am sure, the job of every prospective parent to worry about the world in which they are introducing a child, but in trying to imagine how things will be for my daughter when she is my age, I cannot help but worry how the economic legacy of today’s credit crunch will affect her future lifestyle and standard of living.
After spending all of my 20s to date, like my peers, building up a professional career in what I now see was a bubble of optimism – you get your professional qualifications, win a job in the City, work hard and you are pretty much guaranteed a job and rising salary levels for life – the world has certainly changed. I am now part of what is being called the “IPod generation” – Insecure, Pressured, Over-taxed and Debt-ridden. What will be the unfortunate label attached to my daughter’s generation?
As we in the UK are increasingly being faced with tax hikes and spending cuts, I worry not only about the penal taxes that are likely to be imposed on my daughter to pay off our debts, but also the state of this country’s hospitals, schools and other infrastructure when she will come to rely on this. Will the debt mountain prove ever harder to climb? Can we feel confident in the ability of politicians to make this climb easier? Papi Silvio certainly doesn’t set a good example when his eyes roam to glamorous 18 year olds rather than what is needed for the world economy.
As ever, it is not the public sector that can rescue us but the private one, where innovation and entrepreneurialism will be the driving force of the new greenshoot recovery. At IFS, this is the most exciting part of our work, to be party to new business ideas that our clients are bringing to us and helping our entrepreneurial clients to develop these ideas. Maximising after-tax returns, protecting the IP rights associated with innovative ideas, and creating viable long-term business structures for them has been the hallmark of IFS’ work over the past 35 years. Through legitimate tax planning, we feel fortunate to be part of the positive move in creating a new generation of wealth.
And talking of new generations, it has been a whole generation since Roy initially wrote the acclaimed international tax reference work, International Tax Systems and Planning Techniques in 1983. Although the country-specific chapters of this book have been regularly updated since its inception, we feel that it is time for a revamp of the entire book to give greater emphasis to current international tax issues and generally to improve the reading experience for our entrepreneurial clients and wider readership base. I will be taking on the exciting project of preparing this revamp over the course of the next few months, and the new version is due to be published in Summer 2010. Indeed, we are in the process of formalising an excellent network of lawyers and accountants who have been contributing to this book over the years (as well as some new contributors) with a view not only to ensuring the best possible content for this book in each jurisdiction, but to further strengthen our international connections so that we can succeed in our aim to provide an ever improved service to our clients. As well as holding annual meetings amongst the network to achieve these objectives, we are planning on hosting a new international tax conference which will be aimed at addressing what we consider to be the most pressing international tax issues of our day, and to which you will all be invited – watch this space!
And after all this musing on new starts and the generation to come, now a nod to the older generation. As most of you will know, I am Roy’s daughter, although my married name has not made this obvious since I joined IFS two years ago. In fact, so proud am I to be a part of such an excellent legacy of international tax practice, that I have decided to use my maiden name for work purposes – hence my sign off from now on as Lara Saunders (but I will ensure with our IT people that e-mails to Lara Arnold will still reach me!).
In this May Issue, our good friend Arthur Thompson at H W Fisher has written about the benefits of becoming non-resident of the UK (which is unfortunately increasingly becoming the objective of many of our entrepreneurial clients, particularly after the announcements of the recent Budget), and some of the issues connected with establishing non-residence successfully. Roy has also written an article about a significant area of our practice, the structuring of private equity funds, and how these vehicles may be intrinsically linked to a new era of economic growth.
For those of you whom I do not see again over the next few weeks, I look forward to working with you again when I return in October to what I hope will be a brighter economic outlook for us all. In the meantime, I wish you a happy and prosperous next few months.
With kind regards
Escaping the UK
With the holiday season fast approaching, many of us are considering escaping the UK for a week or two in the sun.
The other thing approaching fast is the increased tax liability faced by many with the acceleration of a 50% top rate of tax. This, coupled with the changes to the taxation of UK resident but non UK domiciled individuals, a new remittance basis, the withdrawal of personal allowances and restrictions on pension contributions, may encourage individuals to leave the UK for somewhat longer than a fortnight!
It has always been attractive to reduce one’s tax bill by attempting to become non resident in the UK and it is an area that H M Revenue & Customs have often attacked, leading to a labyrinth of statute, decided cases and ‘guidance’.
The question now is one of how does one establish non-residence and how much time can one spend in the UK for business and other reasons?
“Residence” and “Ordinary Residence” are complex enough in themselves so, let us assume one has been here for some years and the current status, as both resident and ordinarily resident, is not in doubt. Let us also assume that this is not a temporary sojourn abroad. The effect of Double Tax Treaties on residence needs to be considered but is an article in itself.
Attractions of non-residence
If you can establish that you are not resident and not ordinarily resident in the UK, then there are income tax advantages and, if you remain out for five full tax years, to a large extent, exemption from UK Capital Gains Tax.
The main income tax advantage is, broadly, that you are only taxed on certain UK source income. There is no tax on your UK investment income, other than net UK rents. This is a clear benefit if, for example, you own shares in a UK company and are able to receive substantial dividends each year UK tax free (suffering only the 10% tax credit that cannot be reclaimed).
Becoming non-resident requires you to deal with both the time you spend in the UK and the reasons for being here.
Physical Presence in the UK
The basic tests for non-residence require you to be outside of the UK for at least:
• 183 days each tax year and
• 275 days per year on average (ie not in the UK for 90 days per year)
A day is counted as being in the UK if you are present here at midnight at the end of the day.
The limits are reduced pro rata if you leave the UK and are ‘splitting’ the tax year.
Reason for leaving
In order to stop being resident in the UK you must have left the UK for something other than a temporary purpose. This is not clear but recent cases have framed it in the reverse. Is there some continuing reason to spend time in the UK?
If there is some continuing reason for being in the UK, for example immediate family or a permanent employment, then the absence from these shores must, or so it is claimed, be temporary, and so UK resident status may not be lost.
The only way to be certain of becoming not resident in the UK is to cease all employment and business connections here, take up an employment abroad, leave the UK and not return at all for at least a complete tax year, taking the family with you.
If this is not practical, then cutting any permanent ties is needed, before considering the time spent here. Convert employments to temporary contracts or consultancies, do not have any available accommodation in the UK and move spouses and minor children with you.
With a settled purpose for leaving the UK and there being no continuing reasons for returning, it is only a matter of keeping the UK presence within the limits!
The individual’s actual circumstances determine the precise steps needed to cease UK residence and so professional advice should be taken in all cases.
Private Equity Funds
Bankers are supposed to lend money for entrepreneurially driven projects – that is part of their raison d’être. Government owned banks are even being instructed to do so, but it is not happening as any entrepreneur will tell you. So what is the alternative? Private Equity Funds. And we at IFS are so convinced that these funds are the economic alternatives to stifling entrepreneurial initiatives that we are playing a lead role in the establishment of a multi-national, multi-venture Private Equity Fund which we will be discussing in greater detail in the coming months.
Over the past four years we have structured more than 30 private equity funds, financing such diverse interests as real estate investment, securitisation of pharmaceutical patent rights, regional airport development, an art fund for classical and modern art, a shipping fund, a renewable energy fund and many others. We adopt a top down/bottom up approach, which means that we look at the requirements of the investors and their tax status and other commercial requirements, as well as creating appropriate corporate structures to create a maximum after-tax return from the relevant investments. We advise therefore on the location of the fund, bearing in mind regulatory requirements as well as tax and other commercial issues, and we assist the fund managers in structuring their interests to maximise their net after-tax returns as well as those of the fund.
Bearing in mind the reluctance of commercial banks to finance new ventures in the current climate, one would have thought that imaginative governments would legislate to provide fiscal incentives for those willing to take such risks. Those with a financial centre which has been forced to make wholesale redundancies in the last year, be it Wall Street, London, Frankfurt or Paris, or indeed some of the Asian capitals, could regenerate their financial services industry by realising who is going to generate the new finance. The UK does in fact have beneficial provisions regarding venture capital funds but they do not go far enough. Countries such as the Netherlands, Luxembourg, Belgium and many other EU countries provide for participation exemptions so that dividends and capital gains can potentially be tax free, but these generally do not apply for an investment portfolio; moreover withholding taxes on the onward distribution of income and gains can be considerable.
It is a simple enough proposition. We have the corporate structure of a Limited Liability Company (LLC) in the US and a Limited Liability Partnership (LLP) in the UK where it is the members that are taxed on income and gains rather than the entity itself. Assuming these investors/members are non-residents of the US or UK as the case may be, there should be no tax liability. The problem comes when the entity has the need for an infrastructure which involves having an office and staff in the relevant location. The investors/members are then considered to be earning profits as a result of a permanent establishment (local presence) in the relevant country and the tax benefits of a transparent entity are therefore lost.
At IFS, we understand the issues concerning private equity funds, as well as those of the investment managers, and structure such funds so that they can enjoy the presence of the required infrastructure in a high tax jurisdiction, but nevertheless avoid the consequences of the entire income and gains of the private equity funds being taxed in that jurisdiction. A couple of years ago, we held a conference at Pennyhill Park on the taxation of private equity funds and fund managers, which was well attended. We would be happy to repeat this if we receive the demand to do so, so perhaps if you are interested, you would CLICK HERE and we will advise you further when we have made relevant arrangements.