Does redomiciling make financial sense?

FDs must consider cost control when considering redomiciling

When pharmaceuticals giant Shire, advertising icon WPP and
publishing house United Business Media decided to move away from the UK and into
what they deemed more favourable tax pastures, it gave the idea of redomiciling
a serious sheen.

With the introduction of the 50% tax rate on bonuses paid in UK banks, there
is a stronger prospect that more companies may leave for sunnier, more
financially favourable climes, while the possible extension of the tax rate into
2011 and to other types of financial businesses has fuelled a lot of
redomiciling talk. Inter-dealer broker Tullett Prebon has offered support to its
London staff who might want to relocate outside the UK to protect their bonuses.

A recent KPMG survey of some of the UK’s largest companies found that more
than half, including four FTSE-100 businesses, have either looked at the
prospect of leaving the UK or are still actively considering it. Meanwhile,
London mayor Boris Johnson said in January that he had received word from
several companies that they were mulling the potential of relocating out of the
UK, as questions over London’s competitiveness as a global financial centre
gather steam. Johnson claims that around 9,000 banking staff might now leave
London.

One reason for the gradual transition of a clutch of big companies away from
the UK is the perception that there are other countries that offer more
stability in their tax systems than the UK can, believes John Whiting, tax
policy director of the Chartered Institute of Taxation (CIoT). This is in direct
contrast to UK tax rates and rules which have altered frequently in recent
years, meaning tax plans and forecasts often have to be scrapped when the rules
suddenly shift. Whiting says companies don’t just relocate to a regime with a
lower tax rate, but because they “crave certainty” as well.

Deloitte tax partner Stephen Woodhouse agrees. “UK tax rules are changing,
often over a period which is not that much longer than the time taken to decide
whether to move a company,” he says. “Questions would need to be answered and
work undertaken around what sort of exit costs there are for the company; how
the relocation would impact on transfer pricing agreements; what would need to
be done to ensure that the new arrangements being set up are recognised by HM
Revenue and Customs as the business is not resident in the UK and figuring out
what the commercial costs are. You are looking at something which is going to
take a substantial amount of time,” Woodhouse says.

Relocating costs
What are the factors finance directors must consider when looking into
redomiciling?
“The real issue is cost control and opportunity,” says CIoT’s Whiting. He
believes businesses will not relocate just because they want to pay less tax –
but that it will be a contributing factor to take into account when assessing
the cost of expanding the business, rather than a standalone issue of getting
out of the UK. “Tax, like it or not, is a cost of doing business,” he adds.

One example of a company that has made a success of relocating outside the UK
in recent years is FTSE-250 company Hiscox, which was the first of a throng of
reinsurance businesses to redomicile in Bermuda at the end of 2006, as part of
its international expansion plans.

“We opened a major operation in Bermuda at the end of 2005, which is our
largest capital base in the group, so it had become quite an important market
for us,” group finance director Stuart Bridges explains. He adds that there was
obviously a tax benefit to moving, too. Corporation tax for reinsurance
companies is zero percent in Bermuda, but for Bridges the decision to move was
not solely about that. “We expanded into the US in 2006 so redomiciling’ the
[umbrella] geographically nearer to the US made a lot of sense.”

A lot of work and advice was needed before the move took place: reviews of
various tax regimes, working out what shareholder return might be, the ethical
issues around redomiciling offshore and financial projections. Relisting on the
London Stock Exchange involved reviewing and revising the documents and
prospectuses; how exactly dividends worked from Bermuda to worldwide
shareholders; structuring it so they were not at a disadvantage; and due
diligence and cashflow work among others, Bridges reports.

There are added costs from increased travel expenditure to have not just the
FD, but the entire board there from Europe, for example. Bridges explains that
as central management and control of the group has relocated from the UK to
Bermuda, the directors have also had to adjust to all board meetings being held
in Bermuda.

“Getting to grips with the schedule of all board meetings being in Bermuda
has required quite a significant amount of organisation, in terms of travel
itineraries and arrangements for directors coming from around the world to
meetings in offshore locations. The travel causes a major disruption in terms
of how [we] operate and adds pressure on the senior executives. That is probably
the big lesson [from this],” he admits.

With all the extra organisation and arrangements as a result of the
relocation, questions are often raised as to why it is done. Bridges says the
reason is commercial.

“We’re in a very regulated industry, so if we have a competitor that is
operating in a regulatory or tax environment which gives them a distinct
advantage, then of course, that gives them a pricing advantage in their product.
We obviously need to deliver the highest return on equity we can for our
shareholders but we need to compete on pricing on a worldwide basis. So look at
your industry and where your competitors are ‘domiciled’,” Bridges recommends to
other FDs. “Where are they regulated and where they are taxed. That is key.”

Geographical considerations
Additionally, Bridges says, redomiciling added a real international flavour to
the business and another level of sophistication.

“The big plus we got out of it was the international mindset. We can have our
board meetings in Bermuda with our American directors, our Bermudian directors
and our Canadian directors, instead of just being UK-focused. That was very good
for us as a firm.”

Where to redomicile to also depends on what offshore locale offers the best
treatment for your particular industry. “Bermuda would not be the best place for
a company in the manufacturing industry,” says the CIoT’s Whiting.
“Manufacturing companies have gone to countries such as China and former
soviet-bloc countries because the labour costs are so low, even when you factor
in tax costs. On the other hand, for example, a head office holding intellectual
property may look to site itself in Ireland or the Netherlands.

But let us not forget that in recent years the UK has been a beneficiary of
corporate relocations as it has been a good place for company headquarters to
migrate.”

Another question that remains is whether 2010 will see an exodus of companies
from the UK. While there have been grumblings from some quarters, it remains to
be seen whether companies that are actively considering moving transform into
businesses that are actually non-UK resident. Bridges believes it is often
difficult to know for sure whether this will happen because much will depend on
what is going to change after the next Budget and the General Election.

While the UK has seen many companies exit the country, there have been recent
developments around dividend legislation which may make some companies think
twice about whether to relocate abroad. The recent reform of dividend
legislation means it is now possible to pay foreign dividends to UK companies
without an adverse tax effect. As a result, this will mean it is less attractive
from a tax perspective to move abroad and therefore businesses may think twice
about relocating to another country.

According to Bridges, the next step surrounding this legislation remains
unclear and could yet influence the thinking on redomiciling this year. As he
says: “I think we’ll have to watch where the legislation goes from here.”