Wolseley, the UK quoted builders merchant, is to move its place of incorporation to Jersey and tax residence to Switzerland according to the BBC this morning.
Not that it is actually a big deal. First, it’s a loss making company. Second, it’s been shedding UK business. Third, the tax impact is therefore small.
But the message is none the less that tax cheating is acceptable: no one on earth can think this structure anything but artificial. And that alone means that this, and other such moves, says the time to act on corporate residence has arrived. The non-sensical UK approach that the location of board meetings determines the residence of a company is an anachronism from the age of the steam ship and telegrams. It is in urgent and obvious need of updating so that corporate residence reflects economic reality — not a silly game that boards of directors can play.
The change that is very obviously needed is that a company must be considered resident where the economic substance of its management is located. And yes, that can be determined. It’s where a majority of the board and their senior management team work day in day out.
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That is already the rule – companies are resident where management is located. Keep up at the back!
You’ve stated time and again that you think that profits should be taxed where they are earned. This is hard to disagree with but makes your post above a little perplexing.
If the business of this group that is carried on in the UK is still taxed here (which it should be given that there will still presumably be a UK trade) then why should the company be prevented from relocating the management function abroad? If the management function is actually carried out in Switzerland or anyway else outside the UK and is priced appropriately (again, HMRC should enquire into these matters as a matter of course to ensure the company isn’t just putting through a massive P&L debit in the UK which bears no relation to the actual value of the management services provided) then why should the element of profit attributable to management be taxed here?
This isn’t tax avoidance, this is tax competition on rates between nations and the reality that some companies will shift operations abroad if it reduces their tax bill. So long as actual work done and profit-generating activity is taxed where it takes place in reality, then it seems reasonable to me.
Merely shifting board meetings outside the UK but keeping all other management in the UK is indeed highly artificial. That this suffices to keep residence outside the UK is an indictment of the current state of the law, following the Wood v Holden case. I agree some form of change in law is needed. But there is an important caveat.
Wolseley, I believe, conducts most of its business outside the UK. So it wouldn’t be particularly difficult, or artificial, for them to move their headquarters, management team and directors outside the UK. They would then escape the ambit of any reasonable residence rule. There are a number of companies in the FTSE 100 in this position. EU law means we can’t simply stop such companies from leaving the UK.
The inevitable conclusion is that if our tax system is perceived as unduly onerous then companies like Wolseley will leave the UK. The controlled foreign company rules are that onerous, and I believe that is what’s driving Wolseley’s exit. It’s a question of compliance cost and uncertainty rather than tax cost.
@Richard Price
No – you’re wrong
Read carefully
@Adam
Because the management won’t be carried out there, is my suggestion
I’m suggesting this is classic tax avoidance -abusing the rules – albeit legally
@Marc Daniels
Of course companies can leave
But if we give up OFC legislation then we give up taxing capital
Is that what you’d want?
I don’t
And I can live with some departures who weren’t paying much tax to capture the rest
It is a trade off
Richard, that is quite wrong – there are some major corporation tax payers who are in this boat- HSBC and Standard Chartered for starters. And the CFC legislation is not in any sense a tax on capital – following recent EU caselaw it is of quite limited application (although a compliance headache).
@Marc Daniels
No OFC law and non taxation of remittance from subsidiaries and all the world’s profits would be in tax havens overnight
And that would be the end of the taxation of capital
Switzerland and Jersey are happy to facilitate that
But let’s have no pretence that this is anything but an attempt to shift the whole basis of tax onto labour alone
Because that is what it is
The rhetoric of uncertainty etc is just convenient and untrue wrapping
It’s not a question of having no CFC rules, it’s about the complexity of the rules we have. Ask any multinational, or any professional who advises them.
A targeted rule (perhaps reliant upon a list of blacklist jurisdictions) would be workable. The current system, which requires a UK-headed multinational to carry out a UK tax computation for each of its foreign subsidiaries, is not.
HMRC and the last Government recognised this when they kicked off the CFC reform process, but there is a feeling HMRC has gone in the direction of more, rather than less, complexity.
And it is not helpful to give the message to the likes of HSBC that we’d be happy for them to leave the UK.
[…] of Wolseley plc in the Uk is interesting. As the Guardian reports this morning( apart from quoting this blog, from yesterday): [Wolseley] finance director John Martin said the government needed to end the […]
I love the way you start all your posts about a particular investor/company/employee fleeing the country with the assertion that this is no big deal/they were making losses/it doesn’t matter anyway blah blah blah.
And then go on to say how this is such a big problem and we must do something about it!!
Nothing artificial at all! Board meetings (which from a company law perspective is the ultimate management and control of a company) will be held outside the UK therefore resulting in there being no tax residence in the UK. The company doesn’t meet the requirements of tax law to be taxed in the UK.
Now how would you change the law to ensure that the company remains tax resident in the UK and subject to taxation on its worlwide earnings?
@Richard Murphy
In which case, Richard, the offshore holding company would be likely to have a PE in the UK and the great big management charge which reduced profits of the UK trading entity would still be taxable here. It would be a failed attempt to avoid tax and would (hopefully!) be exposed during the HMRC enquiry which I hope as a UK taxpayer will be launched into Wolseley next year.
I have advised on taking a UK trading company non-resident (Switzerland, in my case), and my advice was that there must be substance to the new offshore operation. Senior directors must relocate abroad, there must be offices rented full time (no “brass plate” rubbish), staff taken on, and there must be a clean break with the UK.
If Wolseley don’t do that, then their tax planning simply doesn’t work.
Oh and Jaypee – board meetings are only the ultimate management and control of a company if as a matter of fact the direction of the company happens at those meetings. If the board meetings are just a rubber stamping exercise, then residence can lie elsewhere. In addition, even if you win on the residence point you need to avoid the presence of a permanent establishment in the UK. Simply getting your board meeting paperwork right is not enough.
@Adam
I an aware HMRC plans to challenge all these moves
I suspect this is the line of attack
@Adam
So there is a PE of the Swiss Holdco in the UK. Now lets apply Art 7 of the Swiss/UK treaty and suddenly there isn’t the flood of tax revenue in the UK you may have expected.
PE doesn’t establish tax residence merely a taxable presence.