Packing up and shifting headquarters somewhere else is an axe that business has always wielded over the heads of HM Revenue & Customs and the Treasury when it wants to make the point that tax rates are too high and reliefs not as generous as they could be.

The major obstacle that has always held businesses back from following through on this threat are the UK exit charge rules, which say that a company moving residence or shifting its board to a foreign location is deemed to have sold its business and is taxed according to the market value of its UK assets.

That is until now. Lawyers and accountants who have examined recent ECJ rulings believe that as the current UK exit rules stand, they are vulnerable to a challenge in the European courts.

In a paper, which has been submitted to the European Commission for consideration, the Law Society has argued that the UK exit charge could be found to be in breach of article 43 of the EC Treaty, which prohibits any restrictions on a company’s right to freedom of establishment.

The Law Society believes that the exit charge places companies that want to leave at a disadvantage to those who simply stay put, which limits the right to freedom of establishment. The CIoT is of a similar view and has also made representations to the European Commission.

It is a point that has lawyers advising businesses excited. One high-profile lawyer advising businesses on EU law has told Accountancy Age that there are clients who have looked at taking an exit charge case through the European courts, and that all that is needed to open the exit floodgates is for one of the companies to have a crack at it.

The repercussions of such a case would be massive. It was just a year ago that HSBC said that it would consider moving if it felt that tax rules in the UK became too onerous, while fellow FTSE 100 bank Barclays has being dogged by speculation that, in the event of an unlikely merger with ABN Amro, it could relocate to the Netherlands.

Few have leapt yet, but losing such large and iconic businesses to other EU regions suddenly looks a lot more likely if current UK exit charge rules are deemed to be vulnerable to ECJ challenge.

The Treasury has maintained that it is more than confident that as the exit rules stand they are compatible with EU law.

One official told Accountancy Age: ‘If someone wanted to challenge the UK rules in the ECJ then they would have done it already. The government’s view is that the UK’s legislation, which of course is a matter of responsibility for the UK government, not the commission, is compliant with EU legislation.’

This confidence, however, has not stopped the government from holding consultations with other member states on coordinating member state rules. Former paymaster-general Dawn Primarolo admitted as much earlier this year at a public meeting held with tax advisers in April.

Peter Cussons, international tax partner at PricewaterhouseCoopers, believes that the current exit rules are definitely open to attack in Europe.

‘This is not golf club chatter or a legal technicality. There is a chance of someone pursuing this,’ Cussons says.

Cussons believes that UK companies considering such a strategy are likely to wait for an ECJ decision on a relocation case that has already gone through the courts.

The case, known as Cartesio, was brought by a Hungarian firm of lawyers that wanted to relocate its HQ to Italy, but had to pay various exit charges to do so. The case went before the ECJ in July and a judgment is expected soon.

‘Anyone considering challenging exit charges is likely to wait on the Cartesio verdict before making any decisions,’ says Cussons.

This kind of talk is not likely to provide the Treasury with any comfort, but what will ease fears of an en masse corporate exit is that the chances are that large, listed businesses are less likely to mount an exit charge bid than smaller, mid-market players.
‘It is much easier for a business with a sole shareholder to pursue this than a large plc. It would be difficult for a large company to make a move based only on a small and very technical piece of EU legislation,’ Cussons says.

The key cases

The confidence of legal and tax experts on the chances of challenging UK exit charges through Europe follows two key cases that recently went through the European Court of Justice.

The de Lasteyrie case dealt with exit charges in France charged to an individual who relocated to Belgium.

Similary the N Case dealt with a Dutch individual who wished to relocate within the EU.

In both cases, the ECJ ruled that exit charges limited an individual’s rights to freedom of establishment within the Union. The Law Society believes these principles can be applied to companies too.