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
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
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.
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