As many of my peers furiously began writing what Brexit would mean for the UK tax system, I (semi) studiously sat back and decided to wait and see what kind of questions clients threw at us before sharing my thoughts. Overwhelmingly we’ve seen one particular strand of enquiry – ‘I want to move / expand my business into Ireland’.
The commercial rationale for this seems reasonably clear – business people are concerned that outside of the EU current customers and trading partners will not continue to business with them. Similarly there is a concern that accumulated wealth and value is at risk if it remains in the UK and there is a desire to export it to an EU country.
As with all tax matters it’s important to understand the specifics – there are some big differences between expansion and wholesale migration from a tax perspective and I deal with some of these below.
The first kind of query has centred around the formation of an Irish subsidiary through which the UK company can continue to trade with the EU. From a commercial perspective, one would have to consider what the implications would be for an EU customer doing business with a thinly capitalised Irish subsidiary of a UK parent. From a tax perspective, such an Irish subsidiary might not be taxable in Ireland if there is no genuine economic substance and management there. Alternatively, staff might be seconded or recruited there giving it such substance as it needs. Profits would likely be taxed in Ireland at 12.5% and returned to the UK parent free of tax. In essence we are just talking about the formation of a basic subsidiary company in a foreign country which many SMEs have been doing in the last five to ten years as their business interests become global.
Following on from that, there has been the suggestion that an Irish holding company is desirable. I’m still not necessarily clear on what this achieves commercially and need to spend more time with colleagues and clients to fully get my head around why this is being considered. However, a UK resident person can usually exchange their shares in a UK company for shares in an Irish company tax neutrally. Profits from the UK trading company group can then be distributed free of UK tax up to Ireland where they are in fact technically taxable upon receipt (with a credit for underlying tax which should in theory actually eliminate the Irish tax liability) with further tax due when distributed to the shareholders. Of course care needs to be taken to ensure that the holding company is truly Irish managed otherwise the company may become UK tax resident instead.
The more understandable scenario (at least in my mind) is a wholesale migration (or planned reversal of UK operations into an Irish business) with the business owners moving to Ireland from a personal perspective. From a corporate tax perspective, there is almost certainly an exit charge event (a notional disposal of the business’ goodwill at market value) which may create an unwanted dry tax charge and whilst there are provisions in the UK tax code to help defer that liability to a later date, this is not necessarily viewed as a perfect solution given the imposition of an interest charge.
It goes without saying that any operations that are left in the UK will continue to be taxed here even if the company is now an Irish one (or a UK company managed and controlled from Ireland) – so a staged migration will be a little more complex. Part of any business move will involve employees travelling to and from Ireland, perhaps on secondment, and all to many SMEs underestimate / do not appreciate the impact of moving staff around internationally and the challenges that brings.
The major non-tax issue here will of course be the people – how do you convince your highly valued team to make the move across the Irish Sea? They would need to take their families with them and you’d need to help them with the process both procedurally and financially. This might be easy for Vodafone but it’s tough for an SME. If you aren’t taking your staff with you then you’ll need to find replacements and we all know that recruitment is a hit and miss process at best.
From a personal tax perspective, consideration will have to be given to ceasing to be UK resident and becoming Irish tax resident and how those rules work. Property might be left behind in the UK and let out (in the hope of a return to the EU at some later date perhaps….) and the tax implications of that will need to be covered off.
Finally whilst Ireland is in the EU, it can’t be the sole criteria for your destination of choice. Does Ireland have the kind of people you need? Is the infrastructure what you need? Is the government stable? Is the economy stable? Will the banks support your business? There are many non-tax factors to consider.
It is clear to me that a variety of businesses will make the move to Ireland. In my mind that’s likely to be high tech software businesses and similar businesses that have relatively light and flexible workforces with people who are used to moving around. Nevertheless, the issues that any business wanting to re-domicile to Ireland will face (in whole or part) will be significant and so it seems good news that Brexit will take some considerable time to negotiate allowing time to arrange an organised departure.