One minute with Helen Lethaby, tax partner at Freshfields Bruckhaus Deringer.
What are you working on at the moment?
A good chunk of it is M&A, with tech and fintech increasingly featuring amongst the targets alongside more traditional businesses. That and helping clients across various sectors assess the likely impact of the new interest barrier rules. For some groups, the modified debt cap - which now keys off the group’s net rather than gross financing costs - is causing more problems than the ratio-based rules. And the government’s decision not to exempt bank and insurance groups (despite exemption being within the OECD’s range of permissible responses) is really disappointing: the new restrictions operate too crudely for the financial services sector.
What recent tax development has caught your eye?
The hybrid mismatch rules introduced by FA 2016 have to be the most horrific piece of tax legislation ever enacted, and the recently published HMRC guidance – with its various examples of planning which would be shut down by the new rules if the planning had worked before they were introduced (but it didn’t) – only adds to the confusion.
We find ourselves worrying about the application of these rules in contexts which are a million miles away from the mischief they were aimed at. A simple example would be an excluded indexed security issued by a bank and designed to give rise to CGT treatment for a UK retail investor; although the guidance indicates that this should be okay, there isn’t a clear technical basis for this conclusion.
On the other hand, in cases where one might expect the rules to apply, it can be difficult to regard them as making any meaningful difference. A US private equity fund partly finances the acquisition of a UK portfolio investment with shareholder debt which is injected into a Luxembourg company at the top of a holding structure in the form of preferred equity certificates and then lent down the structure to a UK borrower entity as ordinary debt (a potential ‘imported mismatch’). Once the new interest barrier is in place, UK deductions in this sort of structure are expected to be limited to the higher of 30% of UK EBITDA and the funding costs on any third party debt. The incremental effect of the hybrid mismatch rules would be to prevent the shareholder debt being used to top up to the 30% barrier where funding costs on the third party debt were lower. Does that really justify 44 extra pages in the Yellow Book?
If you could make one change to UK tax law or practice what would it be?
I know I’m supposed to propose some substantive change here but the truthful answer is that I would force a return to the old-fashioned pithy style of legislative drafting, before it all started to go downhill in 1999 with the Tax Law Rewrite project. I fear I will go mad if I have to read yet more draft legislation which begins with a patronising roadmap to the rest of the provisions, contains a plethora of confusingly similar defined terms requiring endless referring back and forth and instructs the reader to take the following steps...
How should tax policy for the City change post-Brexit?
There is clearly a real risk that banks could relocate London operations as a result of Brexit. This won’t just be about tax, but ending the fiscal punishment of the banks might remove a further incentive to scarper. There were signs of the government relenting with the prospective changes to the calculation of the bank levy but the quid pro quo was the bank surcharge, and the screws were tightened again with the latest corporate loss reform proposals. HMRC’s failure to engage with concerns about the interest barrier will not have helped.
Banks aside, the UK is a relatively low tax environment for corporates with broadly sensible exemptions for UK holding companies, especially when the proposed changes to the substantial shareholdings exemption are taken into account. Even though the UK tax code is too complex and unwieldy (admittedly not a bad thing for our business), and despite the fact that the evangelical fervour with which the UK has embraced BEPS is unlikely to have endeared it to the taxpaying community, my sense is this is not a real deterrent. London-based and paying tax at only 17% by 2020 is a pretty attractive proposition.
What should we be looking out for in 2017?
More litigation on ‘real’ tax matters, including cross-border issues, with cases on old tax scheming thinning out. And with any luck some steer on what the post-Brexit world might look like for VAT and customs duties.
What would you be if you weren’t a tax lawyer?
The other career path I seriously considered as an alternative to law when I was younger was journalism (in fact, I read Modern Languages at uni, not law). If you asked my older self, it would be something arty – an interior designer perhaps.
One minute with Helen Lethaby, tax partner at Freshfields Bruckhaus Deringer.
What are you working on at the moment?
A good chunk of it is M&A, with tech and fintech increasingly featuring amongst the targets alongside more traditional businesses. That and helping clients across various sectors assess the likely impact of the new interest barrier rules. For some groups, the modified debt cap - which now keys off the group’s net rather than gross financing costs - is causing more problems than the ratio-based rules. And the government’s decision not to exempt bank and insurance groups (despite exemption being within the OECD’s range of permissible responses) is really disappointing: the new restrictions operate too crudely for the financial services sector.
What recent tax development has caught your eye?
The hybrid mismatch rules introduced by FA 2016 have to be the most horrific piece of tax legislation ever enacted, and the recently published HMRC guidance – with its various examples of planning which would be shut down by the new rules if the planning had worked before they were introduced (but it didn’t) – only adds to the confusion.
We find ourselves worrying about the application of these rules in contexts which are a million miles away from the mischief they were aimed at. A simple example would be an excluded indexed security issued by a bank and designed to give rise to CGT treatment for a UK retail investor; although the guidance indicates that this should be okay, there isn’t a clear technical basis for this conclusion.
On the other hand, in cases where one might expect the rules to apply, it can be difficult to regard them as making any meaningful difference. A US private equity fund partly finances the acquisition of a UK portfolio investment with shareholder debt which is injected into a Luxembourg company at the top of a holding structure in the form of preferred equity certificates and then lent down the structure to a UK borrower entity as ordinary debt (a potential ‘imported mismatch’). Once the new interest barrier is in place, UK deductions in this sort of structure are expected to be limited to the higher of 30% of UK EBITDA and the funding costs on any third party debt. The incremental effect of the hybrid mismatch rules would be to prevent the shareholder debt being used to top up to the 30% barrier where funding costs on the third party debt were lower. Does that really justify 44 extra pages in the Yellow Book?
If you could make one change to UK tax law or practice what would it be?
I know I’m supposed to propose some substantive change here but the truthful answer is that I would force a return to the old-fashioned pithy style of legislative drafting, before it all started to go downhill in 1999 with the Tax Law Rewrite project. I fear I will go mad if I have to read yet more draft legislation which begins with a patronising roadmap to the rest of the provisions, contains a plethora of confusingly similar defined terms requiring endless referring back and forth and instructs the reader to take the following steps...
How should tax policy for the City change post-Brexit?
There is clearly a real risk that banks could relocate London operations as a result of Brexit. This won’t just be about tax, but ending the fiscal punishment of the banks might remove a further incentive to scarper. There were signs of the government relenting with the prospective changes to the calculation of the bank levy but the quid pro quo was the bank surcharge, and the screws were tightened again with the latest corporate loss reform proposals. HMRC’s failure to engage with concerns about the interest barrier will not have helped.
Banks aside, the UK is a relatively low tax environment for corporates with broadly sensible exemptions for UK holding companies, especially when the proposed changes to the substantial shareholdings exemption are taken into account. Even though the UK tax code is too complex and unwieldy (admittedly not a bad thing for our business), and despite the fact that the evangelical fervour with which the UK has embraced BEPS is unlikely to have endeared it to the taxpaying community, my sense is this is not a real deterrent. London-based and paying tax at only 17% by 2020 is a pretty attractive proposition.
What should we be looking out for in 2017?
More litigation on ‘real’ tax matters, including cross-border issues, with cases on old tax scheming thinning out. And with any luck some steer on what the post-Brexit world might look like for VAT and customs duties.
What would you be if you weren’t a tax lawyer?
The other career path I seriously considered as an alternative to law when I was younger was journalism (in fact, I read Modern Languages at uni, not law). If you asked my older self, it would be something arty – an interior designer perhaps.
