Investors' Guide to the United Kingdom

Investors’ Guide to the United Kingdom

GLOBAL MARKET BRIEFINGS

Investors’ Guide to the United Kingdom Third Edition Consultant Editor:

Jonathan Reuvid Published in Association with:

UK Trade & Investment

The views in this book are those of the authors and are not necessarily the same as those of UK Trade & Investment

Publishers’ note Every possible effort has been made to ensure that the information contained in this publication is accurate at the time of going to press and neither the publishers nor any of the authors, editors, contributors or sponsors can accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editors, authors, the publisher or any of the contributors or sponsors. Users and readers of this publication may copy or download portions of the material herein for personal use, and may include portions of this material in internal reports and/or reports to customers, and on an occasional and infrequent basis individual articles from the material, provided that such articles (or portions of articles) are attributed to this publication by name, the individual contributor of the portion used and GMB Publishing Ltd. Users and readers of this publication shall not reproduce, distribute, display, sell, publish, broadcast, repurpose, or circulate the material to any third party, or create new collective works for resale or for redistribution to servers or lists, or reuse any copyrighted component of this work in other works, without the prior written permission of GMB Publishing Ltd. GMB Publishing Ltd. Hereford House 23-24 Smithfield Street London EC1A 9LF United Kingdom www.globalmarketbriefings.com

525 South 4th Street, #241 Philadelphia, PA 19147 United States of America

This third edition first published 2007 by GMB Publishing Ltd. © GMB Publishing Ltd. and contributors Hardcopy ISBN 978-1-846730-68-9 E-book ISBN 978-1-846730-69-6 British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library Library of Congress Cataloguing-in Publication Data

Typeset in 10/12pt New Century School book by Integra Software Services Pvt. Ltd, Pondicherry, India

Contents

Foreword

ix

List of Contributors

xi

Regional and City Profiles

PART 1

xvii

Economic Overview

1.1

The UK Economy and Investment Environment Jonathan Reuvid and UK Trade & Investment

3

1.2

The United Kingdom and the European Union Jonathan Reuvid

9

1.3

Trade Information for Investment Decisions Roy Chegwin, Editor of Export Focus Magazine

12

PART 2

Investment and Start-up Considerations

2.1

Overview for Inward Investors Jonathan Martin and Anna Halliday, Watson, Farley & Williams LLP

17

2.2

Grants and Incentives within the United Kingdom John Devonald, PNO Consultants Ltd

27

2.3

UK Competition Law and Policy Andrew Bailey, Watson, Farley, & Williams LLP

33

2.4

Company Formation – Methods and Legal Implications Ian Saunders, Artaius Company Services Limited

42

2.5

Commercial Banking Services Nick Stephens, HSBC

50

2.6

Finance for Companies Nick Stephens, HSBC

60

2.7

Financial Reporting and Accounting – An Overview Michael Bordoley with Jitendra Pattani and Bee Lean Chew, Wilder Coe

69

vi

Contents

2.8

Business Taxation Tim Cook, Wilder Coe

79

2.9

Key Business Taxation Planning Pointers Tim Cook, Wilder Coe

90

2.10 Outsourcing Alfred Levy, Artaius Ltd

PART 3 3.1

3.2

96

Key Investment Sectors and Locations

AIM – The Alternative Investment Market of the London Stock Exchange Jonathan Martin, Watson, Farley & Williams LLP Roles of the Nomad and the Broker on the Alternative Investment Market Tony Rawlinson and Simon Sacerdoti, City Financial Associates Limited

103

113

3.3

Mergers & Acquisitions and Joint Ventures Jonathan Martin and Tanvir Dhanoa, Watson, Farley & Williams LLP

119

3.4

Financial Services Jonathan Reuvid

127

3.5

The UK Commercial Property Market EMEA Research, Jones Lang LaSalle, London, UK

132

3.6

Residential Property Investment Lucian Cook, Director, Savills Residential Research

150

3.7

Agricultural Property Investment Richard Binning, Savills

156

3.8

Technology and Innovation – The Cambridge Phenomenon Alan Barrell and Mark Littlewood, Library House, Cambridge

160

3.9

Renewable Energy: A UK Perspective Neil Budd, Watson Farley & Williams LLP

171

3.10 Offshore Oil and Gas: Exploration and Production Michael Wachtel and Philip Mace, Watson, Farley & Williams LLP 3.11 Liquefied Natural Gas, Gas Storage and Access to Infrastructure Anna M. F. Soroko, Watson, Farley & Williams LLP 3.12 London – As a Premier Investment Location Michael Charlton, Think London

180

188 196

Contents

vii

PART 4 The Corporate and Personal Legal Environment 4.1

Intellectual Property Mark Tooke and Rachel Kennedy, Watson, Farley & Williams LLP

207

4.2

Regulation of Financial Services Jonathan Martin and Ravinder Sandhu, Watson, Farley & Williams LLP

216

4.3

UK Employment Law Liz Buchan, Asha Kumar and Devan Khagram, Watson, Farley & Williams LLP

223

4.4

Pensions, Insured Benefits and Option Plans Liz Buchan and Rhodri Thomas, Watson, Farley & Williams LLP

236

4.5

UK Taxation for Foreign Nationals Tim Cook, Wilder Coe

246

4.6

Money Laundering Regulations Mark Saunders, Wilder Coe

256

4.7

UK Immigration Angharad Harris and Melissa Vangeen, Watson, Farley & Williams LLP

261

PART 5

Industry Sectors of Opportunity

5.1

Art and Antiques James Goodwin

273

5.2

The Automotive Industry Mark Norcliffe

280

5.3

Biotechnology Jeanette Walker, ERBI

291

5.4

Chemical Industries Neil Harvey and Alan Eastwood, Chemical Industries Association

302

5.5

Creative Industries Jonathan Reuvid

309

5.6

ICT

313

5.7

Life Sciences

316

5.8

Pharmaceuticals Lilly

318

viii

Contents

5.9

Retail Jonathan Reuvid

322

5.10 Software Charles Ward, Intellect UK

324

Appendix I – Contributors’ Contact Details

330

Foreword

I am delighted to provide this foreword to the 2007 edition of the Investors’ Guide to the United Kingdom. UK Trade & Investment is pleased to have contributed to the content for this independent book. I hope you find it useful. The United Kingdom’s success at attracting foreign direct investment remains outstanding and all the signs are that this trend will continue in the coming year. Offering a solid business-friendly environment in which companies can prosper, the UK economy’s strength is underpinned by large investments in public services and infrastructure, including education, health and transportation. Combined with the global scale of resources on offer to companies, this makes the United Kingdom the location of choice in which to conduct business. Renowned for its traditions, and being recognized as an open, globally engaged society, the United Kingdom is also increasingly acclaimed as an innovator, with a unique spirit, eccentricity and all-round creative energy. The United Kingdom has a constant appetite to challenge, invent, question and create and we are a recognized leader in creativity and innovation, acting as a magnet that attracts the best of global creative talent, not least linked into our many world-class universities. For companies to grow they need outstanding support networks and the United Kingdom has well-established clusters of business services that are truly world class. As well as boasting a large market and quality suppliers, the United Kingdom also offers global business leaders the opportunity to interact with the very best of their international peers. In short, it plugs companies into a vital international network of connections. Just like the most successful global businesses, UK Trade & Investment is constantly looking at ways to improve its offering. In 2006, we launched a new five-year strategy, Prosperity in a Changing World, which aims to ensure that the United Kingdom will continue to attract the best investors from overseas. To this end, the organization is committed to building on the strengths of its overseas network and improving its services to customers. All this will help to ensure that the United Kingdom – and the overseas companies that invest here – stay ahead of the game. In the United Kingdom, companies, including many of the world’s major corporations, are connected directly into the heart of global finance, global creative and professional services, global media and global talent. They enjoy access to world-class science and academia and link into a wide-ranging network of smaller enterprises, many of which are also world leaders in their fields.

x

Foreword

A unique, multicultural and entrepreneurial economy, the United Kingdom is at the hub of international business, bringing the world to every company’s door. In short, it is a springboard to global growth. Digby, Lord Jones of Birmingham Minister of State for Trade and Investment

List of Contributors

Watson, Farley and Williams LLP Corporate Jonathan Martin is a partner in the International Corporate Group of Watson, Farley & Williams LLP, dealing with a range of corporate and commercial transactions and advisory matters, including equity fundraisings and other corporate finance transactions, mergers and acquisitions, joint ventures and restructurings. Tanvir Dhanoa is an associate in the International Corporate Group of Watson, Farley & Williams LLP, specializing in general corporate and corporate finance transactions with experience in international mergers and acquisitions, joint ventures and business reorganizations. Ravinder Sandhu is an associate in the International Corporate group of Watson, Farley & Williams LLP, specializing in a broad range of general corporate and corporate finance transactions including mergers and acquisitions, equity fundraisings, group reorganizations and joint ventures. Anna Halliday is an associate at Watson, Farley & Williams LLP, specializing in a broad range of corporate work including corporate finance, joint ventures, group reorganizations, mergers and acquisitions and commercial transactions.

Employment Liz Buchan is a partner of Watson, Farley & Williams LLP, specializing in employment law and employee incentives and a former member of the Law Society’s Employment Law Committee. Asha Kumar is an associate at Watson, Farley and Williams LLP specializing in employment law and cross-border employment law issues. She has gained wealth of experience and has advised on all aspects of employment law including issues associated with recruitment, employment and termination. She has also assisted with the implementation of global business restructures.

xii

List of Contributors

Rhodri Thomas is an associate at Watson, Farley and Williams LLP, specializing in employment law and a contributor to Discrimination in Employment – Law and Practice, 2006, Law Society Publishing. Devan Khagram is a trainee at Watson, Farley & Williams LLP. He joined the firm in September 2005 and will be qualifying into the firm’s employment and immigration department in September 2007.

Energy and Projects Anna Soroko joined Watson, Farley & Williams in January 2006 as a consultant and has over 20 years experience advising major utilities and oil and gas companies on a wide range of international matters, particularly on projects relating to infrastructure including being the Central Area Transmission System (CATS) pipeline lawyer for 3 years. Anna is both an English and a Texas qualified lawyer and has worked in a number of countries, including the United States, Saudi Arabia and UAE, both inhouse in major international organizations and in private practice. Anna is also an elected director of the East of England Energy Group, which business-driven energy industry association represents over 280 companies throughout the energy chain. She has wide commercial and legal experience in Mergers & Acquisitions, corporate restructurings, negotiation of Gas/LNG Sales arrangements, carbon capture and storage, and negotiation of a US$1 billion LNG/Power project in Turkey, project lawyer for the Great Yarmouth Power Plant. Recently, Anna has been advising on and managing all legal work for the Excelerate Energy Teesside GasPort Project for which she won The Lawyer 2007 Infrastructure Team of the Year Award. Neil Budd is an associate at Watson, Farley & Williams LLP, specializing in energy and construction. He has worked on a number of renewable energy projects, both in the UK and internationally, including onshore and offshore windfarms and biomass power plants. Philip Mace is a consultant at Watson, Farley & Williams LLP, specializing in energy related M&A, private equity and project work. He has worked in the oil and gas industry for many years and has experience of major transactions in the North Sea, the Middle East and most other major oil and gas regions. Fabiola Céspedes is a consultant at Watson, Farley & Williams LLP, specialized in dealing with M&A transactions, onshore and offshore upstream operations and joint ventures. She has advised on transaction in Norway, UK, Trinidad and Tobago, Spain and Bolivia and has dealt with major industry oil and gas players such as BP, Repsol, Shell, ExxonMobil, Petrobras and Total.

List of Contributors

xiii

Law EU & Competition Andrew Bailey is an associate at Watson, Farley & Williams LLP specializing in EU and competition law. Andrew advises clients in relation to UK and EC merger control, market investigation in both the UK and throughout the EU and the behavioural aspects of competition law.

Immigration Angharad Harris is a partner at Watson, Farley & Williams LLP, specializing in all aspects of employment law and business immigration and is a member of the Law Society’s Employment Law Committee. Melissa Vangeen advises on business immigration, including work permits, the Highly Skilled Migrant Programme, applications for sole representatives, investors, business persons and retirement as well as applications for indefinite leave to remain and naturalization. Melissa also advises in relation to immigration applications outside of the Immigration Rules and on applications to come to the UK.

Intellectual Property Mark Tooke joined Watson, Farley & Williams in 2001 and is an associate in the International Corporate Group. Mark has particular experience of assisting clients in the technology and media sectors. Identifying the most advantageous was to protect, exploit and finance intellectual property assets. Rachel Kennedy is a trainee at Watson, Farley & Williams LLP. She joined the firm in September 2006 and will be qualifying as a solicitor in September 2008.

Wilder Coe and Artauis Limited Robert Coe is the senior and founding partner of Wilder Coe. Within the practice, Robert’s key role is advising on corporate finance transactions including mergers and acquisitions, pre-flotation restructuring, fund raising and business financing. Robert has vast experience in the public arena, having acted as nonexecutive chairman of Sterling Group plc, senior independent director of Hercules Property Services plc, Finance director of Probus Estates plc, finance director of New Media plc during its transition from Ofex to AIM and finance director of Hardy Amies plc. Currently, Robert is a non-executive director of City Financial Associates AIM listed companies.

xiv

List of Contributors

Tim Cook is a tax partner at Wilder Coe, which he joined in 1996. He now heads up the firm’s personal tax department. In addition to managing the personal tax team, Tim handles tax returns, capital gains tax, trusts, inheritance tax and Inland Revenue investigations. His areas of expertise include tax planning, pensions, emigration and trusts. He works primarily with entrepreneurs, families and gentry. Mark Saunders has been with Wilder Coe since 1984 and has almost 30 years accountancy experience. His technical areas of expertise include audit, the preparation of financial statements, taxation, business planning and the UK management of subsidiaries of US companies with Sarbanes Oxley compliance work. He also deals with IFRS-related matters and acts as an adviser to family firms. Client sectors include property, entertainment, retail, financial industry clients, charities and the timber trade. Mark also has a continuing interest in the financial sector and carries out Financial Services authority audits. He is responsible for IT at Wilder Coe and is also the nominated money-laundering reporting officer, which has led him to act as a consultant on the Money Laundering Regulations. Mark was instrumental in gaining membership of the firm to Integra, an international association of accounting firms, and now sits on its global board. Michael Bordoley has been with Wilder Coe since 1991 and is an audit partner. In this role, he is responsible for advising clients on budgetary control and forecasts. Although working across a broad sector range, Michael specializes in SMEs, family businesses, travel agencies and insurance brokers and charities. He advises clients on all aspects of furthering a business from the day-to-day running to specialist areas and dealing with legislation. Bee Chew joined Wilder Coe in 1997 and was promoted to partner in 2005. As a member of the Institute of Chartered Accountants Entertainment and Media Industry Group, she has vast experience in the film production industry as well as property and currency exchange. Bee specializes in dealing with international business such as investment in China. He regularly attends and actively promotes networking for Women in Business events. Norman Cowan merged his Chartered Accountants practice in December 2000 with Wilder Coe and now heads the business recovery department. Norman’s experience gained in the discipline of insolvency has provided him with an analytical investigative ability and a considerable depth of knowledge in insolvency and commercial law. His expertise covers a wide range of industries and professions of differing sizes and characteristics. On a number of occasions Norman has been appointed by the Court to act as a Receiver to determine internal disputes in respect of companies and partnerships. As a member of the Expert Witness Institute, he has also received a number of instructions to act as a single and joint expert witness.

List of Contributors

xv

Alfred Levy is managing director of Wilder Coe’s sister company, Artauis Limited, while remaining a partner of the firm. Alfred boasts a wide range of expertise in new business start ups and has particular experience in inward investment from companies based overseas. Based in Stevenage, Hertfordshire, Artauis specialize in the provision of financial outsourcing solutions to a diversity of business types and sizes, from new to established companies. Ian Saunders has managed the statutory department at Wilder Coe since 1997. Additionally, he is managing director of Artauis Company Services Ltd, the specialist company formation and company secretarial arm of the Wilder Coe group. Ian specializes in company formation and the compilation and updating of statutory records on behalf of clients for the Stock Exchange or Companies House. When required by clients, he also acts as a nominated secretary and as Company Secretary for AIM listed companies. Working primarily with SMEs, he advises a number of specialized sectors, including accountancy and legal firms, on company formations and statutory consultancy.

Other Contributors Dr Nigel Almond is Senior Researcher at Jones Lang LaSalle, specializing in UK commercial real estate markets. Alan Barrell is a Founder Partner of Library House, the Cambridge research centre and networking hub. Richard Binning is an Associate at the Oxford office of FPD Savills specializing in farm sales. Lucian Cook is Director of Savills Residential Property Research Michael Charlton is Chief Executive of Think London. John Devonald is Business Development Manager at PNO Consultants Ltd. Alan Eastwood is Economic Adviser to the Chemical Industries Association. James Goodwin writes, lectures and consults on art and business. He has written for the ‘Financial Times’ and ‘The Economist’ and several rt, antique and finance journals. Neil Harvey is Manager, International Trade and Sector Groups, Chemical Industries Association. Mark Littlewood is Business Development Director of Library House, the Cambridge buy-side research house and networking hub.

xvi

List of Contributors

Mark Norcliffe consults for the UK Department of Trade and Industry on the international automotive industry. He was formerly Head of the International Department at the Society of Motor Manufacturers and Traders (SMMT). Tony Rawlinson is Managing Director of City Financial Associates Ltd. Nykki Rogers is Business Development Manager, Life Sciences, a6t East of England International. Simon Sacerdoti is Assistant Director at City Financial Associates Ltd. Nick Stephens is Manager, Trade Services, at HSBC. Charles Ward is Chief Operating Officer of Intellect UK. Robert Willsdon works for Merrill Lynch International Bank.

Regional and City Profiles

BRISTOL

A Premier UK City Region and Capital of the South West

The historic cities of Bristol and Bath have distinctive identities and, together with Weston-super-Mare and other centres, make up a city-region of just under one million inhabitants. Together they rank amongst the most attractive, successful and culturally prestigious in the UK and enjoy a rising profile within Europe, USA, China, Japan and other countries. This is due to the world-class knowledge economy emerging here based on aerospace, defence, engineering, ICT and electronics, financial services, media, creative and environmental industries, and the global reach of its four outstanding universities. The Bristol city-region has a very powerful economic pull which extends deep into the Counties of Gloucestershire, Somerset and Wiltshire and across the two road bridges linking Bristol over the River Severn to South Wales. The heart of it broadly coincides with the West of England (formerly Avon) administrative area, which comprises the four local authorities of the City of Bristol, Bath and North East Somerset, North Somerset and South Gloucestershire. Its strategic road and rail network gives it good proximity to London, Birmingham, Cardiff and Southampton (all within 2 hours) and provides the main gateway to the South West. The South West is England’s largest rural and leading touristic region endowed with a great wealth of natural and cultural attractions, including several World Heritage sites and large expanses of environmentally protected landscape and coasts. Wider national and international connectivity has significantly improved in recent years with the rapid expansion of the airport (8 miles south west of the city) and seaport (at Avonmouth and Royal Portbury on the Bristol Channel). Bristol International Airport now has scheduled services to 17 cities across UK and Ireland, and 27 cities across Europe and and USA (New York). The Bristol Port Company operates one of the UK’s most successful and fastest growing commercial ports, and has advanced plans to create a new deep water container terminal which will have capacity to service the new generation of Ultra Large Container Ships up to 14,000 TEU and 16 metres draught. Bristol is the closest port to the UK population as a whole with 45 million people living within 300 kms. A diverse and consistently buoyant economy is evidenced by the fact that it boasts the highest GVA per head of the eight ‘core’ English cities and highest growth rate since 1995 (add in figures). World class companies established here include Airbus UK, Rolls Royce, Aardman Animations, BBC, Royal Bank of Scotland, Halifax Bank of Scotland, Lloyds TSB, Bank of Ireland, Orange, Hewlett Packard, Garrad Hassan and Compact Power. The Bristol city-region has been designated as a national ‘growth point’ by the UK government, which brings with it supportive policies and resources to

enable the expansion of population, housing, employment, transportation and other infrastructures. The growth strategy proposed involves creating 100,000 new jobs and 92,500 new homes over the next 20 years with the major development concentrated in Bristol city centre, South Bristol and Weston super Mare. At the same time, there is a strong commitment across both public and private sectors to ensuring that these goals are approached in a truly sustainable manner worthy of a ‘green capital’ in Europe and without compromise to the excellent ‘West Country’ quality of life currently enjoyed. Major economic development and infrastructure projects with a total value of £3 billion are either presently under construction or in the planning pipeline across the city region up to 2012. These span across office, industrial, retail, leisure / culture, transport and education sectors and include Bristol’s new Cabot Circus retail centre, the Bristol and Bath Science Park, the South Bristol Link Road, expansion of the port, airport and public bus networks, the Bristol Arena, Museum of Bristol, Weston former Airfield and Bath Western Riverside sites, a new Skills Academy and secondary schools for Bristol. The principal commercial property development areas and sites are listed at the end of this profile.

Contact Information For readers seeking further information on packages of support available for business investment and relocation to Bristol city-region, we recommend the following contacts: Greater Bristol: Marketing, Investment and Enterprise Team, Bristol City Council Tel: +44 117 922 2928 www.bristol-city.gov.uk/business Bath, Weston super Mare and the wider city-region: Investment Team, West of England Partnership Office Tel: +44 117 903 6876 www.westofengland.org For all industrial and commercial property searches: visit the on-line register at www.investwest.org

Sector Profiles Creative Industries: Bristol and Bath combine their distinctive offers to provide one of the preeminent European centres of creative and cultural industry and talent with a growing global profile. Home to the multiple oscar-winning Aardman Animations, creators of the world famous characters Wallace and Gromit, as well as the BBC Natural History Unit, Granada Wild, Endemol West and many other independent film and production companies, Bristol enjoys close economic and cultural links to London and emerged in recent years as the UK’s second Media city - the driving force of a richly creative region with an estimated £1 billion annual media output. In 2006 the inward investment to the Bristol city-region from externally based film companies amounted to some £23 million. Bristol is the world capital of the wildlife and environmental film industry – responsible for 25% of this sector’s global output, hosting of the international ‘Wildscreen’ Film Festival annually, and employment of around 1,500 people. Another leading event is the ‘Encounters’ festival of short films held annually at the Watershed, the UK’s first and most highly regarded media centre. Popular British television drama series such as ‘Casualty’, ‘Teachers’, ‘Deal or No Deal’ and ‘Celebrity Big Brother’ are filmed or produced in the city. Apart from its film, broadcast and digital media companies, the city region is justly famous for its varied and vibrant music scene – from the Bath Philharmonia and Bristol Bach Choir to the more subterranean ‘Bristol Sound’ in the form of Portishead, Roni Size and Massive Attack, and of course the Glastonbury Festival. Bristol and Bath also boast a strength in other creative sectors unmatched by most other European regional cities – design and architecture, books and publishing, visual arts, theatre and performing arts, including a profusion of festivals and carnivals throughout the year, dance venues, comedy clubs, cabaret, street theatre and Europe’s leading circus school.

Simple Minds play Ashton Court Festival 2006

Environmental Technologies and Services Bristol is today emerging as one of the leading centres in the UK for the development of environmental technologies, including worldclass companies in renewable energy, waste management and recycling, energy control and sustainable transport, and also for environmental consultancy and specialist services of all kinds which are supporting the shift towards more sustainable modes of production, development and consumption / lifestyle. Jobs in the Bristol environmental sector have increased by some 20% over the last 10 years to around 12,400 or 2.9% of the total workforce above the regional and national average and accounting for almost one quarter of the jobs in the sector in South West England. The area sector now has an estimated 260-300 companies with significant clusters located in Avonmouth / Severnside, Bristol city centre and Clifton. The Avonmouth cluster (about 20 companies) features significant players in the renewable energy, waste management, recovery and pollution control fields, including Compact Power, a global leader in pyrolysis, gasification and oxidation technologies for conversion of domestic and commercial wastes to energy, the Bristol Port Company, which gained planning permission in 2006 for a 9 megawatt 3 turbine wind scheme to supply up to 75% of the Port’s electricity needs in conjunction with leading South West renewable energy supplier, Ecotricity, and Chemical Recoveries, a market leader in reprocessing of waste oil and solvents, and Hambrook Pallets, pallet and waste wood recyclers. In addition, Bristol City Council has its own 2 turbine wind scheme at Avonmouth with capacity to supply power to 3,000 homes or half of the city’s street lighting. The City Centre and Clifton hosts a mix of prominent national and international players in environmental services and consultancy fields, including the Soil Association, Sustrans, Centre for Sustainable Energy, Resource Futures Ltd

The RSA WEEE Man

(incorporating the former Recycling Consortium, Network Recycling and SWAP), Schumacher UK and The Green Register (sustainable construction), as well as pioneers of sustainable technologies such as Bristol Electric Railbus, Wind Prospect, Tidal Generation (tidal stream energy) and Garrad Hassan, wind turbine designers and independent wind energy consultants to governments and NGOs, and winner of the Queens Award for Export Enterprise in 2000. Other large companies are located in South Bristol – Bristol Water plc, supplier of drinking water to the city since 1846 and consistently one of the best performing in UK, and Horstmann Controls, designer and manufacturer of energy control products. Wessex Water based in Bath is recognised by Ofwat as the most efficient operator in the country and was the first UK water company to sign the 2003 UN Global Compact for sustainable development.

Financial and Business Services With 59,000 employees in the sector, Bristol is the hub of the financial and business services sector in the South West and one of the leading centres in the UK. Bristol has long specialised in banking and mortgage provision, insurance/ brokering and ethical finance. Leading companies include AXA Sun life, Lloyds TSB, Royal Bank of Scotland, HBOS, DAS Legal and Triodos Bank. Now there is also a strong presence of international legal, accountancy and consulting firms including Osborne Clark, Beachcroft, Bevan Brittan LLP and KPMG. HBOS (including Clerical Medical) is expanding its Bristol Headquarters by moving to the prestigious Canon’s Marsh site on the newly regenerated Harbourside , which it will occupy by the end of 2007 with capacity to accommodate up to 1,700 staff. This major new investment follows similar moves by Bank of Ireland (including Bristol & West), RBS and other companies occupying prime new grade A office space at Temple Quay next to Temple Meads station. Academic research and expertise are also prominent and includes Centre for Management Accounting and Research and the Centre for Fiscal Studies at the University of Bath and the XFi centre - Bristol. The city region can also boast a lower cost base and good staff retention which can be an issue in other UK centres. “Bristol has the third largest financial services sector outside London” source UKTI

Clerical Medical, Harbourside

Science and Innovation Bristol and the West of England continue the proud heritage of being at the forefront of scientific discovery and innovation. In 2005, the Chancellor of the Exchequer conferred the title of Science City on Bristol, one of only six cities in England to receive this accolade. The designation recognised two key strengths. Firstly, world-class scientific research in the university sector; and at the four Universities of Bristol, Bath, West of England and Bath Spa science and advanced engineering form a core part of the sub-region’s research and teaching offer. To illustrate: if the results of Bristol and Bath Universities’ Research Assessment Exercise (2001) are combined, they would show that the area has the fourth most powerful research environment in the UK. Academic researchers operate at the cutting edge of fundamental scientific and engineering research in single and collaboratively themed programmes, including aerospace, computing and biological systems. Secondly, a concentration of commercial innovative research and development. Major companies including Airbus, Orange, Hewlett Packard and Rolls Royce have a strategic presence in the area and, together with a significant cluster of advanced engineering companies and suppliers, make this sector one of the largest employers and contributors to the sub-region’s GVA.

Development Sites Major Strategic Sites: Aztec West Business Park, Almondsbury: Covering 68 hectares, at the junction of the M5 motorway and the A38 this business park is now home to over 120 companies including The Royal Bank of Scotland, Orange, ST Microelectronics, The Environment Agency, Cornhill Direct and G E Capital Equipment Finance. Bristol Harbourside: This 66 acre regeneration project combining apartments, shops, office and leisure facilities is one of Bristol’s showpiece development projects, with an unrivalled waterside location in the heart of the city. It incorporates the @Bristol complex at the core of this new leisure quarter and a £240 million regeneration of Canon’s Marsh due to be completed in 2010.

Temple Quarter, Bristol

East Works Site, Patchway: This 26ha site, currently occupied by older industrial buildings, will be redeveloped for a mixed range of employment uses over the next three years. Filton Northfield: Covering 74 hectares, 14 hectares is allocated for mixed employment use. A 2003 outline planning application proposes 66,000 sq. metres of mixed B1, B2 and B8 development. Hengrove Park, Bristol: 76 hectare site featuring the UK’s largest new green urban open-space development ; 40,000 sqm of B1/B8 space. It has master planning consent for mixed uses including Community Hospital and Residential units. Redcliffe, Bristol: A changing neighbourhood providing 114,500 sqm of mixed use opportunities for new buildings as well as public and green spaces. Temple Quarter, Bristol: Continuing development of the 46ha Temple Quarter adjacent to Temple Meads Station is providing a prestigious new commercial heart for Bristol. Work has begun on Temple Quay 2: a high-density mixed development and the £100 million Bristol Arena project. Weston Airfield, Weston super Mare: 170 hectares including approximately 33ha for high quality business park uses and Weston Airfield East and 26ha for B uses at Weston Airfield West. Western Riverside Bath: A 28 hectare Brownfield site to the west of Bath City Centre, adjoining the River Avon. The masterplan includes new homes, community and leisure facilities. The project has an anticipated end value of around £1bn.

Industrial & Distribution sites Avonmouth / Severnside: Proximity to the port and the motorway network and extensive development sites have attracted very considerable investment in heavy industrial, power generation and waste treatment plant, large distribution and warehousing depots and a range of other businesses. About 15ha of warehousing development have been completed at Severnside in 2005/6, with considerable opportunity available to meet demand for further industrial and related development. This includes Cabot Park (42ha), Merebank and LakeSide (32ha) and Western Approach Distribution Park (87ha).

Cabot Park, Avonmouth

Cabot Circus, Bristol

Rolls Royce

Retail & Leisure Bristol Arena, Bristol: 10,000 seat multi-purpose indoor arena at a 9 acre site. Additional mixed-use developments of residential, commercial and entertainment units (this is part of the wider Temple Quarter development). Cabot Circus, Bristol: This £500m shopping development in the heart of Bristol city is due to open in September 2008, comprises 1million sqft retail and leisure space and aims to place Bristol in the top 10 national shopping and leisure destinations. SouthGate, Bath: Close to Bath’s mainline station this £350m, 8 acre redevelopment features shops, restaurants, leisure facilities a transport hub and housing.

Science Parks & Sector Hubs Bristol and Bath Science Park (SPark), Emersons Green: The proposed 25 hectare Science Park will provide 77,000 sq metres to create a high calibre £300 million science facility. Creative Depot (former Post Office sorting office), Temple Meads, Bristol: 5 acres site providing up to 275,000 sq ft mixed-use space with a Creative Industries theme. Locking Parklands, Weston-super-Mare: Locking Parklands will transform an 82 hectare site into a new hi-tech business, residential and leisure community. It will provide 25 hectares of high quality business accommodation and up to 1,800 homes in mature landscaped parklands. Major Development Areas 1. Aztec West Business Park, Almondsbury 2. Bristol Harbourside 3. East Works Site, Patchway 4. Filton Northfield 5. Hengrove Park, South Bristol 6. Redcliffe 7. Temple Quarter 8. Weston Airfield 9. Western Riverside 10. Avonmouth/Severnside 11. Bristol Arena 12. Cabot Circus 13. South Gate 14. Bristol and Bath Science Park (SPark), Emersons Green 15. Creative Depot 16. Locking Parklands

1

10

3 14

2 6

5

9

8

16

13

City Financial Associates is a leading corporate and professional financial advisory firm in the City of London. We are focused on the provision of the highest quality financial advice to public and private corporate clients across a broad range of sectors. We minimise the risks inherent in complex transactions by tailoring each project to the needs of the client. We seek to establish long term client relationships with our clients and many of them have relied on our advice through a series of transactions. City Financial Associates Limited is an AIM Nominated Adviser, a PLUS Markets Corporate Adviser, an Official List Sponsor and a member of the London Stock Exchange. Some of the services we offer include:–

Initial Public Offerings

• •

We provide independent advice throughout our clients’ flotation process We work with a number of brokers best suited to meet clients’ requirements

Mergers and Acquisitions

• • • • •

Takeovers – recommended and hostile MBOs, MBIs and secondary buyouts Structuring transactions Valuations Sourcing of debt and equity funding to finance transactions

Fund raising

• •

Through our sister company, Ellis Stockbrokers Limited, we are well positioned to identify various sources of funding through private clients or institutional investors We negotiate with banks and other alternative funding providers to procure optimum financing terms Contact Tony Rawlinson, Chief Executive City Financial Associates Limited 46 Worship Street, London EC2A 2EA Telephone Fax Email Website

020 7492 4777 020 7492 4774 [email protected] www.cityfin.co.uk

City Financial Associates Limited is authorised and regulated by the FSA.

Dundee - Discovering Life Sciences Dundee - ‘City of Discovery’ is one of Scotland’s

Dundee is home to one of the most exciting life

major cities with a population of over 142,000,

science clusters in the UK, with world-class companies,

and a 60 minute catchment population of 640,000.

Universities, research institutions and scientists all

Steeped in history, Dundee commands a breathtaking

within a three mile radius. The area offers a wide

position on the banks of the River Tay. The City

range of expertise from drug discovery, through

boasts excellent communication links through road,

medical devices and diagnostics to ag-biotech and

rail, air and sea, being 90 minutes drive from 90%

environmental biotechnology. Around 15% of the

of the Scottish population

life sciences companies in

including

Scotland are based in or

Edinburgh

and

Glasgow, on the main UK

around

east-coast rail line, and

the area a major player in

Dundee,

making

having a city-centre airport

the UK and European life

with daily direct London

sciences industry. With 25

ÁLJKWV 7KH VFHQLF ORFDWLRQ

core life sciences companies

gives rise to a high quality

(and a similar number of

of living offering beautiful

support organisations) and

countryside and a wide

an internationally renowned

range of sporting and recreational activities. Dundee

academic sector, Dundee currently employs over

is a lively hub of contemporary art and culture, with

4,000 people in the sector, with the sector accounting

a vibrant music scene and is large enough to have all

for 16% of the local economy, and with a forecasted

the advantages of city life but compact enough to offer

growth of 10% per annum over the next three years.

rewards, such as short commuting times. The cost of living is low - over 19% cheaper than the rest of the UK on average, with house prices at a quarter of London and half of Edinburgh prices. According to the Lonely Planet Guide to Scotland, the people of Dundee are ‘among the friendliest, most welcoming and most entertaining people you’ll meet anywhere in the country’.

A key factor in Dundee’s rapid rise to the status of

Cellartis, a stem cell research company which has

a life sciences hub is the close relationship between

recently relocated to the city from Sweden. Dundee

academic institutions, private companies and the

Technology Park is the home of many life sciences

public sector.

Many of the city’s most successful

FRPSDQLHV LQ WKH DUHD IURP VPDOO VWDUWXSV WR ODUJH

biotechnology and medical device companies were

PXOWLQDWLRQDOV 'XQGHH 7HFKQRSROH KRXVHV WZR RI

set up to commercialise technology developed at

WKH FLW\·V PRVW VXFFHVVIXO OLIH VFLHQFHV FRPSDQLHV 

institutions such as the University of Dundee. Links

Cyclacel and CXR Biosciences, as well as the Dundee

between the private and academic sectors have made

Incubator facility which offers suitable accommodation

it easier to establish projects such at the University of

for new technology companies. Business support is

Dundee’s Division of Signal Transduction Therapy,

available for companies through Dundee City Council

which involves the University

and Scottish Enterprise Tayside

working

the

who both see life sciences

world’s biggest pharmaceutical

with

six

as a priority sector for the

companies to study the way

area.

cells communicate.

Another

organisation, BioDundee has

strong example of collaboration

been very successful in bringing

is the Translational Medicine

together

Research Collaboration. The

through seminars, networking

£50million

and social events, as well as

project

of

consists

of four of Scotland’s leading

The local networking

local

companies

building a well known brand

universities working with Wyeth Pharmaceuticals,

internationally through exhibitions, newsletters and the

Scottish Enterprise and NHS trusts in the development

BioDundee International Conference. Held annually,

of personalised medicine, providing a revolutionary

WKH FRQIHUHQFH DWWUDFWV GHOHJDWHV IURP DV IDU DÀHOG DV

approach to developing new drugs and treatments

the USA, Australia and China.

for a range of human diseases. It is testament to the strength of the area that the main research laboratory

The growth of life science excellence in Dundee shows

for this venture is based in Dundee. The City has also

no signs of stopping. The city’s success is a magnet

been named as the lead institute for translational biology

for investment, entrepreneurial talent, ambitious

in SULSA (Scottish Universities Life Sciences Alliance),

young scientists and renowned academics. A superb

a £77million collaboration between six Scottish

location, world class academic base, and strong focus

universities which will attract the best researchers and

on networking and collaboration make Dundee a force

more investment to the area.

to be reckoned with on a global scale.

The majority of the core life science companies LQ 'XQGHH DUH DFFRPPRGDWHG LQ ÀWIRU SXUSRVH

For further information please contact us:

premises in three main locations across the city.

BioDundee,

Dundee Medipark is a new 25 acre site on the campus

3 City Square,

of Ninewells Hospital and Medical School. Two young

Dundee DD1 3BA

OLIH VFLHQFH FRPSDQLHV KDYH UHFHQWO\ KDG SXUSRVHEXLOW

Email: [email protected]

premises built at the Medipark, having outgrown their

Tel: 01382 434913

previous accommodation. This site also accommodates

Web: www.biodundee.co.uk

Highlands and Islands Enterprises

A region renowned for its outstanding natural beauty and rich cultural heritage, the Highlands and Islands is also an area with strong ambitions for the 21st century. People are drawn to this vibrant place from all over the world for a whole host of reasons, from the excellent quality of life to the diverse and resilient business sector with its well-developed skills and sustainable markets. Located at the very north western edge of Europe, the region covers half of Scotland, yet is home to just around 440,000 people – over 50 per cent aged 44 or younger – 19,000 businesses and more than 8,000 voluntary and community groups. In fact, it is the area’s northerly, sea-bound location and relatively disparate makeup that has seen it emerge as a potential powerhouse in sectors such as renewable energy, marine biotechnology, research and development, the knowledge economy, life sciences and rural healthcare. For instance, the Highlands and Islands has one of the longest coastlines in Europe, putting the region in prime geographical position to harness both marine and wind power to generate clean electricity. Currently, key sectors comprise the primary industries, construction, tourism, transport and communications. The region also has a first-class secondary school education system, providing the labour market with a highly qualified workforce and a feedstock of students for further education. Highlands and Islands Enterprise One of Scotland’s two enterprise agencies, Highlands and Islands Enterprise (HIE) works closely with Scottish Development International (SDI) to attract inward investment from around the globe Established in 1991 as a non-departmental public body, HIE plays a major role in diversifying and strengthening the area’s economy. “Our goal is to enable people living in the Highlands and Islands to fulfil their full potential on a long-term, sustainable basis,” explains HIE chair, William Roe. This goal is delivered through four key objectives: growing businesses, making global connections, developing skills and strengthening communities. “Talented people with clever ideas are the real drivers of the economy – people who live here already as well as those we want to attract to the area,” says Mr Roe. “To encourage enterprise in the Highlands and Islands we need

Highlands and Islands Enterprises

to create the optimum conditions not just for business, but for the people who do business. We have to provide the infrastructure and support to enable people and businesses to flourish.”

Inward investors Inward investors already thriving in the Highlands and Islands include LifeScan Scotland, a Johnson & Johnson company with its headquarters in Milpitas, California. LifeScan Scotland is the leading life sciences company in Scotland and its facility in the city of Inverness is regarded as a centre of excellence for those working in the field of diabetes. Over 1,300 people are employed there including more than 150 research and development specialists. Created in 2001 when Johnson & Johnson acquired the UK assets of Inverness Medical Limited, LifeScan Scotland has a diverse workforce made up of over 20 different nationalities, the majority from the Inverness local community. “Both HIE and SDI have been invaluable in helping us grow our business,” says Michael Crowe, managing director for LifeScan Scotland. “From their assistance in recruiting and developing talent to support for infrastructure projects such as improved air links to Inverness, the economic development agencies have been strong advocates of our business as well as partners in our growth. Not only have they been open to our ideas and needs, but they have been proactive in bringing ideas and solutions to us to help us grow.” Next year will see Lifescan relocate a number of its research and development staff to the proposed Diabetes Institute at the city’s new life sciences flagship, the Centre for Health Science. This revolutionary centre, in which HIE has invested £20m, is set to become a leader in life sciences, focusing on multi-disciplinary healthcare research and education, high-tech business incubation, and range of health services from both the public and private sectors. In the renewables field, the European Marine Energy Centre (EMEC) represents the world’s first test centre for full scale wave and tidal marine energy converters. Based in Orkney, a group of islands located at the northern tip of the mainland, EMEC is at the forefront of developing seabased renewables – technologies that generate electricity by harnessing the power of waves and tidal streams. HIE took a lead role in establishing the centre in 2004 and is continuing to support its evolution. More recently, HIE has secured eight inward investment projects; a combination of expanding businesses as well as new starts. These include the Castle Stuart development at Dalcross, which will see the construction of an international standard golf course, driving range and associated facilities; SGL Technic at Muir of Ord, where additional manufacturing capacity has been created by introducing a new production line; and Northern Irish firm Balcas at Invergordon, which is currently developing a wood chip and CHP

Highlands and Islands Enterprises

(combined heat and power) plant. Collectively, these projects have directly created 220 full-time equivalent jobs in the Highlands and Islands area. Labour market and the economy Indeed, the Highlands and Islands currently enjoys lower levels of unemployment (2.4%) than the rest of Scotland (2.8%) and the UK (2.5%), a figure that has been in steady decline and augmented by a corresponding decline in the seasonality of sectors such as tourism and the primary industries. The region also boasts higher levels of economically active people (80%) than Scotland (74%) and the UK (74%). Employment by sector: 2005

Source: Nomis (ONS)

Note: these figures exclude self-employed. Actual employment is likely to be higher, particularly in primary industries and tourism. By far the most dominant employment sector is the public administration, education and health sector, accounting for 34.4% of the total workforce. The distribution, hotels and restaurant sector is the next largest, employing 25.6%. Meanwhile, construction (6.7%), and agriculture and fishing (2.4%) provide a larger percentage of employment in the Highlands and Islands than it does in Scotland as a whole. Characteristic of the region and its enterprising communities, the rate of business starts at 4.7 per 1,000 people is higher in the Highlands and Islands than in Scotland. Self-employment is particularly high in rural areas and among island communities. The export market has also experienced growth. Between 2002 and 2005, the total export for the region rose by almost 20 per cent – from £1,175million to £1,405million. This has been driven by growth in the primary, production and construction sectors, which rose from 77% to 82% – most likely as a result of

Highlands and Islands Enterprises

growth in the manufacturing export value, especially in the food and drink sector. Marine based scientific research, technology and innovation also has a vital contribution to make to the region’s knowledge economy. HIE is working to help consolidate the growing reputation of the region as a centre of excellence in marine science. The Highlands and Islands already boast a world leader in the Scottish Association for Marine Science (SAMS) at Dunstaffnage, near Oban, the presence of which has lead to the formation of a growing marine science cluster in Argyll. HIE assisted SAMS to establish business incubator units at the European Centre for Marine Biotechnology (ECMB), which opened in April 2005. The ECMB offers international development facilities for new business tenants and wider partners. All commercial organizations utilising the ECMB benefit from operating within the hub of this rapidly growing marine focused cluster. Currently the ECMB is home to Aquapharm Biodiscovery Ltd, Culture Collection of Algae and Protozoa (CCAP), Glycomar, as well as the Scottish Association for Marine Science (SAMS) itself. A key partner in UHI Millennium Institute, which aims to establish a world-class university for the Highlands and Islands, SAMS employs over 135 scientists who are leading many national and international research programmes. Financial assistance In addition to impressive R+D credentials, the Highlands and Islands area offers a competitive cost base for investment. Attractive salaries and operating costs make it an attractive investment location for both overseas and UK companies. If, for example, a business requires finance, there is a wide range of discretionary financial assistance available to help towards project costs. Broadly speaking, there could be grant assistance towards the capital costs and creating new, higher paid jobs. The vast majority of the Highlands and Islands benefits from a comparatively high maximum level of assistance. There is also assistance towards training and research and development costs. Further assistance includes property provision, marketing and product development. In essence, HIE will work with the client to provide bespoke business solutions. Infrastructure Continuing advances in telecommunications have opened up the Highlands and Islands to the rest of the world, enabling a wealth of business activities to be carried out efficiently and effectively from the region. Advanced digital telecommunications provide a modern communication network that satisfies international businesses such as Vertex, LifeScan, the essentiagroup, O2 and Cap Gemini. This means that the area can offer any

Highlands and Islands Enterprises

organisation, whether it is operating locally in the Highlands, nationally in Scotland, or even globally, a highly effective business base. Indeed, the variety of remote working that takes place in the region provides clear evidence that telecommunications have made location irrelevant for certain functions. However, should travel be a prerequisite, the integrated Highland transport network of air, rail, road and sea travel enables easy access throughout the region and beyond to the rest of Scotland and the UK. Inverness Airport continues to enjoy impressive growth year on year. There are now six daily flights from Inverness to London and flights to Edinburgh, Manchester, Liverpool, Birmingham, Leeds-Bradford, Southampton, Bristol, the Outer Hebrides, Orkney and Shetland. There are also regular flights to Dublin, Belfast and Nottingham East Midlands. Additionally, the A9, A96 and A82 act as essential ‘arteries’, representing the main routes into the Highlands from the rest of the UK. These are complemented by a rail network which operates frequent services every day to Aberdeen, Glasgow, Edinburgh and south to London. The new joint venture company, Inverness Airport Business Park (IABP), will further complement the area’s transport infrastructure. Formed to develop prime business space with excellent road, rail and air links, IABP is a key initiative for the region and phase one will incorporate the creation of around 16,500 square metres of business accommodation, including an airport hotel, and about 260,000 square metres of business, light industrial and freight distribution. Ian Thorburn, business development manager for IABP, says: “As the area’s largest business park development, IABP is set to play a major role in attracting inward investment to the area and enabling business expansion across a range of industries.” The business park has the potential to become a hub for commercial activity with businesses benefiting from an expanding range of air and rail connections. It also has the potential to provide a significant jobs boost to the area over a sustained period, contributing greatly to the future economic expansion of the region as a whole. Over the last 30 years, HIE has undertaken programmes to provide business accommodation and now holds a stock of modern advance workshops, factories, offices and development sites for lease to expanding local or incoming firms. HIE’s current property portfolio, stretching from Shetland to Argyll and Moray to the Outer Hebrides, stands at 115,000 square metres of commercial space, incorporating almost 200 industrial units and 60 offices. HIE also holds 332 acres of serviced and unserviced land for future development in various locations.

Highlands and Islands Enterprises

Living and working in the Highlands and Islands HIE’s development of this land and future public sector premises is now robustly underpinned by sustainable construction principles. This environmentally conscious outlook is hardly suprising, since one of the Highlands and Islands’ greatest assets is undoubtedly its world-renowned natural environment. Highlighting this is the fact that out of 115 destinations throughout the world, the Scottish Highlands ranked number seven in terms of sustainable tourism and destination quality. The findings came out of an independent global survey conducted by National Geographic’s Sustainable Tourism Initiative and a graduate team from Leeds Metropolitan University, who consulted over 200 specialists in the field. The Highlands and Islands also has an exceptionally low crime rate and its vibrant cultural heritage is a major attraction – for residents, visitors and businesses. As Mr Roe puts it: “a rich arts and cultural scene not only drives the social economy through strengthened communities and an improved quality of life, but it is also a key driver of the wealth economy.” HIE is a fervent supporter of arts and culture in the round, demonstrated by the creation and ongoing support of the region’s arts agency, HI-Arts, as well as its commitment to the revival of both Gaelic language and Gaelic culture, traditional and contemporary culture and heritage throughout the Highlands and Islands. This year’s Highland 2007, a celebration of traditional and contemporary Highland culture, is a prime example of a proud region showcasing the very cream of its cultural crop. With so much going for the region, it’s not surprising that the population has risen faster in the Highlands and Islands (1.7%) than the rest of Scotland (0.6%) in recent years. It follows, then, that there has also been a substantial increase in residential property prices. Between 2002 and 2005, the median cost of a house rose almost 71% to £88,000, however in UK terms, property prices remain competitive. In terms of education, the Highlands and Islands secondary schools regularly top the country’s performance tables. Establishing university title for UHI Millennium Institute will help continue that success into the tertiary sector and continues to be a top priority for HIE. “It is really ironic that the Highlands and Islands is the only region of the UK not to have its own university, while the region has a sustained track record of educational attainment at secondary school which is consistently above the Scottish average, and at the very pinnacle of any region in the UK,” points out Mr Roe. UHI Millennium Institute comprises a distinctive network of higher education colleges and learning centres across the Highlands and Islands. Students living anywhere in the region can access a range of vocational courses, undergraduate and postgraduate degrees, either by attending one of the 13

Highlands and Islands Enterprises

academic partner colleges, and/or through the extensive use of the latest information and communications technology and video conferencing. Vision for the future So ultimately, what is the long-term vision for this ambitious region? This is perhaps best explained by HIE’s strategy, agreed with the Scottish Executive, A Smart, Successful Highlands and Islands. This sets out a vision to: • become a region of half a million residents by 2025; • create a further 20,000 full-time equivalent quality jobs over that period; • raise income levels by 10-15 per cent in real terms, and • be an international shop window for the best the region has to offer. As Mr Roe puts it: “HIE is committed to using its investment, influence, innovative partnerships and international networks to ensure that the Highlands and Islands gains a global reputation, over the next generation, as one of the most distinctive, sustainable and flourishing rural regions of Europe.” In short, the Highlands and Islands has established itself as a strong, viable business location and currently supports a wide range of enterprises serving both national and international markets. The region’s modern telecommunications network combined with an adaptable workforce means that the Highlands and Islands is shaping up to be a dynamic and attractive place in which to do business. For further information please contact: Highlands and Islands Enterprise Cowan House Inverness Retail and Business Park Inverness IV2 7GF T: +44 (0)1397 708251 F: +44 (0)1463 244241 E: [email protected] W: www.hie.co.uk

Highlands and Islands Enterprises

Worldwide

Worldwide

Can you be more specific than that? Many IT businesses may look to have much in common. But get to know them and you discover a world of difference between a lucrative one-man operation and an international consulting firm. As part of a group which has over 140 years of heritage, we’re familiar with the true diversity of our customers and the cultures in which they operate. We believe in a business without boundaries. If you are looking to invest in the UK, we can help. For a different perspective on your business, talk to us today.

Click hsbc.co.uk/business Call

+44 (0)20 79910538

Email [email protected]

COMMERCIAL BANKING

Issued by HSBC Bank plc. Lines are open 9am to 5pm Monday to Friday (excluding Public Holidays).

AC6393

International Business Wales Wales is a separate nation within the United Kingdom. The country, with an economy of £40bn and growing, is a European state and a member of the European Union. Naturally a trading nation, with easy access to Europe and the rest of the world, Wales is home to both indigenous and inward investment companies which sell and ship goods to and from all corners of the world. Surrounded by the sea on three sides Wales may be small, with a total area of 8,005 square miles (20,732 square kms) but it is extremely well connected. You can get to London Heathrow Airport in less than two hours and links via the excellent motorway and railway networks mean that major UK centres, such as Birmingham, Liverpool and Manchester, are near neighbours. Frequent flights from Cardiff International Airport bring key locations across Europe close. Some 60 million tonnes a year, 10 to 12 per cent of the UK total, are moved through Wales’ sea ports. The six principal ones are at Holyhead, Milford Haven, Swansea, Port Talbot, Cardiff and Newport. Wales is internationally recognised for the natural beauty of its countryside from its breathtaking rivers and valleys to its stunning mountain ranges. Almost a quarter of the landmass is either designated as a National Park or as an Area of Outstanding Natural Beauty (AONB). The Wales Millennium Stadium is home to the country’s national sport, rugby and the nearby Wales Millennium Centre is a hub of Welsh cultural life. Since 1999 Wales has enjoyed devolved government through the National Assembly for Wales, based at the Senedd in Cardiff and led by a First Minister. The 60 Members of the Welsh Assembly are directly elected by the people of Wales and from these members the Welsh Assembly Government is formed. Wales, which has a population of 2.95m, is represented by four members in the European Parliament and by forty members in the UK parliament. During the past quarter of a century in excess of 1,500 companies have invested some £13bn into Wales. Over forty per cent of this was reinvested by enterprises that decided to inject additional resources into their successful Welsh-located operations. Wales is now a major base, for example, for a large number of world leading businesses including the likes of Airbus, British Airways, Ford, Bosch, Sony, Dow Corning, GE and T-Mobile. Over the next decade the Welsh Assembly Government’s Winning Wales strategic plan has identified some £15bn that will be invested to

International Business Wales

target economic development in the country. The country’s main economic development arm is International Business Wales (IBW). IBW was created by the Welsh Assembly Government to further the economic prosperity of Wales. IBW is at the vanguard of efforts to attract new investment into Wales and in assisting the continued growth of business and companies that are already here and thriving. Demographics Wales has the greatest concentration of its population in the south-east and north east of the country. The country has a workforce of 1,313,000 talented, smart, motivated and flexible people. Many of these people are graduates coming from one of the country’s highly regarded universities and colleges or from one of its 25 further education colleges. Some three in five people living in Wales are of working age. And there continues to be a high regard for traditional employment values in Wales. Welsh workers are among the most loyal there are with the country having one of the highest staff retention figures in the UK. Staff turnover is as low as just 3% in some cases with a national average of between 10% and 15%. Even in industries that are notorious for high turnover, such as contact centres, staff retention rates are impressive. High productivity levels, healthy industrial relations and a flexible can-do attitude to work help businesses to prosper and grow. There is a lot of space to spread out in the country as well. Overall the number of people per square mile in Wales is something in the region of 361 (140 per square km) which is just about half the rate of the United Kingdom as a whole. Cardiff, with a population of 305,000 and growing, is the dynamic and fast expanding capital city of Wales. The other major centres in Wales are Swansea in the south- west, Newport, in the south- east and Wrexham in the north-east. The country enjoys a very affordable cost of living with competitive house prices 25% lower than in Germany and 60% lower than London. And in Wales lower labour costs do not equate to a lower standard of living. Far from it. The quality of life in Wales is a key reason why people decide to come to Wales in the first place and after experiencing what there is on offer, decided to stay. Comparative population and land mass Area in square miles

Population

Cardiff Wales UK EU total

316,800 2,952,500 60,609,153 456,953,258

54 8,005 94,526 1,535,286

Inhabitants per square mile 5,867 369 5456,641 298

International Business Wales

Largest centres of population in Wales Cardiff Swansea Newport Wrexham

316,800 225,000 139,500 130,200

The Welsh Economy: Wales is home to some 500 overseas-owned companies which together employ in excess of 77,000 people. The largest investor country into Wales is North America which contributes some 28 % of new or safeguarded jobs. The other major player, in terms of investment, is mainland Europe at 26%. Traditionally Wales has been known as a manufacturing centre and 15% of the total workforce remains employed in these industries. Increasingly the Welsh economy is becoming more diversified. It is developing strengths in specific sectors such as aerospace, engineering, automotive components, financial services, contact centres and bio-technology. Other areas, in which Wales is increasing its share, include advanced manufacturing, business process outsourcing, Customer Relationship Management (CRM), financial and business services, food, IT, medical technologies, opto-electronics, pharmaceuticals, renewable energy, semiconductors and software and digital media. There are now in excess of 100 aerospace and related companies in Wales employing over 20,000 people. Some 30 per cent of the UK’s aircraft maintenance repair and overhaul business by value and 25 per cent by employment are located within 30 miles of Cardiff International Airport. Wales is also one of the most advanced automotive supply regions in the UK. Ford, Toyota and Bosch, are among 150 sectoral companies employing some 25,000 people and the sector is rapidly looking at alternative technologies with the recent arrival of Connaught in Wales, a green technology company developing world class, hybrid power train technology. Toyota recently announced a re-investment with the news that they will manufacture the engine for their new Auris car at its north Wales plant. Wales has a strong and expanding financial services community which directly employ some 28,000 people and has massive potential for growth. The insurance sector is particularly strong and includes global players such as Admiral Insurance, Legal and General and AA Insurance. Wales is also strong in the life sciences sector and includes operations by four of the world’s top ten medical devices companies, Johnson & Johnson, Bayer, 3M and Bristol, Myers Squibb. The computer software sector in Wales is also significant with an annual turnover in the region of £750m. Activities in this burgeoning sector include Research & Development to software design and testing.

International Business Wales

Companies operating in Wales include Mitel, BT Logica CMG, and General Dynamics. As recently as March, (2007), leading French global software development consultancy, Valtech, announced it was creating a new 170 job centre in south Wales. Opto-electronics companies employ some 3,500 people in Wales with an important cluster being created in the north of the country. Companies with operations in Wales include Alcatel and Cogent Defence Systems which is creating a new corporate headquarters and R & D facility at Celtic Springs Business Park in Newport. Global motor manufacturer, Toyota, makes and ships parts to Europe, South America and the rest of the world from its plant in north Wales while Magstim, an indigenously developed medical device manufacturer, services customers in America, Asia and Europe from its plant in south west Wales. IQE ships its semiconductor microchips from Wales to customers across the world including the US. Export levels remain high in Wales and the rest of the UK. Goods from here are exported all over the world with 60% going to fellow EU countries.

Wales employment by industry group: Industry % in Agriculture, hunting, forestry Mining and quarrying Manufacturing Electricity, gas and water supply Construction Wholesale, retail trade and repairs Hotels and restaurants Transport, storage and communications Financial intermediation Real estate, renting and business activities Public administration / defence Education Health and social work Other community and social activities

Wales 1.2 0.2 15.3 0.5 4.6 16.9 7.0 4.6 2.6 9.2 7.2 10.5 15.1 5.4

% in the UK 0.9 0.2 11.9 0.4 4.5 17.8 6.8 5.9 4.1 15.9 5.5 9.1 11.8 5.1

Wales employment in key areas Sector

Number of companies

Aerospace Automotive Bioscience Business Processes Electronics Financial services Food IT

150 250 250 160 300 1,800 525 700

Number of staff 20,000 28,000 13,000 30,000 30,000 30,000 23,000 11,000

International Business Wales

Education, research and development: The education system in Wales is widely recognised as being among the best in the UK offering quality learning at all levels through both public and private institutions. Higher education is a key priority in Wales and remains a key factor in attracting inward investors. The graduate pool is supplemented by technician training programmes organised by colleges of higher education. Many courses are tailored to meet specific industry requirements. Welsh higher education continues to forge strong links with industry and a host of networks are in place. The University of Wales is a key research and development centre. The centre is the second largest in the UK with a number of its departments recognised as excellent, not just academically but also in research and development, and collaboration with industry. There are currently a further 315 organisations across Wales offering scientific or technical services directly to industry. Innovation is held in high esteem in Wales. There is a general understanding that it offers the key to maintaining an economy with a strong competitive edge. Wales is developing a series of Technium Innovation Centres in a multi million pound project. The aim is build a network of state-of-the-art ‘incubators’ for hi tech research to bring together the very latest research technology with the brightest minds in the business. Wales was among the first of the EU regions to create a Regional Technology Plan designed to spread the benefits of the latest developments in technology throughout the economy. Its Centres of Excellence, hubs of focused academic research, are sited throughout colleges and universities. The 20 industrially-focused research groups support and enhance the delivery of technology transfer activities in support of industry. The EU-supported Wales Information Society maintains Wales’ presence at the cutting edge of developments in information technology while a telecommunications network is being developed in Wales which is among the most advanced in the world. st BT’s new IP-based 21 century network of services, including VoIP, is being rolled out in Wales ahead of the rest of the UK meaning that business in Wales will have access to the latest data and voice communications capabilities.

Wales undergraduate University students Discipline

Number of undergraduates

Agriculture, veterinary science and related subjects Architecture, building and planning Art and design Biological sciences Business administration studies

986 1,694 8,086 8,353 10,412

International Business Wales

Communication studies Education Engineering and technology Historical and philosophical subjects Languages and related subjects Law Mathematical and computer sciences Medicine and dentistry Physical sciences Social, economic and political studies Others

1,855 8, 164 6,777 6, 103 12,751 3,621 4,901 12, 312 3,405 9, 575 3,742

Total

102,746

Business environment: Many inward investors are initially attracted to Wales by its many financial incentives. Financial grants and other assistance are available to new businesses through a number of bodies including the National Assembly for Wales, International Business Wales and the European Commission. Parts of Wales benefit from Objective One status within the EU. These Tier One areas are eligible for the highest possible levels of financial assistance currently available in the EU. Social security costs, paid both by the employer and employee are among the lowest in Western Europe. And the UK’s 30% corporate tax rate makes Wales one of the most profitable places in Europe for foreign investors. Thanks to low labour costs and personal tax levels, among the lowest in Western Europe, it is less expensive both to live and to work in Wales. There is plenty of land available in Wales and at keenly competitive prices. Wales can offer an extensive range of high-quality sites and buildings at extremely agreeable rates compared with other regions in the UK and mainland Europe. From modern, prestige space and refurbished accommodation, to prime development sites, there are opportunities across a wide variety of locations suitable for all types of businesses ranging from multinational corporate bodies to small and medium sized enterprises (SMEs). And Wales is a wired nation. It leads the world in terms of its communication infrastructure. In the past 15 years some £500m has been invested to upgrade Wales’ digital network. To date 310,000 miles of fibre have installed and 98% of the population now has access to broadband services. One of BT’s Global Services premier data centres is located in Cardiff making sure that international clients have the access to a highly resilient and secure suite of fully managed and co–location services. Wales/UK average gross weekly earnings Overall Managers and senior officials

Wales (£) 588.40

UK (£) 742.20

International Business Wales

Professional occupations Associate professional/technological occupations Administrative and secretarial occupations Skilled trade occupations Personal services occupations Sales and customer service occupations Process, plant and machine operatives Elementary occupations

604.60 447.30 275.80 399.20 220.30 164.10 365.30 202.90

638.10 487.80 291.30 412.50 221.50 182.70 375.40 213.90

Overall

370.70

423.20

Wales and European Taxation: Total employee social security contribution % Security Belgium France Germany Ireland Italy Netherlands Spain Sweden UK

13.1 15 13 4 10 7.1 6.4 7 11

Contribution % 34.8 45 13 10.8 53 17.6 30.6 32.5 12.8

National Corporate Tax rates (%) Austria 25 Belgium 33.99 Denmark 28 France 33.83 Germany 38.31 Ireland 12.5 Italy 37.25 Luxembourg 30.38 Netherlands 31.5 Spain 35 Sweden 28 UK 30

International Business Wales

International Business Wales International Business Wales (IBW) is dedicated to convincing investors that Wales is the perfect place to locate, relocate or expand their business or to invest in existing enterprises. IBW helps in identifying and recruiting employees ensuring that investors accrue the most talented work force. IBW can also offer staff training support. IBW helps with matters relating to property and during the vital settling in process from helping acquire work permits, to finding the right house and school for children. And IBW plays the same personal attention to business with experts in project management enabling recent arrivals to get on their feet and quickly become part of Wales’ very welcoming business community. For more information please contact: Carys Pugh D’Auria, International Marketing Manager, International Business Wales, T: +44 2920 828683 F: +44 2920 442696 E: [email protected] W: www.ibwales.com

International Business Wales

Invest Northern Ireland Northern Ireland the Ideal Business Location Northern Ireland is an open and flexible economy. Over 700 foreign investors and a multitude of investors from the rest of the UK have chosen to locate in the region. The country has hi-tech expertise, industrial ingenuity and a great lifestyle to offer, making it one of the most attractive inward investment locations in Europe. Young, Well Educated Population Northern Ireland has one of the youngest populations in Europe, with nearly 60 per cent of its 1.71 million residents under the age of 40. Currently the unemployment rate stands at 4.6 per cent, below the UK national average and the EU27 average. Northern Ireland has long been recognised to have one of the best education systems in Europe with pupils consistently out-performing their counterparts in Britain at GCSE and A-Levels. Two world-class universities and an extensive network of further education colleges provide excellent academic and vocational training, with over 2,000 people graduating each year with business qualifications in Northern Ireland. Established Investors Northern Ireland’s economy in recent years has been transformed into an outward looking knowledge economy. The region’s strong academic record, together with impressive intellectual property reserves have enouraged a host of internationally successful companies to invest in there. Among the sectors witnessing significant growth in recent years are financial services, software development and business services. Key investors include SAP; HCL-BPO, Polaris Software Labs; Northbrook Technology; Abbey; Seagate Technology; Liberty Mutual; Microsoft and HBOS. More traditional industries such as manufacturing continue to make a significant contribution to the Northern Ireland economy, accounting for approximately 13 per cent of employment in the region. Global organisations such as Caterpillar, DuPont, Bombardier, Emerson Electric and NACCO have all invested in Northern Ireland. Cost Competitive Location High quality, modern office space for high-tech operations is readily available throughout Northern Ireland. Facilities include the state-of-the-art Science Park in the Titanic Quarter, Belfast. According to CB Richard Ellis, global market rents are very affordable, with prime facilities starting at an average of £14/per square foot in Belfast against comparable space at £50 /sq ft in Dublin, £48 /sq ft in London.

Invest Northern Ireland

Superb Infrastructure Northern Ireland enjoys a state-of-the-art communications infrastructure. It was the first region in Europe to achieve 100 per cent broadband coverage and it will become the first region to complete BT’s 21 CN network upgrade. Telecoms costs are among the lowest in Europe and it has excellent transport infrastructure with hundred of flights daily to the UK, Europe and beyond. The region’s seaports, together with a high speed rail link to Dublin, mean that Northern Ireland is the perfect gateway to Europe. Northern Ireland is a vibrant, modern region. Considered one of the safest places to live, Northern Ireland has a rich variety of scenery, activities and a host of cultural attractions and leisure opportunities, and was recently named as one of the “must-see” travel destinations for 2007 in the Lonely Planet’s Bluelist. Today Northern Ireland is a centre of innovation and industry. This, together with its talented workforce and excellent infrastructure, makes Northern Ireland an ideal inward investment location. Invest Northern Ireland Invest Northern Ireland is the agency responsible for promoting economic development throughout the region: to grow the economy by helping new and existing businesses to compete internationally and by attracting new investment into Northern Ireland. Across its global network of offices, Invest NI delivers a tailored package of practical and financial support, enabling new investors to become operational quickly and to achieve sustained growth.

For more information please contact: International Marketing Team Invest Northern Ireland Bedford Square Bedford Street Belfast BT2 7ES T: +44 28 9023 9090 F: +44 28 9043 6536 E: [email protected] W: www.investni.com/invest

Invest Northern Ireland

property + Locate in Kent has the expertise, contacts and local knowledge to give you a genuine advantage. Our property database gives you access to a wide range of properties from serviced offices to development sites across the county and our relocation service is comprehensive, confidential and free. Kent is perfectly located for your business with High Speed 1 rail services cutting journey times to European cities from November 2007 and to London from 2009. With property costs up to 60% less than in London the area offers companies an unrivalled business location.

Locate in Kent

Perfect for Europe. Perfect for Business.

+44 (0)1732 520700

www.locateinkent.com

Locate in Kent

Perfect for Europe. Perfect for Business.

location Kent and Medway is perfectly placed for business – positioned between the markets of London and Europe, the county is the closest UK location to continental Europe, offering access to over 531m consumers within a 24 hour drive.

Paris from Ebbsfleet and Ashford taking approximately two hours.

Kent already benefits from Eurostar services from Ashford International Station to Continental Europe, and the launch of a new high speed line from the new Ebbsfleet International Station in North Kent in November will build on Kent’s reputation as the gateway to Europe. Europe’s cities will be that much closer, with new trains to

New domestic services operated by South Eastern Trains from 2009 will cut a number of journey times from the county to London by up to half, further strengthening Kent’s offer to new investors. London St Pancras will only be 17 minutes from Ebbsfleet International Station and 37 minutes from Ashford International.

cost-effective research-based pharmaceutical company, has been based in Kent since the 1950s. The site in Sandwich, the company’s European R&D Headquarters, occupies 335 acres and employs around 3,500 people.

Kent offers immediate access to the leading international financial centre of London – but its property prices are up to 60% lower than in the capital, making it the location of choice for many national and international companies. Kent has a workforce of over 780,000 people, with 5,000 skilled graduates moving into industry from universities and colleges every year, but again, its salary rates and labour costs are significantly lower than London’s. The county is already home to many blue-chip companies including BAE Systems, GlaxoSmithKline, Kimberley-Clark and Royal Bank of Scotland. Pfizer, the world’s largest

+44 (0)1732 520700

Investors in Kent and Medway can also take advantage of business grants available in certain areas of the county. The Selective Finance for Investment in England (SFIE) grant scheme is delivered by SEEDA in the South East region. All grants are awarded on a discretionary basis and the level of potential assistance depends upon company size, location, eligible project expenditure, number of skilled jobs created or safeguarded and project quality. New criteria that have just been announced mean grants of up to 15% of project costs are available for small-sized companies and up to 7.5% for medium companies rising to 35% and 25% respectively in certain areas of East Kent, where large corporates are also eligible to apply for up to 15% of eligible costs.

www.locateinkent.com

Locate in Kent

Locate in Kent

Perfect for Europe. Perfect for Business.

property As well as being a cost-effective location with unrivalled links to London and European markets, Kent has a wide variety of commercial property on offer. From business parks like Kings Hill in West Malling - one of the largest and most successful mixed-use developments in Europe and science parks like Kent Science Park in Sittingbourne, through to enterprise hubs, industrial units and individual offices, there is a property solution to be found in Kent for all types of business.

regeneration Developments in the county’s two governmentidentified ‘growth areas’, Ashford and Thames Gateway, are set to create further opportunities for companies looking to move into the county. Ashford is expected to have 31,000 new homes and 28,000 jobs by 2031, while North Kent is set to benefit from 50,000 new homes and 80,000 jobs within 20 years. As well as offering a new international and domestic station, Ebbsfleet Valley’s 9m sq ft of office, retail, leisure and community space is likely to create some 20,000 new jobs in the area.

Proposals for several major investment projects in East Kent have also been announced, including London Array, the world’s largest offshore wind farm, and £300m expansion plans for a new terminal, four new berths and a new marina have been unveiled by The Port of Dover.

future With its multi-million pound developments, regeneration projects and investment in infrastructure, transport and renewable energy, Kent is looking forward to a bright future - proving it really is the place in the UK to do business.

+44 (0)1732 520700

www.locateinkent.com

Locate in Kent

Locate in Kent

Perfect for Europe. Perfect for Business.

Locate in Kent Locate in Kent offers a free, impartial and confidential service to companies looking to relocate to Kent or Medway. Over the last 10 years Locate in Kent has advised over 400 companies in the UK and overseas to relocate or expand in the county. Its work has led to the take-up of around 5m sq ft of commercial property space in the county and has created more than 18,000 direct jobs – of which nearly half are knowledge-based. Its services include advice and guidance on available property, access to its online commercial property database which covers the whole of Kent and Medway, ready-made business networks to tap into and an aftercare

service to assist businesses with their integration, development and growth in the county. The agency also offers companies customised research data to support a location decision including information on rent levels, demographics and salary costs. The company can also provide free grants advice and assistance through the South East Grant Advisory Service (Se-gas). For more information about Kent’s business credentials and the relocation and support services offered by Locate in Kent visit www.locateinkent.com or call 01732 520700.

locational advantages of Kent and Medway: • Although Kent is only a 60 minute drive from the capital, commercial property and labour costs are nearly 60% less.

• The area around Ebbsfleet station is being developed with offices, shops and about 9,000 new homes.

• Kent is home to many world-class companies such as Pfizer, Kimberly-Clark, BAE Systems, Delphi and Hornby, with others moving in all the time.

• Kent has more developable land than any other area in the South East of England.

• From 2009, ‘bullet trains’ will travel to a new station at Ebbsfleet in North Kent to St. Pancras in 17 minutes and ‘bullet trains’ from Ashford will reach St. Pancras in 37 minutes.

+44 (0)1732 520700

• Kent has a population of 1.6 million people, the largest of any county in the UK, and a workforce of over 780,000. • Kent has over 1000 miles2 of glorious countryside and 360 miles2 of unspoilt coastline to explore, and more historic homes and castles than any other county.

www.locateinkent.com

Locate in Kent

Northamptonshire Enterprise Limited With one of the fastest growing economies of the last decade, Northamptonshire is already established as a great place to live and for businesses to invest. High levels of employment and skills, combined with competitive costs and a highly productive labour market, have already established Northamptonshire’s position as a diverse economy and a successful location for living, working and learning. However, its economic and demographic growth levels are set for further rapid expansion. Northamptonshire is the focal point for population and jobs growth identified in the Government’s Sustainable Communities Plan – a commitment to sustain and extend the economic success of London and the South East. Over the next 25 years Northamptonshire will be home to 141,000 additional jobs and 167,000 more homes. This requires joined-up partnerships, including the development of two dedicated delivery vehicles and significant upfront funding for essential infrastructure. This is all to be invested in the county’s transport, education and community facilities, thereby creating a new era of growth opportunities for businesses, and a truly sustainable community for present and future generations. Strong commitment to sustainable development will see that Northamptonshire retains its exceptional beauty while delivering this ambitious growth. This evolution reflects Northamptonshire’s strengths as a business location, where employment and population growth rates are already more than double the national average. It is located at the heart of the Oxford to Cambridge Arc (O2C) of high-tech industry, and is less than an hour from both these cities as well as London and Birmingham. Northamptonshire has plans to attract and develop a range of new investments above the housing development. These include: • • • • • •

major retail and cultural regeneration developments in all of the county’s major towns development of 711,000 sq m of new office accommodation development of over 300 hectares of new strategic distribution facilities construction of 48 new primary schools construction of eight secondary schools development of at least one new secondary medical facility and considerable evelopment of primary facilities, including community centres and district medical centres

Northamptonshire Enterprise Limited

• • •

development of new regional conferencing centres and hotel facilities to cope with Northamptonshire’s growing business tourism demands the development of a Technology Realm, strategic employment sites (circa 230,000 sq m of science park-related development) and cutting-edge business support services. development of the ‘River Nene Regional Park’ – the largest sustainable tourism, environmental and leisure resources in the East Midlands.

This population growth and these development opportunities mean approximately £6bn extra per annum of spending will be generated within the Northamptonshire economy alone, excluding housing and infrastructure development costs, making it an ideal place for development and relocation. As part of efforts to deliver this growth, Northamptonshire Enterprise Limited (NE L) has been formed. NE L is the result of an innovative merger of five existing organisations to create a ‘one voice’ approach to Economic Development, Inward Investment and Tourism/Destination Management. Working with partners from the public, private and voluntary sector, NE L’s primary role is to promote, invest in, develop and grow Northamptonshire as the location of choice to live, work, learn and visit. Activity in these areas has already seen the creation of over 5,500 jobs in the past three years in the county. The enormous opportunities the growth agenda offers is not the only reason why Northamptonshire is the ideal choice for your investment. Northamptonshire is the UK’s central growth location. Fast access to the major road, rail and air networks creates a strategic gateway to the whole of the UK and beyond. The UK’s strategic road and rail lines and European transport Networks (TENS) route all directly accessible within the county, providing arguably the best North-South and East-West communication links in the UK. London is less than an hour away, so businesses needing links to the capital can operate successfully from a highly cost-competitive base. Other major cities and ports are all within easy reach, with 95% of the UK’s population located within four hours. The county offers a choice of five international airports and three major air-freight hubs within an hour – essential for companies seeking access to international markets. Northamptonshire is also located within the ‘Golden Triangle’ the most cost efficient location in the UK for access to ports and logistics, due to our location relative to the EU drive time directive, other major UK cities and access to the EU. Northamptonshire is also able to offer both fright and passenger links to the continent, with rail freight terminals at Daventry International Rail Fright Terminal and Eurohub. Northamptonshire has three rail services

Northamptonshire Enterprise Limited

running through the county. These provide access to London in under an hour Northamptonshire has a property offer to suit your business needs. Able to offer small services offices to serviced strategic sites all your business needs can be catered for. The growth of the county will see a growth in the supply of the highest quality sites and premises to st facilitate business needs for the 21 Century. This creates enormous opportunities for developers and end users alike, building on the county’s strengths as one of the fastest growing economies within the UK Key Locational Advantages • Significant catchment population of 5 million people within 1 hour drive-time, 95% of the UK’s population within a four hour drive • Northamptonshire represents a 25% lower operating cost when compared to the rest of the South East of England and is less than an hour from London. • Accelerated investment in the ICT infrastructure ensures easy access to the latest communications technology (99.9% of the county has access to Broadband). • Skilled, adaptable and a cost effective labour supply, comparative to London and the South East

For further details please contact: James Cushing Northamptonshire Enterprise Limited Enterprise House 30 Billing Road Northampton NN1 5DQ T: +44 (0) 1604 609393 W: www.letyourselfgrow.com

Northamptonshire Enterprise Limited

Investing in North East England The latest Government statistics show 63 firms moved to the North East or re-invested in existing businesses in the region in the last financial year - five more than in 2004/05. In total, these investments will create 4,250 new jobs, safeguard a further 1,520 posts, with capital expenditure of just over £62m by the investing companies.

Simon Goon One NorthEast Head of Business Development and International Relations North East England can rightly claim to be punching above its weight in securing valuable inward investment. Representing a region with a population of just 2.5m and a comparatively small GDP, One NorthEast ranked an impressive third out of the UK’s 12 regional development agencies in inward investment performance in the last financial year.

The prosperity that these companies, especially larger firms, bring to our region in the form of new jobs and wealth creation is a real vote of confidence in our economy, its workforce and quality business environment. The North East is home to 585 overseas companies employing over 27,000 people within a two-hour drive of Newcastle and Durham Tees Valley international airports. In the past five years, One NorthEast has helped create 10,600 new jobs through inward investment and protected the jobs of a further 11,900 workers. As the regional development agency for North East England, we are charged with driving forward sustainable economic development. Attracting overseas and UK firms to Northumberland, County Durham, Tyne and Wear and Tees Valley is an important part of the programme of activity we are developing to drive this growth. One NorthEast’s investment and aftercare team has in place a carefully targeted strategy to build the portfolio of companies choosing the North East as the home for their new venture or expansion.

Its vision is to deliver investment into North East England by targeting job creation investment, working with existing companies to secure reinvestment and promoting the establishment of strategic partnerships. The region now has a far more targeted and subtle offer to attract investors than in days gone by when the lure of a vacant business park site and ready labour market was enough to secure large single investments. Our investment and aftercare team, along with regional partners, provide a comprehensive package of support for inward investors. These partners include centres of excellence, universities, access to grant aid through One NorthEast’s business finance team, urban regeneration companies and UKTI, the Government’s inward investment arm which has access to markets outside the UK. They can be asked to intervene at any stage of a company’s strategic planning cycle to assist with the company’s long term aims and objectives. The aim is to do this by accessing all aspects of the regional network and, where and when appropriate, with One NorthEast acting as the key point of contact. In order to ensure that the North East retains the investors it has here and to promote their reinvestment in our region, One NorthEast has tackled the need for a much more coordinated, managed and informed aftercare system. An aftercare system based on project and key account management has been established. It covers the pro-active information management of regional companies and their headquarters and focuses on coordinating and managing contact with regional firms.

North East England is sharpening its focus and refining its role to win further inward investment from the crucially important US marketplace.

The aim is to give One NorthEast a far clearer picture of the economic health of our investors, their forecasts for future activity and challenges they face. One NorthEast also has a team of specialists dedicated to identifying and growing opportunities within nine specific industry sectors - all areas where the North East has existing world class strengths. The team is committed to sourcing opportunities, improving productivity, promoting network development and innovation and skills development in the process industries, food and drink, knowledge intensive business services, marine and defence, new and renewable energy, automotive, commercial and creative, tourism hospitality and life sciences sectors. One NorthEast’s inward investment and aftercare team has long established, dedicated teams working in the Asia Pacific, Europe, UK, North America and Far East marketplaces. The competition across the UK to attract new investment is fierce and the North East has to differentiate itself in a crowded marketplace and play to its strengths. Having overseas offices and representatives actively working in target countries and markets, promoting our message directly to CEOs and senior Government officials is incredibly important.

The new financial year 2007/08 represents the dawn of an exciting new era for both North East and North West England and their joint US investor strategy. Both regions have reaffirmed their commitment to and funding of the North of England Inward Investment Agency (NOEIIA) office network in the States.

world-class strength in scientific research and development and exploitation of intellectual property. One NorthEast is a leading partner in the Newcastle Science City project to establish the region as a world leading centre of scientific excellence. At the heart of this scientific theme are three pillars of activity which we believe can generate up to £6bn of new wealth for the regional economy over the next ten years - namely process industries, new and renewables and healthcare advancements. The regional development agency is investing heavily in these fields to build on the North East’s knowledge base to help generate new jobs, businesses and investment.

Our region has an inward investment offer

In China, One NorthEast, with the full backing of the regional arm of UKTI, signed an exclusive agreement with Shanghai Government officials and their counterparts in Jiangsu province, giving regional firms and universities prime access to the these lucrative marketplaces - now the economic heartbeats of the world’s third largest trading power.

to rival any in the UK and we are striving to consolidate and build upon the solid foundations we have in place.

This raises the possibility of future trade and investment opportunities for the region and of research and development link ups between North East and Chinese businesses and universities. A unique selling point for the North East and one that is already reaping rewards, is the region’s

Make contact To discuss the service further, or to receive an initial response to an investment proposal, please make contact by phone, fax, email or via our website: T +44 (0) 191 229 6500 or +44 or (0) 191 229 6363 F +44 (0) 191 229 6243 E [email protected] W www.investnortheastengland.com

NETPark a catalyst for regional change

NETPark, County Durham’s showcase science, technology and engineering park at Sedgefield, is at the heart of the region’s drive to develop a hightechnology, knowledgedriven economy. Developed and managed by County Durham Development Company, Durham County Council’s business development arm, NETPark provides an environment in which innovative businesses can grow and develop. With support from the North East’s five universities and the region’s five Centres of Excellence, NETPark has begun to establish itself as a prime location for start-up scientific, technological and engineering knowledge-based businesses.

Focusing on R&D companies involved in plastic electronics, nano and micro technology, software, photonics and life sciences, the NETPark Incubator has already attracted a range of rapidly developing spin-out companies such as Durham Scientific Crystals, Farfield Photonics, NeoSensors, Analytical NanoTechnologies Ltd (ANT) and ROAR Particles. 2007 will see a substantial increase in new building developments. Incubator Phase II will provide much needed space for new start ups whilst the Business Village will create accommodation for companies post-incubation and for more mature SMEs. The construction of the Plastic Electronics Technology Centre (PETeC) will bring a development of national and international significance to NETPark. This £10m PETeC project will provide state-of-the-art facilities to support R&D in the field of plastic electronics.

Managed by Cenamps, the Centre of Excellence for emerging small-scale technologies, PETeC will be a leader in the development of novel devices with independent forecasts predicting a market worth $30bn by 2015 and $250bn by 2025.

PETeC’s benefits should spread far beyond NETPark, encouraging the development of a cluster of companies engaged in novel product development and manufacture based on flexible functional materials.

To find out more visit www.uknetpark.net

Maersk shipping giant berths in North East One of the world’s biggest shipping groups is relocating part of its business to the North East. The Maersk Company Limited, which currently runs its UK operations from Canary Wharf in London, is transferring its ship management division to Newcastle Quayside. The move, which will see some 40 staff relocate to the region, has been agreed thanks to vital advice and assistance from One NorthEast and its regional partners. Sector and investment specialists from the regional development agency have worked closely with Maersk. This culminated in the awarding of £1.8m of Selective Finance for Investment (SFI) funding to finance the move, which will lead to around 100 new jobs being created over the next three years. Alan Clarke, One NorthEast Chief Executive, said: “This deal is a major coup for North East England. The majority of Maersk’s UK operations are being relocated elsewhere in London, so for us to secure the shipping management division, bringing with it some 40 highly skilled, well paid jobs and the promise of many more to come, is fantastic news. “We have a rich shipping heritage in the region, so it is fitting that one of the world’s biggest shipping companies has chosen to relocate part of its business here. This agency’s aim is to make the North East the location of choice for leading national and international firms, and this multi-million pound deal is yet another indicator that we are heading in the right direction to achieve this.”

The team transferring from London to Newcastle is responsible for the crewing and technical management for over 40 UK-flagged vessels operating around the world. However, there are plans to create a design team and a technology support unit over the next couple of years, which will further increase employment. Mark Malone, managing director of the Maersk Company’s Shipping Division, said: “Tyneside’s history has been shaped by engineering, especially marine engineering. “To date it remains a centre of excellence, with a high concentration of marine engineering resources and experienced shipping professionals. We welcome this opportunity to establish a strong maritime presence on Tyneside.” The Maersk Company Limited is part of the A.P.Moller/Maersk organisation. The UK-based activities are expanding, creating new job opportunities for shipping professionals in the North East.

team elsewhere, but we were able to satisfy them that North East England has everything it needs to take the business forward. “The move has enormous potential for the region. It will bring highly skilled and well paid jobs and further strengthen our bid to be the number one business location of choice. “It is important to recognise the continued importance of the sector to the region’s economy. We are working hard to ensure that we continue to support and develop all areas of the sector, including maximising North East England’s involvement in the major projects on the horizon.” The Maersk Company was founded in the Danish town of Svendborg in 1904 by a father and son. It now employs over 70,000 people in 125 countries, and operates 250 vessels worldwide.

Maersk’s decision to move to the region came about following a meeting between agency representatives and managers. A cross-department team within One NorthEast was able to provide assistance with location, a £1.8m SFI grant, and sectoral knowledge to secure the project for the region. The facility, at Pandon Street in the quayside area of Newcastle, is expected to open later this year. Margaret Fay, Chairman of One NorthEast, said: “I am delighted Maersk saw the benefits of relocating its shipping management division to the region. “The company could have decided to base its expanding technical

One NorthEast Chairman Margaret Fay and Jesper Kjaedgaard of Maersk launch the Maersk Gosforth in Southampton.

MobileGov computer security pioneers head for Newcastle

Pictured from l to r: Stephen Slater of RMT, Craig Daglish, One NorthEast, François-Pierre Le Page and Benoit Goyens, both of MobileGov and Tom Cosh of Newcastle City Council

A French firm has chosen the North East as the UK distribution base for its groundbreaking IT security solution. MobileGov - based in Sophia Antipolis in southern France – is about to move into an incubator unit in Charlotte Square, Newcastle, after signing distribution agreements for its Mobile Device Authenticator product. The device allows IT administrators to monitor and control all access to a company’s IT network to guard against fraud and misuse. Up to four MobileGov staff will initially move into the Charlotte Square incubator unit owned by Newcastle City Council. The company is forecasting turn- over of £500,000 in product sales this year, rising to £7.8m in 2009. Craig Daglish, One NorthEast Investment and Aftercare Technical Advisor, worked closely with the company to ensure it chose the North East as its first UK business location.

“When people refer to IT security it is normally associated with protecting their network through deployment of firewalls, e-mail filtering and anti-virus software. “But the unauthorised use of portable storage devices with huge storage capacity such as iPods, smart phones and USB keys pose risks to many businesses. For example, anyone can plug one of these devices into a network and introduce viruses to the network, or more critically they provide an opportunity to anyone intending to steal sensitive and valuable data. “However, portable storage devices undoubtedly provide good practical benefits to a company and its workforce and it is unpractical and counterproductive to ban their use outright. What is required is a more controlled approach with the deployment of suitable technology solutions. “The Device Authenticator solution does just that, allowing IT administrators to decide which USB keys have access to the network, who has them and what they are allowed to access – allowing greater control over information flow to such removable devices.”

MobileGov has signed UK distribution agreements for its product with North East-based firms IT-PS, Onyx and RMT Accountants & Business Advisors. MobileGov’s founder and CEO François-Pierre Le Page, said: “The main reasons for choosing Newcastle are the quality of the people we met here, their kindness and their ability to motivate everyone around a new project such as MobileGov. “In addition, we are proud to announce the signature of distribution agreements with dynamic companies such as RMT, Onyx Group and IT-PS.” Tom Cosh said: “MobileGov is a great example of the kind of technology company we had in mind when we created Charlotte Square as a supportive environment for early stage innovative digital businesses. “I am doubly pleased that the relationship the City foresaw when it linked to the Sophia Antipolis region of the South of France is generating a range of positive results.”

One NorthEast cemented close ties with MobileGov following its work on a European e-justice research project that looked at the issues around protection and storage of sensitive public information. The technology developed in the project was commercialised leading to the formation of MobileGov in April 2004. MobileGov returned to France to concentrate on building the product and commercially selling it in the French market.

They have recently signed a distribution agreement in France with AMEC-SPIE Group, a leading integrator with more than 66,000 clients. They are now interested in developing the UK market for the product.

For more information about the company please visit www.mobilegov.co.uk or www.deviceauthenticator.com or www.devicelinker.com.

GE Money to create over 400 new jobs Financial giant GE Money has unveiled a multi-million pound investment in the North East, creating over 400 new jobs in the region. GE Money announced today that it is to expand its operations in the North East with the construction of a purpose built 100,000 square foot office facility that will accommodate up to 1000 people. The investment continues to build on the success of their current operation, which opened in 2005 and employs 450 people. The construction of the new building started in February and is due to be completed and fully operational by June 2008.

Rob Willis, HR Director, GE Money UK, said: “The new development will grow Newcastle significantly, and the creation of over 400 jobs demonstrates GE Money’s commitment to the area and our current employees. We are very lucky to have talented, enthusiastic and dedicated staff who have helped make our existing Newcastle operation such an overwhelming success.” Alan Clarke, One North East Chief Executive, said: “ GE Money’s reinvestment in its Cobalt Park business is a huge vote of confidence in its workforce and the North East economy. And we look forward to GE Money moving into its new offices, creating 400 valuable new jobs”. One NorthEast has backed the expansion with a £1.9m SFI grant.

Stewart Macphail, CEO, GE Money Cards UK, commented: “This multi-million pound investment announced today represents the biggest investment in property GE Money has ever made, and reinforces our commitment to growth and job creation in the UK. The new development will create over new 400 jobs - taking our local workforce to over 800 people. This investment in the North East continues to build on our current success here, and represents a very exciting new chapter for GE Money.” Recruitment for the new vacancies will begin immediately, with a highly visible and ongoing recruitment campaign in the regional press. The campaign offers variety of roles, predominately in Sales, Customer Services and Collections and will include recruiting for a number of new management roles. Pictured l to r: Stuart MacPhail, Chief Executive of GE Money Cards, Alan Campbell Tynemouth MP, Alan Clarke, One NorthEast Chief Executive, Guy Marsden, Director of Highbridge Business Park Ltd – developers of Cobalt Park.

SeaDragon £300m oil and gas construction project bound for Teesside The first rig is expected to be delivered in 2009.

Hundreds of jobs are on the way to the region after the North East was chosen as the location to undertake a massive £300m marine offshore project. SeaDragon Offshore, a Cayman Islands company, has chosen the Tees Alliance Group to build a state-of-the-art floating drilling platform for the oil and gas sector. The company has also announced plans to build two more identical vessels with Tees Alliance Group. It will be the biggest non-military marine fabrication project in the UK, and will bring one of the country’s largest shipyard facilities, Haverton Hill near Billingham, back into use and create up to 800 jobs. The project has been assisted, with non-core funding, by a number of organisations, including regional development agency One NorthEast, Tees Valley Regeneration and English Partnerships.

Stephen Baird, Chairman of SeaDragon Offshore, said: “SeaDragon Offshore recognised that Teesside offered the skills to create a world class vessel. Our challenge was to organise and market this capability and simultaneously create sophisticated risk mitigation policies that would make the project feasible and attractive to the banks, investors and charter clients.” Other companies involved in the consortium are oil services operators the Abbott Group plc and Lloyds TSB plc. Once complete, the vessel, which will be able to drill for oil and gas in depths of up to 10,000ft, will be used to assist deep-water reserves around the world in locations such as the Gulf, West Africa and the North Sea. Stockton North MP Frank Cook, who has been campaigning for the regeneration of the Haverton Hill yard, said: “For over 40 years I have used every possible opportunity to tell anyone who would listen about the superb

industrial skills and facilities here on Teesside – and the opportunities available for those with the right managerial attitudes and outlooks.” The first hull has already been bought and is due to arrive in the second half of 2007. SeaDragon Offshore is now in the process of securing options on two further Russian hulls and has agreed on fit-out times for the two additional vessels from the Tees Alliance Group. Ray Thompson, sector projects manager at One NorthEast, said: “If we can bring some of the facilities we have in the North East back into use, and get workers back into traditional engineering jobs, we’ll put the region in a strong position to maximise opportunities in the future.” David Eason, CEO of Tees Alliance Group, said: “It will secure major employment for locally skilled people in a field of work that has been in recession in this area during the last eight years. There will be a significant number of new jobs from both a direct and indirect perspective for the area which must be good news for everybody in Teesside.”

Pictured from l to r: Frank Cook, Stockton North MP, David Eason, CEO of Tees Alliance Group and Stephen Baird, Chairman of SeaDragon Offshore

Pictured from left to right: Clare McDermott, One NorthEast Europe Senior Advisor, Chris Levett, Seadrill Engineering Managing Director and Richard Marr, NaREC Finance Director.

Chris Levett, Seadrill Engineering Managing Director, said:

Seadrill taps into rich seam of North East talent A world-leading oil and gas drilling contractor is creating 60 new jobs in Northumberland as it looks to the North East to help it capitalise on an unprecedented boom in the industry.

Norwegian owned Seadrill Engineering has just opened a satellite office in Eddie Ferguson House, Blyth, home of the New and Renewable Energy Centre (NaREC). Sixteen employees will initially support the company’s activities in its Aberdeen, Bergen and Stavanger offices, with job numbers forecast to rise to 60 within three years as the company looks to recruit specialist engineers from the North East labour market. Seadrill Engineering has extensive contracts with major global companies such as Shell, Statoil and BP, to upgrade oil rig drilling technology, allowing the companies to tap into harder to reach pockets of oil and gas in the North Sea.

“It was a choice between Blyth and other international locations but we decided on Blyth because of its location, accessibility, the quality of these facilities at Eddie Ferguson House and the pool of resources in the North East related to our industry.” Seadrill Engineering is beginning a recruitment process to fill future positions with graduates and North East workers with oil and gas sector experience, some of which may be working overseas. The Blyth office will work to help Seadrill Engineering customers update ageing technology on oil rigs with new state-of-the-art automation, allowing access to lucrative oil and gas reserves previously out of reach. Seadrill Engineering is the engineering arm of offshore services firm Seadrill – based in Stavanger with an annual turnover of £500m and 4,400 staff worldwide. “The oil and gas industry is in the midst of an unprecedented boom at the moment, the oil companies just can’t get it out of the ground quick enough,” said Mr Levett.

One NorthEast has backed the project with a £200,000 Selective Finance for Investment Grant. The regional development agency’s inward investment and aftercare team worked with Seadrill and NaREC to identify suitable space in NaREC’s facilities as the ideal location to establish its first presence in England.

Richard Marr, Finance Director at NaREC, said: “With a skilled workforce and a wealth of resources already in the region, it makes sense for oil and gas companies to look at the North East as a key part of the future for new and emerging energy technologies.”

South East England Development Agency THE BEST ENVIRONMENT TO GROW YOUR BUSINESS The South East of England is the powerhouse of the UK economy, contributing more in net tax to the Exchequer than any other UK region, including London. It is a prosperous, dynamic and innovative region with a highly skilled workforce and the largest population of any region in the UK, approximately eight million. South East England encompasses Hampshire, Isle of Wight, East and West Sussex and Milton Keynes as well as counties which border London - Buckinghamshire, Oxfordshire, Berkshire, Surrey and Kent. The region has a £166 billion (GVA) economy and has grown at an average annual growth rate of 3.66 per cent during 1996-2006 (Source: Experian Business Strategies). Across the region there are 682,380 enterprises, 16% of the UK total. Businesses – both local and internationally owned - regard the South East as an attractive and dynamic location to operate. It is an ideal springboard for global growth. So what are the advantages of locating in the region? South East England is the preferred choice of location for over 6,500 overseas investors and these companies benefit from: • An international transportation hub with excellent links to European and global marketplaces, which includes London Heathrow and Gatwick Airports and the Channel Tunnel rail link to Europe. • The highest rate for exporting in the UK, £28 billion per year. • Easy access to London, Europe’s financial capital. • The largest population of any UK region. • A highly-skilled and flexible workforce, with 74,000 new graduates per year. • Home to 25 universities and higher education institutes, including the University of Oxford • Significant clusters of businesses in all high technology industries. • A high technology, research intensive economy. Transport and Communications The South East boasts three international airports - London Heathrow, Gatwick and Southampton; 11 ports including Dover, Southampton and Portsmouth; and the Channel Tunnel.

SEEDA

Research & Development (R&D) Annual R&D expenditure in the region, at £4.66 billion, is almost one quarter of the UK total. This is due in part to the hundreds of commercial R&D operations which locate in the South East to access the talented R&D workforce and benefit from the close proximity to world class research departments within the regions’ universities. Almost 25 per cent (45,800 people) of the UK’s R&D workforce is employed in the region. Among the region’s world class universities, Oxford is the most renowned and its science park is host to firms specialising in computer hardware and software and bioscience. Sharp Laboratories of Europe set up its research centre for consumer electronics in the Park in 1992. Oxford University and Southampton University are two of the influential Russell Group of research focused establishments. Along with other academic institutions in the region, these two generate consistently strong results in science research and produce 74,000 graduates per year. With 25 universities and higher education institutes in the South East, each with strengths in specific areas, there is significant potential to help businesses become more competitive and productive. The Research Excellence Directory - www.researchexcellence.org - has been developed to assist individuals and business to explore data on applied research and put direct users in touch with dedicated people working at the leading edge of research and discovery in their fields. Many universities and scientific institutes in the South East undertake collaborative research projects with world-renowned businesses such as Nokia, QinetiQ and Microsoft. The University of Oxford’s global reputation ensures that there is a cluster of R&D activity nearby. In early 2007, the £500 million Diamond Light Source Synchrotron began operations. Located at Harwell, Oxfordshire, the Diamond Synchrotron produces infra-red, ultra-violet and X-ray beams which enable scientists and engineers to delve deep into the basic structure of matter and materials, leading to scientific breakthroughs in the fields of biotechnology, medicine, environmental and materials science. The Rutherford Appleton Laboratory (RAL), based in Oxfordshire employs 1200 staff and provides world-leading research and technology development, space test facilities, instrument and mission design, and studies of science. Much of the laboratory’s work is in collaboration with research groups from the UK and overseas. As an example, collaborations have been set up to support the European Space Agency and NASA.

SEEDA

Science and business parks Science parks provide an environment where large and international businesses can develop relationships with some of the region’s world class centres of knowledge, such as universities, higher education institutes and research organisations. There are eight science parks based in the region, including two with wet laboratories at Sittingbourne Research Centre in Kent and the Begbroke Science Park, part of the University of Oxford. All science parks offer flexible services to both established and start up companies. For more information on their services contact UKSPA, the United Kingdom Science Park Association at http://www.ukspa.org.uk/ Smaller high technology companies in the region are assisted by the Enterprise Hub Network. The Network focuses on entrepreneurial individuals and companies, helping them to bring ideas to market quickly and profitably. The Network is built around a team of commercial experts who can draw on a wide range of specialists to help entrepreneurs and businesses realise their potential. www.enterprisehubnetwork.co.uk Industry sectors Although financial and service sector industries dominate the economy of the region, there is a strong and diverse manufacturing base – in GVA terms, manufacturing in the South East is the highest in the country. Electronics From research to manufacturing, the largest electronic sector in the UK is located in the South East. There are over 2,000 electronics companies employing over 44,000 people, many in scientific and engineering positions. Eight out of the top 10 global electronics companies have operations in the South East and the region has developed particular strengths in electronics systems research, design and marketing covering a wide range of applications from consumer goods to avionics. Electronics companies in the region include LG Electronics, Siemens and Samsung. The University of Southampton has a world class reputation in the field of optoelectronics and the University of Surrey has collaborated with a number of major companies such as Nokia, Ericsson and Sun Microsystems. Other electronics companies in the region include Philips Semiconductors has major design and manufacturing operations and Honeywell UK is headquartered in the Thames Valley. High-Tech Engineering There are over 500 automotive companies operating in the region, with specialisms in motorsport, manufacturing and research and

SEEDA

development. The South East is home to some of the most successful and innovative aerospace and defence companies in the world, and between them they employ over 93,000 people in the sector. Boeing, Thales, BMW and Ford all have operations in the South East. Five formula one teams are based in the region – Williams, Mclaren, Renault, Red Bull and Super Aguri. The Information and Communication Technology (ICT) sector is a success story for the South East with one of the highest concentrations of companies in Europe clustered around the Thames Valley, to the West of London. The region is home to many of the world’s most successful and influential companies and provides an important base for their UK, European or Global client-focused operations. There are 30,000 ICT companies in the region employing around 185,000 people. The South East is the centre of the UK Telecoms industry and home to many of the worlds most successful and influential Telecoms companies. In total there are around 2,160 companies operating in the sector employing approximately 53,000 people. Vodafone, Nokia Microsoft and IBM are located in or near the Thames Valley. Life Sciences South East England is home to the highest concentration of healthcare companies in the UK with over 6,900 companies employing 240,000. Companies include GE Medical Systems and GlaxoSmithKline. Twenty percent of the UK’s medical devices companies are based here and the success of these companies is enhanced by the region’s strong electronics, engineering software and biotechnology sectors. Investment and research in this area is supported by organisations such as Oxford Bioscience. Many leading biotechnology companies have operations in the South East including Takeda, Murex Biotech, and Astellas. Renowned for its expertise and expenditure in research and development, the South East has welcomed the key research and production facilities of global healthcare organisations, including Pfizer, the UK’s largest pharmaceutical company; Genzyme, one of the world’s leading biotechnology companies and Allergan which houses its European R&D and UK sales functions in the region. Aerospace & Defence The UK’s aerospace and defence industry is the largest in Europe with more than 20% market share. It was worth over £27 billion in 2004 and is forecast to grow to over £32 billion by 2009. The South East employs 93,000 workers in the industry and a large proportion of these jobs are involved with research & development. Twenty five per cent of aerospace and defence companies based in the region carry out R&D. Seven of the top ten US aerospace and defence prime companies are located in the region. UK or European HQs based here include Boeing, GKN, Thales, Virgin Atlantic and BAE systems. The region is also

SEEDA

home to QinetiQ, Europe's largest science and technology solutions company. Financial & Professional Services Many international and UK finance and professional services companies are based in the region, benefiting from a close proximity to London, while avoiding the overheads of an office in the capital. The region’s workforce is made up of highly educated professionals offering essential skills in IT, accountancy, economics, finance and business studies. American Express, HSBC, Lloyds TSB, and Merril Lynch are just some of the key players that can be found in the South East. These companies offer a vast range of financial services, including consultancy, pensions and investments, shares and brokerage, insurance and assurance. Investment capital The availability of investment capital is recognised as a key requirement for growing companies, wherever their location. With its strong regional economy, South East England has a healthy investment environment. Many companies find funding from banks and venture capitalists. The region also has well developed Business Angel networks, for example the Solent Investment Opportunity Network (SION), offering access to a rich source of selected investment opportunities in early stage ventures. The network is primarily for Private Investors or "Business Angels" who can bring experience and contacts as well as capital. Quality of Life In addition to the hard business facts which make the South East a natural choice for inward investment, the region boasts a rich cultural heritage and is steeped in history. Annual outdoor events such as Royal Ascot, Glyndebourne Festival of Opera and the world famous sailing regatta, Cowes Week, combined with scores of museums and theatres; the leisure opportunities afforded by the region are numerous. One third of the region is designated Areas of Outstanding Natural Beauty status or equivalent. Quality of life can be a competitive advantage, as employees of all businesses to enjoy living here. 2012 and beyond The next few years will be particularly exciting in the South East. It will be involved closely with the development of the London 2012 Olympics and will host some events as well as many international visitors. Our development plans for the region will see new and vibrant communities spring up in the Thames Gateway, Milton Keynes and Ashford as part of the Government’s Sustainable Communities Plan which will result in around half a million new homes by 2020. There will be increased transport and travel opportunities opened up by the expansion of Heathrow, the development of Crossrail and new, fast services on the

SEEDA

Channel Tunnel Rail Link. This will all enhance the region’s place as a key global location for business and investors. Business support The South East England Development Agency (SEEDA) was established in 1999 to generate sustainable economic development throughout the South East of England. It is a business-driven organisation that offers professional, impartial, confidential and free advice to companies located or seeking to locate in South East England. Six regional Sector Consortia are open to foreign owned companies. The Consortia are for companies who operate in the same field and are keen to share best practice – and to act in concert to win new markets or compete on a collaborative basis for contacts. These sector groups are the Farnborough Aerospace Consortia (FAC) which works with aerospace and defence companies; Envirobusiness, environmental technologies and services; the South East Media Network (SEMN), for digital and creative companies; Marine South East, South East Centre for the Built Environment and South East Health Technologies Alliance. Much of this support is funded by SEEDA. Since SEEDA began, its International Business activity has attracted or retained 295 companies and created or safeguarded 15,442 jobs. Through Finance South East, created in 2002, companies in the region have been helped to raise over £30 million, and over 4,000 companies have benefited from SEEDA’s Sector Consortia. SEEDA’s International business team The South East is an attractive location for foreign investment and SEEDA provides a free, professional inward investment service to overseas companies. Its international function has teamed up with UK Trade and Industry (UKTI) South East to help the region’s businesses to grow into the global marketplace. UKTI offers solid practical assistance to firms based in the region who are looking to sell their products and services abroad. UK subsidiaries of overseas owned companies can benefit from assistance from programmes like the Overseas Market Introduction Service (OMIS). This Service includes research and analysis of potential new markets for you to trade with. The International Business Team has a strong track record in helping foreign-owned companies establish profitable businesses in South East England to access the European market. The team can save your company valuable management time and money by offering a fully comprehensive inward investment service. SEEDA and business support partners, such as the sector consortia and UKTI, offer an established infrastructure to help businesses achieve

SEEDA

their potential. The region supports substantial business clusters, often led with passion and new ways of thinking by industry leaders and organisations which provide vision and networking for their sectors. SEEDA’s focus on global competitiveness and sustainability aims to propel the South East to its highest level of achievement yet. These are excellent times to locate in the region – why not contact SEEDA and see what can be achieved?” SEEDA’s free services for businesses wishing to locate in the South East include: Working with businesses to define critical location needs Finding real estate or business facilities to match current and future requirements Planning and managing location and expansion projects Introductions to professional service providers including architects, construction contractors, tax advisers, planners, solicitors, bankers and human resources specialists Organising visits to explore opportunities in the region Introductions to component suppliers and sub-contractors Providing support to key team members with immigration, housing, education and relocation issues Assisting with project implementation, delivery and future support

For further information, please contact: Lewis J Scott, Director Trade & Investment, SEEDA & UKTI South East John Rutherford OBE, Inward Investment Director SEEDA Cross Lanes Guildford Surrey GU1 1YA T: 01483 484200 W: www.investsoutheastengland.co.uk

SEEDA

region proved inspirational from “theThestart, there’s a real passion here

“

for ideas and free thinking. DALE VINCE, FOUNDER, ECOTRICITY, STROUD

SOUTH WEST ENGLAND IS HIGHLY ENTREPRENEURIAL AND ENJOYS THE COUNTRY’S HIGHEST LEVELS OF SELF-EMPLOYMENT OUTSIDE LONDON. SOURCE: ANNUAL POPULATION SURVEY – ONS

southwestengland.co.uk BUSINESS. LIFE. INSPIRATION.

Everything about the quality of life “here is inspirational. It’s definitely

“

helped motivate us to become Britain’s leading organic brand. GRAHAM KEATING, COMMUNICATIONS MANAGER, YEO VALLEY, SOMERSET

WORKERS IN THE SOUTH WEST ENJOY THE UK’S HIGHEST LEVELS OF HAPPINESS, MOTIVATION, ENTHUSIASM AND PLEASURE IN THEIR SURROUNDINGS. SOURCE: 2005 WELLBEING@WORK SURVEY

southwestengland.co.uk BUSINESS. LIFE. INSPIRATION.

South West of England RDA The Right Climate for Business For potential investors, the business case for the South West of England is compelling. Not only does the region tick all of the usual boxes – strong economy, skilled workforce, good transport links, and so on – but it has one crucial advantage over other parts of the UK (and many parts of Europe too) and that is quality of life. The region’s seven counties are consistently ranked among the best places to live in the UK and quality of life in the South West is quite simply outstanding. Happy to be Here For businesses, the benefits of being based in a place where people want to live and work can be measured in terms of easier recruitment, improved retention and greater productivity, amongst other factors. The statistics certainly bear this out. The South West has one of the most productive workforces in the UK. Advanced engineers, for example, are a massive 31% more productive than their counterparts in the rest of the UK. And the combination of world class universities whose graduates who tend to prefer to remain in the South West, plus a constant influx of highly skilled workers from all over the country has given the region one of the most highly qualified workforces in Britain. Thirty seven percent of the region’s employees work in higher level occupations, the greatest of any in the UK. “Surveys consistently show that workers in the South West are, for the most part, happier, more motivated and enthusiastic than employees in the rest of the UK,” says James Harris, Head of Skills at the South West of England Regional Development Agency. “The 2005 Wellbeing@Work survey, for example, revealed that workers here enjoy the highest levels of wellbeing in the country. It doesn’t take a genius to work out the correlation between high job satisfaction and high productivity, which is also a characteristic of this region” Growing Faster It is easy to see, therefore, why the South West has one of the UK’s fastest growing economies, worth around £80 billion. The region generates 9% of the total output of England and its GDP growth outstrips the national average. Exports grew by 34% between 2001 and 2006, above the national rate of 28%. Between 1981 and 2001, the South West’s population grew by 12.5%, faster than anywhere else in the UK. This increase was fuelled almost entirely by inward migration. Already, more than 1500 major international investors have recognised the considerable competitive advantages of basing themselves in the

South West of England RDA

South West and this number is increasing all the time. Paul Ellis, CEO Sifam Fibre Optics sums up the feelings of many: “We get real business benefits from operating our business in the South West… from attracting excellent employees to exporting effectively due to excellent transport links… It’s all here in this beautiful area.” Highly Qualified Stretching from Gloucestershire to Cornwall, the South West is the largest region in the UK with a population of around 5 million. Life expectancy here is the highest for women and joint highest for men in the UK. Healthcare and education are excellent. Sixty two percent of the adult population is currently in employment, providing a total workforce of some 2,205,000. These are some of the most highly qualified workers in the UK. Twenty eight percent of them are educated to degree standard or above and 24% report being in job-related training, higher than just about anywhere else in the country. Spirit of Enterprise “South West England has an independent spirit and fire in the belly. Quite frankly, if I was investing anywhere in the world today, it would be here.” - Tim Smit, Eden Project There is an energy and enthusiasm about the South West that is almost palpable. The spirit of innovation and adventure that began 5000 years ago with the building of Stonehenge is still very much alive today, as evidenced by the incredible transformation of a former china clay pit near the town of St Austell into the Eden Project – a visionary recreation of the climates associated with rainforests, deserts and the Mediterranean, housed inside huge futuristic geodesic domes. The Eden Project is now a major tourist attraction and was recently dubbed the eighth wonder of the world. This same energy helps to ensure that more small businesses succeed here than anywhere else in the UK and the region also enjoys the highest proportion of self-employment in the country. Some of the world’s leading high technology companies – Hewlett Packard, Lucent Technologies, Motorola, Toshiba – have tapped into the South West spirit of enterprise and innovation, basing some of their most important global research and development facilities here. Global Impact Across the region, ground-breaking R&D work is taking place. As well as internationally significant research institutions in the fields of nuclear power, biotechnology, aeronautics, food and drink, water technology and mining, many private companies are developing new technologies that will help to shape all of our lives. OC Robotics, for example, is the world’s leading manufacturer of snake arm robots, at the heart of the South West’s emerging robotics cluster. Managing Director, Rob Buckingham, explains:

South West of England RDA

“Early adopters of snake arm robot technology include the nuclear, aerospace and security industries, but it has considerable potential elsewhere - in the workplace, in the home, in the environment and even inside our bodies.” Brilliant Minds It is the strong links between the region’s universities and leading edge companies that drives the dynamic R&D sector. The University of Bath, for example, has 550 academics and a research budget in excess of £22million. The university supports companies in the research of new products and processes, as well as testing and evaluation. Just a few miles away, the University of Bristol is renowned as one of the UK’s top research universities, with world-class facilities and knowledge. Toshiba’s European research centre is based here, driven by one of the most famous names in world ICT research, Professor Joe McGeehan. Support for Business The South West Regional Development Agency, which is responsible for providing high quality support to businesses and inward investors, has made a commitment to support the development of world-class R&D facilities in the region. Amongst its many investment projects, SWRDA is collaborating in the £300 million SPark Science Park for Bristol and Bath. The science park will occupy 40 hectares and employ over 6000 people. One of its first developments will be the innovation centre, uniting the world class universities of Bristol, Bath and the West of England. The Regional Development Agency is also helping to fund the work of the Peninsula Medical School in the areas of Neuroscience and Clinical Trials. In total the South West is spending around 10% more on R&D than the current UK national average. Core Clusters A key part of the Agency’s remit is to increase the region’s competitiveness by focusing on business sectors with the greatest development potential. In the South West, there are seven core clusters - aerospace, creative industries, food and drink, biomedical technologies, ICT, marine and tourism – along with significant numbers of financial services, real estate and business services organisations. The Agency advises on a range of funding for investors in these and other sectors, including capital grants, the SW Venture Fund and the South West Angels and Investors Network. Aerospace More than 700 companies in the South West of England are directly engaged in the design or manufacture of parts and systems for the aerospace industry, making it Europe’s largest concentration of aerospace-related companies. The industry employs 43,000 people and has an annual turnover of £4 billion. Bristol has been home to many aero engine breakthroughs, including the Olympus 593 for Concorde and the Pegasus engine for the Harrier jump jet. Today the region is

South West of England RDA

actively involved in building components for the new Airbus A380. The new Composite Structures Development Centre, based at Airbus, is expected to attract more than £100 million worth of R&D projects in the next five years alone. Creative Industries Wallace and Grommit are unlikely ambassadors for the region but their plasticine faces have helped to focus the eyes of the world on Bristol – officially the UK’s most affluent city after London. Their creators, Aardman Animations – winners of 3 Oscars - are based at the heart of a dynamic Creative Industries cluster which has grown exponentially in the last decade. Scores of independent film production businesses are now located here, alongside the world-renowned BBC Natural History Unit. Creative Industries employ around 144,000 people in the South West and the sector is expanding faster than anywhere else in Britain. Food and Drink The South West’s mild climate and its traditional farming roots make it one of the strongest food and drink producing regions in the UK. A quarter of the country’s entire organic food is produced here and the region has given the world many famous delicacies, including the original and much copied Cheddar Cheese. Today, the region is home to more than 3000 food and drink companies, from international brands to niche producers. The leading research organisations, Campden and Chorleywood Food Research Association are also based here. Biomedical Technologies Biomedical Technologies are one of the region’s emerging success stories. It is difficult to keep pace with the rapid growth of this fast moving sector and the figure of 500 companies employing 15,000 people is increasing all the time. The South West is quickly becoming known as a major centre of biomedical research and new opportunities are emerging all the time for partnering and licensing agreements. St Louis-based Tripos Inc was quick to recognise the benefits of being based in this region and has recently committed a further $22.5 million to a major expansion programme, backed by Regional Selective Assistance and a grant from the DTI. Managing Director of Tripos Discovery Research, Dr Mark Allen comments: “The considerable growth in our business allowed Tripos to consider many locations for this expansion. Our search criteria included both a highly skilled workforce and a locality that would support our expansion requirements. We have been delighted with the high-calibre of scientific personnel that this area can attract, and the great community support that Bude and the South West region have demonstrated.” ICT The exciting discoveries being made in Information and Communications Technology have made this region one of the most

South West of England RDA

important in Europe for the ICT sector. Large multinationals like HP Labs, Orange and Message Labs rub shoulders with specialist players like Clearspeed and Apertio. The South West has its own version of Silicon Valley, in the form of the M4 corridor. This fertile network of forward-thinking companies is driving some of the most important developments in the world today. ST Microelectronics, which is the world’s leading producer of processors and operating systems for settop boxes, recently invested £1.7m in its Bristol site. Phil Morris, Managing Director of ST UK Research and Development, says: “Being part of a cluster of high technology companies means that there is a concentration of talented engineers nearby. Not only can we offer them an opportunity to work on some of the most interesting and ground-breaking projects in our industry, but they can also see that, when they are ready for their next career move, there are plenty of opportunities locally without having to uproot themselves and their family. There is a real sense of community amongst high tech companies in this region and our staff benefit from being part of this, as well as the obvious lifestyle advantages of this part of the UK.” Marine With its 700 miles of coastline and strong naval traditions, the Marine sector is a natural winner for the South West of England. Boat-building and repair services generate a turnover of £1.3 billion and there are some 2700 companies employing more than 32,000 people. Many centres for marine-related research operate within the region. The Met Office, the world’s leading organisation in weather prediction and global climate change which recently relocated here from Bracknell, is conducting research into oceanography and atmospheric science. Nearby, in Plymouth, the Plymouth Marine Laboratory is one of the world’s first truly multidisciplinary marine research centres, contributing to the issues of climate change, marine pollution and sustainability. Tourism and Leisure In a region that has the longest coastline of any in the UK and a fifth of which is designated as an Area of Outstanding Natural Beauty, tourism and leisure are, not surprisingly, a key industry sectors. Twenty three million visitors each year stay in the South West, including more foreign visitors than anywhere outside London. The region’s credentials as a world class tourist destination are beyond question. It has some of the country’s most spectacular tourist destinations, including the Eden Project, Bath, Stonehenge and the Jurassic Coast. Two National Parks, Dartmoor and Exmoor, account for 8.3% of the total land area and nowhere is more than 50 miles from the sea. The region is also considered to have some of the UK’s finest surfing conditions and plays host to national and international surfing championships.

South West of England RDA

Strong and Safe Transport Networks The demands of business and tourism means the South West needs to have a strong transport network. The region is home to two of the UK’s most rapidly expanding airports – Bournemouth, which grew by 46% in 2002 alone, and Bristol, which currently has services to 330 destinations worldwide. Exeter Airport, too, is set to double in capacity by 2008. The South West is served by two motorways, the M4 and M5, and is crossed by a network of some of the safest roads in Europe. Eighty five percent of the UK is within four hour’s drive and the region has fast, direct rail links to London, as well as the rest of the UK and Europe. £951m is earmarked for transport projects to further improve travel times. Well-Connected The South West also benefits from a high speed network of ICT communications, with 100% connectivity. Because the peninsula is the landfall destination for North American traffic to and from Europe, there is already an advanced fibre optic network in place, with more miles of cable than anywhere else in the UK. This has opened the door to more flexible patterns of working, making even some of the remotest parts of the region a viable business proposition. A Magnet for Investors For many inward investors, London is held up as the example against which other regions are judged and, in this respect, the South West has huge competitive advantages. High quality business premises are available at significantly lower rents than the capital and property prices, too, are significantly cheaper than in London and the South East. Labour costs are around 5% lower than the UK average, In the South West, the average commuting time is 22 minutes compared with an average of 55 minutes for central London. And, while employees here are generally more productive, remuneration packages are below the national average. It is easy to see why the South West is such a magnet for businesses from all over the world. All of the usual benefits of the UK – low interest rates, a low rate of inflation and one of the lowest main corporation tax rates in the European Union – combine with the unique lifestyle benefits that only this region can provide. It is a potent mix and one that is helping the South West to emerge as one of the most favourable business locations in the whole of the UK. For more information please contact: Matt Smith, Inward Investment Manager South West of England Regional Development Agency Sterling House, Dix's Field Exeter, Devon EX1 1QA T: 01179 330 262 E: [email protected] W: www.southwestrda.org.uk

South West of England RDA

www.wfw.com

INVESTING OR SETTING UP IN THE UK? In WFW you have some of the UK’s most respected legal professionals on call to assist with your expansion plans. We advise on: Corporate start ups Fund raising IPOs Acquisitions & disposals Employment Law Immigration

For more information contact: Jonathan Martin WFW London office + 44 (0) 20 7814 8031 [email protected] London Piraeus Paris New York Singapore B angkok Rome Hamburg All references to ‘Watson, Farley & Williams’ mean Watson, Farley & Williams LLP and/or its affiliated undertaking. This advertisement constitutes attorney advertising.

Part 1 Economic Overview

1.1 The UK Economy and Investment Environment Jonathan Reuvid and UK Trade & Investment

With its population of over 60 million, the United Kingdom is part of the world’s largest trading entity, the European Union (EU), whose population was enlarged to 456 million from 1 May 2004 following the accession of 10 new members to the previous Western European grouping of 15 states. Two new states, Bulgaria and Romania, were admitted from 1 January 2007, bringing the membership up to 27 and the EU population to 486 million. However, the United Kingdom is also a major market and economy in itself and has the lowest barriers to inward foreign investment in the industrialized world, according to a June 2003 report of the Organization for Economic Cooperation and Development (OECD).

The UK economy in brief The vital statistics of the UK economy are recorded in Table 1.1.1 and illustrate its favourable current performance in comparison with the other US $3 trillion economies of Western Europe and many other EU members.

Growth Gross domestic product (GDP) growth in the United Kingdom in 2006 was 2.6 per cent, another year of positive performance, and is forecast to remain

4

Economic Overview

Table 1.1.1

UK major macroeconomic indicators (per cent)

Economic Growth Consumer Spending (% Change) Investment (% Change) Inflation (CPI) Unemployment Rate Short-term Interest Rate Public Sector Balance/GDP Public Sector Debt/GDP Export (% Change) Imports (% Change) Current Account Balance (as per cent of GDP)

2002

2003

2004

2005

2006a

2007b

2.0 3.4

2.5 2.6

3.2 3.6

1.9 1.3

2.6 2.3

2.3 2.2

0.3

(2.2)

3.3

3.0

5.0

3.0

1.3 5.2 4.0

1.4 5.0 3.7

1.3 4.7 4.6

2.1 4.8 4.7

2.3 5.5 5.1

2.1 5.8 5.5

(1.5)

(3.3)

(3.3)

(3.3)

(3.2)

(3.0)

41.5

42.0

44.0

47.0

50.0

53.0

0.1 4.5 (1.8)

1.2 1.8 (1.5)

3.9 5.9 (2.2)

6.5 5.9 (2.2)

12.0 11.0 (2.5)

5.0 6.0 (2.5)

Source: Coface www.trading-safely.com 9 July 2007. a Estimate. b Forecast.

at the recent trend level of 2.3 per cent for 2007. The UK economy is now in its 11th year of uninterrupted growth and has outpaced those of the Euro area.

Interest rates The Bank of England’s Monetary Policy Committee has raised the interest base rate incrementally to 5.75 per cent from 3.5 per cent in July 2003 when long-term interest rates were at their lowest since the 1960s. Under the present government, the Bank of England has independence to set interest rates to meet the government’s maximum inflation target of 2.5 per cent. Since autumn 2006, the Bank Committee has raised the base rate progressively in a seried of 25 basis point increases as a measure to dampen increasing consumer debt and inflationary pressures, and a further increase to 6.00 per cent is considered likely by 2007 year-end.

Inflation UK inflation remains broady in line with EU averages and the OECD. The longest period of sustained, low inflation since the 1960s is forecast to

The UK Economy and Investment Environment

5

continue. The UK average consumer price index (CPI) rate was 2.5 per cent year over year in May 2007 and is expected to ease to perhaps 2.1 per cent by the end of 2007, marginally below current year interest rates in the United States.

Unemployment Since 1997 the United Kingdom’s long-term unemployment rate has fallen by 75 per cent, with youth unemployment at only 20 per cent of its pre1997 level. The present unemployment rate of 5.5 per cent (May 2007) is significantly lower than the current rates of Britain’s major EU partners, France, Germany, Italy and Spain. Among fully industrialized economies, UK unemployment is bettered only by the United States, Japan, Austria, Netherlands, the three Nordic countries and Switzerland.

Foreign trade The United Kingdom runs a deficit on current account, which is forecast to remain at the 2.5 per cent level through 2007. Both export and import growth strengthened in 2006 to double digits but are forecast to return to 2005 levels in 2007.

Public finances The government’s accelerated programmes to speed up improvements in education, transport and health services have impacted current public expenditure and generated a budget deficit since 2001, which reached 3.3 per cent of GDP in 2003 but eased to 3.2 per cent in 2006 and is expected to decline further in 2007. The deficit is therefore marginally above the Maastricht Treaty criterion level for euro entry.

The inward investment environment The underlying strength of the UK economy is an important factor in its popularity as an investment location. Although services, particularly banking, insurance and increasingly IT, Internet and e-commerce, computer software and shared service operations, account for the largest proportion of GDP, the manufacturing industry remains healthy. In particular, higher value-added sectors like chemicals, pharmaceuticals, aviation, automobile engines and electronics have developed rapidly. Agriculture is highly mechanized, intensive and efficient by European standards, producing about 60 per cent of the nation’s food requirements by employing only 1 per cent of

6

Economic Overview

the labour force. The United Kingdom retains large reserves of coal, natural gas and oil. With its diverse economy, the United Kingdom remains the fifth largest trading nation, accounting for 4.7 per cent of world trade in goods and services combined (World Trade Organization, 2006). Overall, the United Kingdom’s key strengths as an investment location continue to be the City of London with its status as the financial capital of the world; the dominance of English as the language of science, business and the Internet; and the United Kingdom’s research and science base, which makes it the strongest R&D base globally after the United States, although China now ranks second in terms of total R&D expenditure.

Inward investment data For the year 2006/07 a total of 1,431 successful inward investment projects generating 36,526 new jobs were recorded by UK Trade & Investment, an increase of 17 per cent over 2005/06 in the number of projects. The investments also safeguarded a further 41,000 jobs. The projects are analysed by investing country in Table 1.1.2. There are now 49,446 corporate inward investors in the United Kingdom of which 44 per cent are from Europe and 30 per cent are US companies. The United Kingdom remains the first destination in Europe for inward investment and globally second only to the United States. The United States continues to be the source of the largest number of inward investment projects to the United Kingdom while France is the largest source of projects

Table 1.1.2 UK inward investment projects by investing country (2006/07) Projects USA France Canada Japan Germany Australia India China Ireland Netherlands Sweden Rest of EU Rest of the World Total

540 95 82 80 75 74 69 52 43 34 30 103 128 1, 431

Source: UK Trade & Investment Annual Report 2007.

New Jobs 13, 326 3, 025 1, 687 2, 786 2, 694 947 5, 130 869 1, 377 842 606 1, 808 1, 172 36, 526

The UK Economy and Investment Environment

7

from the EU. The number of investments from China has almost doubled. The United Kingdom is increasingly seen as the preferred springboard to the EU. The number of foreign companies choosing to invest in the United Kingdom was a record for the third year running since 2004/05. Overall, 42 per cent of the projects were new investments, 23 per cent were expansions of earlier investments and the remaining 35 per cent were mergers and acquisitions (including joint ventures). In terms of operation type, services activity accounted for about 41 per cent and manufacturing sector projects rose five per cent overall. About two-thirds of all inward investors were companies engaged intensively in innovation or R&D. A record of more than 200 companies established headquarter operations in the United Kingdom in the past year. Among the specific business and industry sectors, the largest number of projects (19 per cent) were in software, significantly up on 2005/06, followed by business services (11 per cent) and information and communications technology (ICT) (10 per cent). Other significant sectors in the 2006/07 count were life sciences, financial services, advanced engineering, environmental technology and the creative and media industries.

Benefits of the United Kingdom for inward investors In 2004 KPMG analysed cost advantages/disadvantages of 11 countries relative to the United States in a 10-month research programme that measured the combined impact of 27 significant cost components in 98 cities. The basis for comparison was the after-tax cost of start-up and operation for 17 specific businesses over a 10-year time horizon and the findings were published in its Competitive Alternatives Report. The United Kingdom was judged to be the most competitive in Europe, in terms of both business costs advantage (2.4 per cent) and manufacturing costs (2.5 per cent). Italy was the second most competitive country on business costs and Luxembourg on manufacturing costs. The Netherlands and Germany were found to suffer considerable cost disadvantages against the United States. There are five main reasons why the United Kingdom is the most favoured inward investment location in Europe and attracts around 40 per cent of Japanese, US and Asian investment into the EU: • The United Kingdom’s openness and flexibility to job-creating new investment. The United Kingdom’s open-borders approach attracts quality investment – in offshoring and in many other sectors. With its leadership in deregulating markets and opening them to international competition (eg in financial services), the United Kingdom encourages and fosters technological and commercial innovation. • The United Kingdom has a skilled, well-motivated and adaptable workforce of 28 million and high standards of education with a strong

8

Economic Overview

emphasis on vocational education and training. Labour market regulations in the United Kingdom, including working hours, are the most flexible in Europe, and staffing costs remain highly competitive. In the past two decades the government has addressed the structural imbalances of the economy by greatly reducing public ownership and, until recently, containing the growth of the social welfare programmes. The United Kingdom maintains a reputation as one of the world’s best locations for international students. • The United Kingdom has a strong science and technology base with worldclass design, research and development disciplines. Many UK universities and scientific institutes take part in collaborative research projects with businesses. The United Kingdom is committed to simplifying science funding in order to maximize its impact. • The business environment is focused on providing the right conditions for companies of all sizes to grow in the United Kingdom and innovate and compete in global markets. Financial incentives are available for companies setting up in certain areas of the United Kingdom and finance is provided for early-stage companies with real growth potential. More generally, the United Kingdom now has a competitive main corporation tax rate among major industrialized countries (lower than for Germany, Italy, France, Spain and Belgium), and there are no additional local taxes on profits. (Pending changes in the tax treatment, dividends repatriated from overseas subsidiaries will provide an additional incentive to inward investors.) In terms of infrastructure, the United Kingdom has a telecommunications industry that is among the world’s most advanced. The United Kingdom’s integrated transport network provides fast, lowcost delivery throughout Europe. Every location in the United Kingdom is within 100 miles of a container port. The Channel Tunnel links the United Kingdom by road and rail to the rest of Europe, bringing both Paris and Brussels only three hours from London by rail. • In European Cities Monitor 2006, the survey conducted by Cushman & Wakefield, Healey & Baker, London is ranked first among European cities as the best business centre and has held that ranking for the past 14 years.

Further reading UK Inward Investment 2006–2007, an annual report by UK Trade & Investment, available at www.uktradeinvest.gov.uk.

1.2 The United Kingdom and the European Union Jonathan Reuvid

The European Union (EU) is now the most important market for UK exporters, accounting for around two-thirds of the United Kingdom’s foreign trade. The ratio represents a dramatic change in the United Kingdom’s economy from 1972, the date of its passing of the European Communities Act, when most of its markets were beyond Europe, mainly the Commonwealth countries of Australia, New Zealand, Canada, West and East Africa and the Caribbean. This transformation in the orientation of the UK economy is the direct result of EU membership and the resultant changes to the way in which the United Kingdom does business have been far-reaching.

EU law In terms of trade, commercial regulations and most areas of the law, in particular competition law, the United Kingdom is bound by EU law, which prevails over UK law and takes the following four forms: • Treaties that are binding on member states and EU institutions. •

Regulations also binding on all member states that do not require any implementation or adoption by national parliaments.

•

Directives that are binding but leave a member state to choose how the required result will be achieved. In the United Kingdom, the alternative methods are an act of parliament or delegated legislation.

10

Economic Overview

•

Decisions of the European Court of Justice of the Communities, which are binding on the highest courts of member states (the House of Lords in the case of the United Kingdom) in their entirety.

Areas of regulation in which the United Kingdom does not conform to EU law or practice are taxation and labour law where the government negotiated exclusions in the Maastricht Treaty.

EU grants, incentives and business support UK investment incentives and regional support programmes are tailored within EU parameters and the programmes administered from Brussels by the European Commission. The range of various schemes available to inward UK investors and programme rules are complex. Chapter 2.2 provides an outline description and some insight into the complexities.

The Eurozone The United Kingdom has not joined the European Monetary Union (EMU), which came into being with effect from 1 January 1999. The forebodings for the impact on sterling and the UK economy expressed at the time have not been realized. UK importers and exporters have learnt to trade in the euro as a matter of routine, and the City of London retains its domination of financial markets despite fears that the centre of gravity would move to Frankfurt. Only Denmark, Sweden and the United Kingdom of the then EU15 have held back from the Eurozone. Both Denmark and Sweden have rejected the euro through national referenda. The prime minister, in his former role as UK Chancellor of the Exchequer, has established criteria for judging whether the UK economy is sufficiently aligned to the Eurozone but there is no shortterm prospect of the United Kingdom holding a national referendum on this issue or joining. In fact, even before the present political uncertainties arose, the relatively good performance of the UK economy had complicated the case for joining the Eurozone. Public opinion polls continue to show a majority of Britons opposed to participation.

The EU constitution Of more concern is the divisions that opened up among members of the EU following clear rejections of the draft European Constitution by the citizens of France and the Netherlands in national referenda held at the end of May 2005. Although the draft had previously been signed by all state governments at the Council of Ministers at the endof 2004, rejections had been forecast in both polls. Previously, the constitution had been approved by

The United Kingdom and the European Union

11

Spain in a national referendum and ratified by the German Parliament, so that the differences of opinion lie at the core of EU membership. As a result other countries, including the United Kingdom, have made it clear that they will indefinitely defer planned referenda or parliamentary ratifications. As a result, debate on the European Constitution in its original form was halted but the topic was returned to the EU Council of Ministers agenda during the German Presidency of the United Kingdom in the first half of 2007. One option to a formal European Constitution, currently under discussion, is a treaty incorporating some key elements of the orginal draft, which could be approved by member state parliaments without recourse to referenda. At the core of a longer-term debate are the contrasting visions for the future of the EU as a more integrated political entity based on the original social model of its founders, or as primarily an outward-looking economic and trading entity as advocated by the United Kingdom.

1.3 Trade Information for Investment Decisions Roy Chegwin, Editor of Export Focus Magazine

Sound investment decisions are usually a mixture of in-depth research and evaluation of what has gone before as a base for predicting what will happen in the future. For any organization looking to invest in the United Kingdom, the trade statistics from the website of the UK government department HM Revenue & Customs are an invaluable source of background information. Holding statistics on both imports and exports for a period of five years, the website can help paint a picture of any sector, highlight trading and investment opportunities. The primary use of the data available on the HM Revenue & Customs website, www.uktradeinfo.com, is to provide market intelligence that can help identify trade opportunities both into the United Kingdom and from the United Kingdom. The trade data can provide market share information, highlight growth areas, help forecast trends and analyse patterns. Because the information is sourced from the official documentation submitted with every import and export consignment, it is robust and reliable and also the most up-to-date data available anywhere. The website features a very efficient search facility enabling users to drill down to the very key information they need to investigate a market. So, for instance, a company in the air-conditioning business can research imports and exports right down to specific product sectors. Table 1.3.1 shows imports and exports of air-conditioning machines between the major regional markets during 2004, measured in sterling. These data can also be analysed by quantity, can be tracked over any period up to five years, can be downloaded to Excel and converted to chart form. Further interrogation of the database could result in detailed information on the import and export of specific types of air-conditioning units to individual countries.

Trade Information for Investment Decisions

13

Table 1.3.1 Foreign trade in air-conditioning machines between major markets – 2004 [Under ‘Total’ covering first 2 columns add ‘air-conditioning machines’. Ignore all data to right of first four columns] Pounds Sterling

Pounds Sterling

Year to date

Year to date

Total Imports

Total Exports

Total Imports

Total Exports

8,225 4,500 136,071

47,786

10,031

2,808

CANADA GREENLAND MEXICO ST PIERRE-MIQUE PUERTO RICO USA

Table 1.3.1 shows general information on one product (air-conditioning machines) and a subsector of that product group. More detailed information by country is also available. The website is a very sophisticated tool that can satisfy the requirements of everyone from entrepreneurs to statisticians. As well as being available free of charge, the website is extremely user-friendly, right from the Home Page where you are invited to click on a number of options including Latest News and the intriguing ‘Stat Facts’, a scrolling list of topical information. Figure 1.3.1 represents the data shown earlier converted to a graphic format. This exercise has illustrated a very simple example, but the key is that as users become more familiar with the data available on www.uktradeinfo.com, they can select and manipulate the information to suit their requirements in terms of product and period. Consequently, they can analyse import and export levels of any product to monitor and see trends over any period in the last five years. Users can construct their own data sets

Canada Greenland Mexico St Pierre-mique Puerto rico USA

Figure 1.3.1

150000

15000

100000

10000

50000

5000

0

0

Foreign trade in air-conditioning machines (2004)

14

Economic Overview

and compile charts that help them to visualize the situation. Clearly, these charts can be also be used in presentation material. The website provides other benefits to users. The e-mail alert facility allows users to opt-in to receiving regular information from a range of sources on selected subjects of interest. The website can also be used to access a regularly updated database of 130,000 UK importers – a very useful marketing tool for anyone looking at the United Kingdom as a potential market. For many organizations, the statistics available from www.uktradeinfo. com can become an essential part of their investment planning. Statistics are vital to any investor. They are the confirmation of fact that takes commercial decisions beyond opinion. Very often statistics do that basic and valuable job – they confirm what is commonly believed – but it is still essential to have that information. However, sometimes statistics throw up surprises and challenge popular conceptions, and when this happens opportunities can arise. Whether the website is used to evaluate market share, to prospect for investment opportunities or simply to be better informed about global markets, users will not be disappointed with the ease of access and the breadth of information. It is a source of valuable information and interesting information too, such as the fact that of all the 4,894 tonnes of Brazil nuts the United Kingdom imported in 2003 only 0.6 per cent came from Brazil.

Part 2 Investment and Start-up Considerations

2.1 Overview for Inward Investors Jonathan Martin and Anna Halliday, Watson, Farley & Williams LLP

Introduction The United Kingdom is Europe’s most favoured jurisdiction for inward investment – that is, the investment of money from an external source into a region – attracting about a quarter of all direct investment in the European Union (EU).1 Once established in the United Kingdom, foreign-owned companies are treated no differently from UK firms. The attractiveness of the United Kingdom as a place to invest continues to grow – between 1998 and 2002, the amount of inward investment into the United Kingdom grew by approximately 48 per cent, reaching US $170 billion in 2006,2 the highest figure of any European country and second only to the United States.3 In London alone, inward investment accounts for 27 per cent of the economy and 13 per cent of all jobs are held in foreign-owned firms, according to a report published by Think London in 2007. There are many reasons for investors and businesses to choose to invest or establish a presence in the United Kingdom, which include the following: •

sophisticated infrastructure and telecommunications;

•

position as the world’s leading financial centre;

1 Doing Business in the United Kingdom: A Country Commercial Guide for US Companies – 2006 US Commercial Service, Chapter 6. 2 United Conference on Trade and Development. 3 Organization of Economic Cooperation and Development statistic.

18

Investment and Start-up Considerations

•

recognized and respected legal system;

•

financial incentives and tax environment;

•

stable political environment; and

•

skilled workforce.

What are the main points to consider when deciding whether to establish a business presence in the United Kingdom? Once a business has chosen to establish a presence in the United Kingdom, there are a number of issues, in addition to other broader commercial issues, that need to be considered by an inward investor, including the following: 1. What type of entity should I choose? 2. What will the tax treatment be on my investment? 3.

How do I go about employing people in the United Kingdom?

4.

Is the United Kingdom a good place to raise finance?

5. Which type of premises do I need for my investment? 6. What if my business becomes involved in a dispute?

Factors to consider when establishing a presence in the United Kingdom Type of entity to be chosen There are a number of entities or arrangements that may be chosen when establishing a business presence in the United Kingdom, including trading partnerships, limited liability partnerships, agency arrangements and European Economic Interest Groupings. However, the most common arrangements chosen for those investing or establishing a presence in the United Kingdom are as follows: •

a UK company (which may be a subsidiary of the overseas presence);

•

a branch; and

•

a place of business.

UK companies, branches and places of business are all regulated by the Companies Act 1985 (as amended by the Companies Act 1989). Companies House, operated by the Registrar of Companies, is the key government organization that coordinates the registration and administration of businesses in the United Kingdom.

Overview for Inward Investors

19

Whenever a business establishes a presence in the United Kingdom through a company, a branch or a place of business, a number of consequences will flow, which will to some extent vary with the form or presence chosen, but will include obligations to file certain documents at Companies House and to submit tax returns to HM Revenue & Customs. The Companies Act 2006, which received Royal Assent on 8 November 2006, will alter the regime that is described in this chapter. However, the new act is not due to be fully implemented until 1 October 2008 and accordingly the information below reflects legislation in the United Kingdom as at the date of publication. (a)

Establishing a UK company

The most common method for establishing a business presence in the United Kingdom is through the incorporation of a UK company. The company may be incorporated as a wholly owned subsidiary of the non-UK parent entity or by one or more individuals. The company will have its own legal personality as an entity separate from its parent undertaking or individual shareholders, and will therefore be able to enter into contracts and otherwise to operate in its own name. It will be a limited liability entity, with the liability of its shareholders being limited to the amount of its issued share capital. In certain cases, the best way to develop a presence in the United Kingdom may be to partner with experienced and established local representatives or undertakings through cooperation or joint venture arrangements, which will often be through a UK company as the joint venture vehicle. For further discussion on joint ventures, reference should be made to Chapter 3.3. In order to establish a UK company, certain documents must be filed with Companies House, including the company’s constitutional documents: the ‘Memorandum and Articles of Association’. Depending on the nature of the company’s business going forward, standard documents may be adopted or these can be tailored to specific requirements (for which a solicitor’s advice should be sought). Once the constitutional documents have been finalized, these and other incorporation documents are filed at Companies House and a certificate of incorporation and an incorporation number are issued. It can take as little as a day to register a company at Companies House. (b)

Establishing a branch or a place of business and the differences

As an alternative to incorporating a UK company, a non-UK business may instead simply establish a branch or place of business in the United Kingdom. An overseas company is required to register at the Companies Registry in Great Britain if the company’s presence has some permanence, whether through the establishment of a branch or a place of business. As mentioned above, the Companies Act 2006 (due to be fully implemented by 1 October 2008) will alter the regime described in this section. At the

20

Investment and Start-up Considerations

time of publication, the Department for Business, Enterprise and Regulatory Reform (DBERR) had not yet announced the date on which the sections relating to branch offices of overseas companies would be implemented.

Establishing a place of business Whether the presence of a non-UK business amounts to a branch or merely a place of business will depend on the nature and extent of that presence. A presence will not amount to a branch and may instead be a place of business, if the only business carried on at that place is ancillary or incidental to the company’s business as a whole. Such incidental operations include the following: •

warehouse facilities or administrative offices for the company;

•

internal data processing facilities; and

•

performing local representative functions for the overseas company.

However, the presence of administrative offices is likely to constitute a business’s UK presence as a branch particularly if there is a management presence and the office is equipped to negotiate business with third parties so that such third parties do not have to deal directly with the overseas company but may transact business at the local office. This is important for both company law and taxation purposes since both the UK registration requirements and the UK taxation implications will depend on whether or not the UK presence constitutes a branch or a place of business/representative office. It will therefore be necessary to consider very carefully whether or not the UK presence is, in fact, likely to constitute a branch rather than a place of business/representative office.

Establishing a branch A non-UK business may need to establish a UK presence through a branch. A branch may be the preferred entity where the investor does not wish to form a separate legal entity in the United Kingdom, but wishes to carry on operating in the United Kingdom, which will take the presence beyond a mere place of business. The essential features of a ‘branch’ that distinguish it from a ‘place of business’ and give rise to an obligation to register as a branch are as follows: •

the appearance of permanency;

•

the presence of managers at the branch premises; and

•

the ostensible capacity of the branch personnel to conduct business with third parties on behalf of the company.

Overview for Inward Investors

21

A UK branch will usually conduct some or all of the trading activities of the non-resident company in the United Kingdom. For commercial reasons, limits may be placed on the extent of those activities, to ensure that the branch is permitted to conduct only some of the non-resident company’s trading activities or so that it performs a local service function and is not allowed to enter into binding obligations in the name of the company. When deciding which type of entity would best suit an investment in the United Kingdom, the ability to mitigate tax is usually an important consideration. The different tax treatments of companies, places of business and branches are discussed in the following section.

The tax treatment on investment The format chosen for establishing a business presence in the United Kingdom will vary according to the taxation implications as well as the commercial considerations and objectives of the principals involved. The basic principles of UK corporation tax and the taxation consequences of each format are briefly set out below. A comparative summary is also made of the relative advantages and disadvantages of a UK subsidiary and a UK branch, since they are the two formats most often chosen. When deciding which entity would be most suitable for an inward investor, it should be noted that the tax implications of establishing a company, branch or a place of business/representative office in the United Kingdom may vary significantly. (a)

Subsidiary

A company incorporated in the United Kingdom will generally be regarded as resident in the United Kingdom for tax purposes, and will consequently be liable to pay UK corporation tax on its profits, unless it is treated as being resident outside the United Kingdom under the provisions of any applicable double tax treaty (eg as a result of the ‘effective management’ of the company being located in a treaty jurisdiction). In the United Kingdom, local and foreign-owned UK resident companies are taxed alike. Inward investors may have access to certain regional grants and incentives that are designed to attract industry to particular areas of the United Kingdom, but no tax concessions are granted. The principal corporation tax rate is currently 30 per cent, with small companies being taxed at a rate of 19 per cent. It was announced in the 2007 budget that the principal corporation tax rate is set to decrease to 28 per cent from tax year 2008/09 and the small companies’ corporation tax rate is set to increase to 20 per cent in tax year 2007/08, to 21 per cent in 2008/09 and to 22 per cent in 2009/10. Capital allowances may be claimed by companies within the charge to UK tax on capital expenditure incurred on certain types of assets (eg machinery and plant) used for a qualifying purpose (eg a trade). Once claimed, capital

22

Investment and Start-up Considerations

allowances can be set against taxable income when calculating the company’s liability to UK tax. The United Kingdom has a simple system of personal income tax, with one of the lowest top marginal rates of any EU country: 40 per cent (the higher rate). The other income marginal tax rates in the United Kingdom are 10 per cent (the starting rate) and 22 per cent (the basic rate). It was further announced in the 2007 budget that the starting rate of income tax is to be removed for earned income and pensions from 2008/09 but will remain for savings income and capital gains. The basic rate of income tax is to be reduced to 20 per cent, from tax year 2008/09. There is also a National Insurance System into which taxpayers make mandatory payments. This funds social security and retirement benefits. (b)

Branch

The profits attributable to the UK activities of a UK branch of an overseas company (a permanent establishment) will be liable to UK corporation tax, subject to the terms of any relevant taxation treaty. (c)

Place of business/representative office

Provided that the activities of a UK representative office are sufficiently limited so as to not constitute a permanent establishment, an overseas company should not suffer UK tax on profits as a result of the involvement of a UK representative office. Whether an office constitutes a permanent establishment is a question of fact. In order for a representative office to avoid a UK tax charge on the profits generated from sales where the UK representative is involved in procuring those sales, the overseas company must ensure that its UK representative does not have, for example, the power to enter into substantive negotiations with potential customers or to conclude sales/services contracts on its behalf. If it does have such power or in fact does undertake such activities, the representative office could be treated as a permanent establishment of the overseas company and be subject to UK taxation on any profits attributable to the UK activities of the representative office. Since the taxation implications are complex it is advisable to seek more detailed tax advice from a solicitor specializing in UK tax on the particular requirements for establishing a UK presence.

Employing people in the United Kingdom Businesses wishing to establish a presence in the United Kingdom have various options in relation to their staff. These, along with connected immigration issues and requirements, are discussed in more detail in Chapters 4.3 and 4.7. The purpose of this section is to introduce the reader to the nature of the UK workforce.

Overview for Inward Investors

23

The relatively strong performance of the UK economy is reflected in its employment data. As of December 2006, the number of people in work in the United Kingdom had reached a record 31.58 million, and the unemployment rate was 5.5 per cent.4 The UK workforce continues to increase due to an influx of workers from the new EU member states in Eastern Europe. Much of the employment legislation currently affecting the United Kingdom workforce market originates from the European Commission in Brussels. EU regulations affect working patterns, wage structures and employee protection rights. For example, the European Working Time Directive creates an entitlement to minimum daily and weekly rest periods, an average workweek limit of 48 hours and restrictions on night work. It also entitles workers who meet the qualifying criteria, including part-time and seasonal workers, to a minimum of four weeks annual paid holiday, including eight national bank holidays. As it has implemented EU directives, the UK government has been proactive in trying to maintain its flexibility and competitiveness. For example, it has negotiated a special provision under the Working Time Directive that allows employees to opt out of the workweek limitations and has favoured changes to the rules on temporary workers. The UK government has adopted the EU regulations governing the admission of non-EU business visitors and economic migrants to the United Kingdom, which limit the ability of some foreign nationals to reside in the United Kingdom. The categories of persons adversely affected, to a lesser or greater extent, by the new immigration rules are selfemployed persons, retired persons of independent means, business investors and short-term business visitors. Entry may be denied to those who intend to perform productive services unless a work permit has been issued in advance to their employer. The determination of who may be admitted as a consultant is decided on a case-by-case basis at ports of entry.

Raising finance The City of London is widely regarded as the leading financial centre in the world. London offers a huge variety of financial services, including commercial banking, investment banking, insurance, venture capital, stock and currency brokering, fund management, commodity dealing, accounting and legal services, electronic clearing and settlement systems and bank payments systems. London is attractive to inward investors because of its solid regulatory, legal and tax environment, a supportive market infrastructure and a dynamic and highly skilled workforce. 4

National Statistics: Labour Market Statistics First Release – April 2007.

24

Investment and Start-up Considerations

UK government policies are intended to facilitate the free flow of capital and to support the flow of resources in the product and services markets. Inward investors are able to obtain credit in the local market on normal market terms, and a wide range of credit instruments is available. The principles involved in legal, regulatory and accounting systems are transparent, and they are consistent with international standards. In all cases, regulations have been published and are applied on a non-discriminatory basis by a single regulatory body, the Financial Services Authority. The London Stock Exchange (the Stock Exchange) is one of the most active equity markets in the world, combining its robust and liquid nature with a high degree of integrity. An increasingly popular forum for inward investment into the United Kingdom, particularly for smaller companies, is the Stock Exchange’s Alternative Investment Market (AIM), which is examined in Chapter 3.1.

Real estate The United Kingdom has one of the most dynamic and transparent property markets in the world, with a wide range of property options and flexible short-lease arrangements. For inward investors in the United Kingdom, one of the first decisions to make regarding real estate is whether to rent premises or to buy premises. There are no restrictions on overseas companies either buying or renting property in the United Kingdom. (a)

Renting or leasing

Companies can either rent premises that are already available or enter into what is known as a ‘pre-let’. This is an agreement with a developer to lease premises before construction is completed, enabling prospective tenants to specify the design, layout and fittings of the building. Commercial leases in the United Kingdom typically run for 15 years with reviews every 5 years, although shorter terms are becoming more common. It may be possible to negotiate ‘break clauses’ at set times throughout the lease (enabling the occupier to serve notice to vacate the premises). The majority of leases on commercial premises in the United Kingdom are let on ‘full repairing and insuring terms’, which places the responsibility and costs for all upkeep, decoration and repairs onto the tenant. In addition, most leases over three years in length will have a provision to increase the rent in line with the market conditions at predetermined points throughout the lease. The standard clause allows for ‘upwards-only’ rent reviews at fiveyearly intervals (this means that should the market rent rise, so does the rent payable but the rent payable does not come down should the market fall). Businesses selecting the leasehold property option must also pay ‘stamp duty land tax’, which is calculated using the ‘net present value’ of all rental payments due over the term of the lease.

Overview for Inward Investors

(b)

25

Buying

Buying property in the United Kingdom is a straightforward process and, importantly, there are no restrictions on overseas companies buying real estate. In addition to the price of the property, purchasers must also pay stamp duty land tax based on the size of the transaction and the location of the property and Land Registry fees will also be payable on a purchase, and in some circumstances on a letting. Companies purchasing or leasing property should appoint an agent to represent them and expect to pay legal fees – which incorporate conveyancing fees, costs for local authority searches and bank transfer fees. An experienced property solicitor is typically necessary to assist in the preparation of all required legal documentation. (c)

Location

London may be the obvious choice for most investors establishing their business in the United Kingdom. London has been voted Europe’s most internationally accessible city, with its proximity to the EU and excellent communications. However, running an office in London can be expensive and some businesses may prefer to locate elsewhere in the United Kingdom. As the legal and tax regulations do not tend to vary between locations in the United Kingdom, the considerations when choosing a location are primarily practical: physical geography, communications and labour and transport to name but a few.

Dispute resolution Disputes in the United Kingdom are generally resolved through litigation in the UK courts or by arbitration or mediation. As a strong centre for legal services, up to 5,000 international disputes a year are determined in London.5 The United Kingdom is a member of the International Centre for Settlement of Investment Disputes and, as such, accepts binding international arbitration between foreign investors and the state. Bilateral investment treaties (BITs) have been used as a means of protecting international investment and ensuring a more predictable and fair treatment of investors. The United Kingdom is party to 94 BITs that are currently in force.6 A key feature of most of these BITs is investor – state dispute settlement providing rights to those investing in the United Kingdom 5 A Country Commercial Guide for US Companies: 2006 – US & Foreign Commercial Service and US Department of State. 6 DTI article: http://www.dti.gov.uk/europeandtrade/key-trade-issues/investment/page22718.html.

26

Investment and Start-up Considerations

to seek redress for damages arising out of alleged breaches of investmentrelated obligations by the UK government. Key elements include provisions for equal and non-discriminatory treatment of investors and their investments, compensation for expropriation, transfer of capital and returns and access to independent settlement of disputes. Investors should be aware that litigation in any jurisdiction can be an expensive and lengthy process, but the maturity of the UK legal system, along with its inbuilt investor protection, goes some way in alleviating these drawbacks.

Conclusion For the wide variety of reasons discussed throughout this chapter, the United Kingdom continues to be attractive to overseas businesses and inward investors. The United Kingdom has a legal system recognized worldwide, which, along with its talented and varied workforce, makes the United Kingdom a sensible choice as an investment location.

2.2 Grants and Incentives within the United Kingdom John Devonald, PNO Consultants Ltd

Introduction Thousands of different grant schemes, worth well in excess of £5 billion each year, are dangled in front of companies in the United Kingdom in an attempt to encourage, amongst others, innovation and economic development. Any enterprise looking to invest in the United Kingdom has the potential to access these financial incentives, which can be quite considerable and are certainly worth exploring further before deciding where to locate an investment. Although the United Kingdom has to compete with other locations in the world, especially Eastern Europe, the United Kingdom also has a lot to offer companies that are willing to invest. When obtaining grants, emphasis is placed on high value-added businesses and novel industries or manufacturing sites that will offer a nationwide service, regardless of where the head office is based. Different types of grants and incentives are there to persuade companies to favour an investment in the United Kingdom.

Available grants and incentives Besides grants, subsidies are also available in the form of tax relief and soft loan facilities. To find out what support is available in specific regions, companies can contact the United Kingdom’s extensive network of Regional Development Agencies (see www.dti.gov.uk). Although on average there are

28

Investment and Start-up Considerations

over 1,500 funding programmes available in the United Kingdom, the most interesting ones for companies can be categorized into the following four different themes: •

capital investments in specific regions that create or safeguard jobs;

•

innovation;

•

energy/environment; and

•

training.

Capital investments While government funding schemes are often purpose and sector specific, depending on the areas that the government is particularly interested in supporting, location is the most important factor for companies looking to invest into the United Kingdom, as locating in certain areas will make them potentially eligible for the most lucrative and the greatest number of grants. In addition to the European Union (EU)’s designated ‘Objective’ areas referred to below, the UK government provides support through the discretionary Selective Finance for Investment (SFI) in England and Regional Selective Assistance (RSA) to the Assisted Areas of Scotland and Wales. Companies locating in Northern Ireland are eligible to apply for grants and incentives that are not available to companies in other parts of the United Kingdom. These areas, defined in the Assisted Areas Map on the Regional Investment website (http://www.dti.gov.uk/files/file38642.png), are designed for companies in the industries that supply national and international markets rather than a local area, and manufacturing sectors that are planning expansions, modernizations or rationalizations, or investing in the United Kingdom for the first time. For overseas companies investing in the United Kingdom where they qualify for SFI or RSA, the amount of funding that they can receive ranges from tens of thousands to millions of pounds. These schemes cover the cost of new buildings, plant or machinery. This scheme is delivered by the Regional Development Agencies, although in cases where the total requested grant exceeds £2 million, the grant is administered by the Department of Trade and Industry (DTI). The scheme is designed for projects that provide employment opportunities and increase regional competitiveness and prosperity, with the amount offered depending on the needs of the project, the number of jobs safeguarded or created and the impact the project will have on the economy. The amount provided and the terms of this assistance are generally negotiated as the minimum amount that would ensure that the project can go ahead. The United Kingdom’s ‘Objective’ areas were considerably reassessed with new area boundaries laid out for the start of 2007, and these will remain in place until 2013. Therefore, potential investors should check carefully for up-to-date information on supported locations.

Grants and Incentives within the United Kingdom

29

Certain local authorities in England, Scotland and Wales also offer financial assistance through grants or special loans and even venture capital, and all local authorities can be important sources of general support, for example, location searches. The EU also provides assistance in the form of low-interest-rate loans from the European Investment Bank (EIB) that can cover up to 50 per cent of the cost of eligible projects.

Innovation Many schemes within the United Kingdom focus on innovation, from ‘blue sky’ research to novel development on a product level. The key eligibility criterion for all schemes is that each innovation has to be new to the industry. Although a lot of companies have made use of the R&D tax credit scheme since its launch in 2000 for small and medium-sized enterprises (SMEs) and in 2002 for larger companies, a significant percentage is underspent and companies can improve their tax benefit by adopting a structural approach when making use of this scheme. The relatively new DTI scheme for Collaborative Research has been very successful. It is envisaged that each year there will be two calls (with multi-million-pound budgets) for proposals. Each new call will focus on different themes. Grants for Collaborative Research projects could be up to 75 per cent and could be worth up to £3 million. Another source of funding for SMEs is the Grant for R&D scheme, which provides funds of up to £200, 000 (£500, 000 for exceptional projects) for new products and process development projects, as well as interest-free loans for environmental initiatives and projects that help reduce operating costs.

Energy/environment Sustainable development is another key target area of the UK government, in which first movers and innovators are incentivized. Both research into new technologies and investment in state-of-the-art technology could be eligible for different types of grants and incentives. There are also EU-funded projects that can provide support towards the initial European demonstration of a novel technology that has significant environmental advantages to society. The total grant awarded is between 30 and 50 per cent of project costs.

Training Training or retraining of employees is of eminent importance to keep the workforce up to speed in rapidly changing environments. In some areas within the United Kingdom, these types of training courses may be eligible for public funding. Focus is on training for personnel below NVQ level 2 or minority groups such as asylum seekers.

30

Investment and Start-up Considerations

The application process Thorough preparation is the key to success in applying for grants. Conducting research and networking with specialists and/or grantor bodies before an application is submitted is a very important part of the application process. Application processing times differ significantly from scheme to scheme, with timescales anywhere from three weeks to up to two years. For investment grants, it is more likely to be in the region of three to four months, so enterprises need to account for this in planning and provide for possible contingencies. One golden rule that is easily overlooked is that application for funding needs to be made in advance of making an investment, as applicants need to demonstrate that the project will not go ahead without this financial assistance. The amount of assistance rarely equates to more than 50 per cent (although 10 to 20 per cent is more common for investment projects) of the eligible project costs, and will be determined largely by negotiation, during which all companies are treated equally, irrespective of their home nation base. There is no guarantee that an application will succeed, regardless of its merits, as UK grants are discretionary, meaning that they are awarded on a case-by-case basis and, more commonly, on a competitive basis. It is therefore of vital importance to ensure that the application is of the highest quality so that it stands out against the competition. It is also prudent to maximize the chances of success by developing a total grants strategy, rather than pinning everything on just one application. Sectors that currently attract the most funding include agriculture, food services, manufacturing, chemicals, waste management, bioscience, aerospace and ICT, while pet projects the government bodies are currently seeking to encourage are those involving energy, transport, the environment, education, research and development activities and training.

Assistance with applications Very few companies possess the specialist knowledge or experience required to handle complicated grant applications successfully. The wiser operations choose to maximize the opportunities while minimizing the hassle, especially in applying for the larger schemes, by calling on external expertise. Support advice and providers can be found through the UK Government Business Link network. There is also a sprinkling of grant consultants, mainly oneor two-man bands, but their reputation has been tarnished in the past by the actions of a handful of cowboys who have charged large upfront fees and ended up delivering little, if anything, in return. In continental Europe, where grants appear to be taken far more seriously than in the United Kingdom, many larger organizations, including Akzo Nobel, InBev, Hewlett-Packard, Nestlé and Nike, look to Europe’s leading grants firm, PNO Consultants, to maximize the available grant opportunities. These clients are serviced by over 200 PNO staff in 15 offices across Europe, including offices recently opened in Eastern Europe. As significant sums of European money are now

Grants and Incentives within the United Kingdom

31

being directed towards Eastern Europe and PNO Consultants have been able to assist some of the major players in the market, manufacturing sites in countries such as Poland and the Czech Republic are being realized. These high-level services are also available in the United Kingdom from PNO (www.pnoconsultants.com), which has already assisted several companies with their external funding strategies, including Procter & Gamble, Heinz and INEOS Chlor, with a success rate of over 80 per cent. PNO Consultants adopt an end-to-end approach to funding, with a range of services that can be broken down into three main areas: •

identify (the identification and building of fundable projects);

•

apply (proposal writing and submission);

•

comply (support in financial project management).

Once an application has been approved, many companies find they are unable to claim the full amount approved, due to errors in the administration of the project, which is where PNO’s 20 years of experience comes into play – maximizing the available grant funding.

Availability of funds from the EU Structural Funds are one of the EU’s key instruments for reducing disparities between regions, by supporting social and economic development and restructuring in regions that are lagging behind or in decline. Any type of organization can apply for funding, depending on the priority being addressed. Applications can be made by eligible bodies such as local authorities, business support agencies, universities, colleges of further education, voluntary sector bodies, non-profit-making organizations and others. The private sector can gain access to a range of support through grants made under the programme to intermediaries in the area. The type of projects funded varies from region to region. Projects supported are required to deliver a direct, measurable and positive impact on the economy of the region to which the application is being made. EU funding is also available to companies investing in an area that benefits from ‘Community Initiatives’, including certain designated rural areas, urban areas, border regions and projects involving transnational cooperation, which are designed to promote equal opportunities in the labour market.

Conclusion Grants can assist enterprises to achieve their aims, and although they can potentially involve a lot of work, with the correct approach and some thorough planning, companies can minimize the inconvenience and maximize the possible returns. There are some very lucrative schemes around, but

32

Investment and Start-up Considerations

they generally require more complex applications, which is where many companies decide to employ the services of grant consultants. With the launch of the new UK and EU seven-year plan in 2007 it has never been more important to review all forms of funding available, but at the heart of the matter must be a great company and project, coupled with independent and professional external advice and support to deliver the opportunities.

2.3 UK Competition Law and Policy Andrew Bailey, Watson, Farley, & Williams LLP

Introduction As in many countries throughout the world, over the last two decades the United Kingdom has shifted from state ownership and a managed economy towards free markets. In response, in competition policy has grown in importance. Under the new systems companies doing business in the United Kingdom are allowed to act, more or less, in whatever way they deem commercially advantageous. This is subject, however, to the strict qualification that they do not artificially interfere with free and fair competition in the market. Competition law is the rules and regulations that set the parameters regarding how companies (undertakings) interact with one another and with the market, aiming to ensure that companies do not restrict free and fair competition. Nowadays it is essential for all companies operating in the United Kingdom, or any part of the United Kingdom, to comply within competition law. This includes inward investors with headquarters located elsewhere. In the United Kingdom, the competition law sets out two basic prohibitions: arrangements between companies that are anti-competitive (the Chapter I prohibition) and abuse by a company in a dominant market position (the Chapter II prohibition). This chapter discusses both prohibitions in detail, outlining the structure and powers of the regulators in administering the competition rules (including market investigations) and the penalties associated with contravention. Before proceeding, it should be noted that competition law in the United Kingdom is interpreted in a manner entirely consistent with European Community (EC) law. Any decision by a UK regulator or court concerning the

34

Investment and Start-up Considerations

implementation of UK competition law must not contradict established EC competition law principles.

Chapter I prohibition Competition rules aim to prevent and penalize agreements or understandings between two or more businesses that seek to regulate the market, but do not necessarily give the best deal to the customer. Prohibited agreements or understandings most often exist between competitors in a market specifically in relation to the following (this list is non-exhaustive): •

prices, discounts or other trading conditions;

•

profits, profit margins or costs;

•

market shares, markets or sales territories;

•

distribution practices;

•

bids or intentions to bid;

•

supply capacity;

•

entering or leaving any product or geographical markets; or

•

selection, classification, supply to or termination of customers or classes of customers.

Restrictive vertical agreements (ie agreements between two or more parties operating at different levels of the production and distribution chain containing conditions that relate to the purchase or sale of goods or services) are also prohibited, but only where a 30 per cent market share threshold is exceeded or the agreement contains hardcore restrictions (such as restricting a buyer’s ability to determine its resale price or restricting the territory into which, or the customers to whom, the buyer may sell).

Exemptions from the Chapter I prohibition Despite the seriousness of contravening the Chapter I prohibition, some potentially anti-competitive activity may be deemed exempt. The Office of Fair Trading (OFT) has the power to adopt Block Exemptions and agreements falling within a Block Exemption will not be subject to the Chapter I prohibition. It should be noted that to date only one Block Exemption has been adopted in the United Kingdom, addressing a relatively narrow area of commercial activity (public transport ticketing schemes). However, any Block Exemption adopted by the European Commission is automatically

UK Competition Law and Policy

35

adopted by the United Kingdom (a parallel exemption). A number of parallel exemptions currently exist covering specific types of agreements such as agreements in the motor vehicle sector, technology transfer agreements, vertical agreements and research and development agreements. The OFT may also consider some potentially anti-competitive agreements to be so insignificant to the market that they have no appreciable effect on competition (de minimis). These agreements are also exempt from prohibition. The test to assess appreciability is whether the parties’ combined share of the relevant market falls below certain thresholds. The relevant market share thresholds are as follows: • an aggregate market share of the parties to the agreement of 10 per cent of any of the relevant markets affected by the agreement where the agreement is made between competitors in a market; or • an aggregate market share of the parties to the agreement of 15 per cent of any of the relevant markets affected by the agreement where the agreement is made between non-competitors. This de minimis exemption will not apply to agreements between competitors that fix prices, limit output or sales, or allocate markets or customers. In the case of non-competitors, a potentially exempt agreement will not be considered de minimis if it restricts the following: •

the buyer’s ability to determine its resale price;

•

the territory into which, or the customers to whom, the buyer may sell;

•

active or passive selling by authorized distributors to end-users or other authorized distributors in a selective distribution network; or by agreement between a supplier of components and a buyer who incorporates those components in its products, the supplier’s ability to sell the components as spare parts to end-users or independent repairers not entrusted by the buyer with the repair or servicing of its products.

Excluded sectors A number of areas or categories of agreements are specifically excluded from the application of the Chapter I prohibition. In particular, agreements that are already subject to a separate regulatory regime, such as the Financial Services and Markets Act 2000, the Broadcasting Act 1990 and the Communications Act 2003, are excluded from the scope of the prohibition. Mergers are also subject to separate competition scrutiny (as discussed in Chapter 3.3). Agreements relating to interests in land may also benefit from an exclusion from the application of the Chapter I prohibition. The inclusion of restrictive covenants in land agreements, for example, is generally acceptable.

36

Investment and Start-up Considerations

Chapter II prohibition Competition rules also seek to prevent and penalize actions by an individual business that dominates its market sector and takes advantage of that dominance to impose unfair trading conditions on its customers or competitors. Such unfair trading conditions can usually be split into two separate categories of conduct: that which is exclusionary and that which is exploitative. Inward investors need only be concerned by the Chapter II prohibition to the extent that their investment creates or strengthens a company with a position of dominance in a particular UK market sector. Even then, being dominant is not an offence in itself. Rather, it is the abuse of that dominant position that will lead to contravention of the competition rules. Abuse can take many forms; the following is a list of exploitative and exclusionary conduct that would be viewed as abusing a company’s position of dominance in a market: •

Pricing products or services excessively high in relation to the costs of producing the products or providing those services.

•

Pricing products or services excessively low in relation to the costs of producing the products or providing those services.

•

Imposing exclusivity obligations on customers without strong commercial justification.

•

Engaging in behaviour deliberately intended to have the effect of preventing a potential competitor from entering the market, or eliminating a current competitor from the market.

• Applying different conditions to equivalent transactions with similar trading partners. •

Offering rebates to customers that do not generate real efficiencies or are aimed solely at securing customer loyalty.

•

Refusing to supply products or services to new or existing customers without objective commercial justification.

•

Making the concluding of contracts dependent on customers agreeing arrangements for the provision of unconnected goods or services.

Whether a company is in a position of dominance will depend on a number of factors. The European Court of Justice has defined dominance as a position of economic strength that enables a firm to hinder effective competition on a market by allowing it to behave to an appreciable extent independently of its competitors and customers, and, ultimately, of consumers.

UK Competition Law and Policy

37

Excluded sectors Specific types of arrangements or conduct are excluded from the Chapter II prohibition. These include mergers and circumstances where other competition regimes for considering the relevant matters are already in place (eg for utilities).

OFT powers of investigation and penalties When it comes to investigating and enforcing competition law, the OFT has particularly broad powers and may conduct an investigation if there is a reasonable suspicion that either of the prohibitions discussed above is being infringed. The OFT may require any person to produce a specified document that relates to any matter relevant to an investigation. The OFT may also authorize, without a warrant, the entry into any premises connected with an investigation. To illustrate the extent of the OFT’s powers of investigation, an investigating officer entering a premises may take equipment, require the production of relevant documents and take copies and extracts of documents. In some circumstances a judge may even issue a warrant for the use of force in entering the premises. The OFT also has additional powers of surveillance when investigating the cartel offence (see below) so that it can police the offence more effectively.

Penalties – civil Along with ordering remedies to combat anti-competitive behaviour, the OFT has the power to impose a fine of up to 10 per cent of worldwide turnover on any undertaking that contravenes the Chapter I and/or Chapter II prohibition. The fines imposed by the OFT since the current legislation became operative in 2001 include the following: •

approximately £15 million for parties, including Umbro, JJB Sports, etc, involved in price fixing in the replica football shirts market;

•

approximately £20 million for Littlewoods, Hasbro and Argos for price fixing in the board game market; and

•

approximately £1.4 million for various companies involved in a nationwide bid-rigging cartel in the flat roof construction market.

The OFT has developed a leniency programme whereby members of cartels may have their financial penalty reduced substantially or avoid a penalty altogether if they come forward with information. For the purposes of the leniency programme, the term ‘cartel’ or ‘cartel activities’ applies to agreements between undertakings, decisions by associations of undertakings or

38

Investment and Start-up Considerations

concerted practices that infringe the competition rules and involve price fixing, bid rigging, setting of output restrictions or quotas and/or market sharing or dividing.

Penalties – criminal In order to provide an additional deterrent to engaging in cartel activity, since July 2004 it has been a criminal offence for an individual to engage dishonestly in cartel-like behaviour. An individual is liable to criminal prosecution for the cartel offence if she or he dishonestly agrees with one or more other persons that competing undertakings will engage in one or more of the prohibited cartel activities. These are as follows: •

price fixing;

•

limitation of supply or production;

•

market sharing; and

•

bid rigging.

Importantly, dishonesty is required. However, the offence is committed irrespective of whether an agreement is actually implemented by the undertakings and irrespective of whether the individuals have the authority to act on behalf of the undertaking at the time of the agreement. Individuals that are prosecuted and found guilty of the offence are liable to a maximum of five years’ imprisonment and/or an unlimited fine. Failure to comply with requests for information, documents, etc, may also constitute a criminal offence in certain circumstances. No one has yet been successfully prosecuted. The OFT has the power to issue written notices and no-action letters confirming that a particular individual will not be prosecuted for the offence if certain conditions are met. Much like the civil leniency program, these conditions include giving details of the cartel activity to the OFT and cooperating throughout the investigation.

Other penalty provisions The OFT is empowered to seek a court order to disqualify company directors, for a maximum of 15 years, where serious breaches of competition law have been found. The OFT has extended its leniency policy so as to not disqualify those directors who have come forward to assist the OFT in detecting seriously damaging anti-competitive activity and who benefit from a no-action letter. Further, third parties that have suffered loss or damage as a result of certain types of competition law infringement may bring claims for damages directly before the Competition Appeal Tribunal (CAT) where a competent

UK Competition Law and Policy

39

regulator has already established a breach of competition law. This is in addition to the existing right to bring damages claims in the courts.

Market investigations and appeals The UK Competition Commission (CC) will conduct investigations into markets where it appears that the structure of the market or the conduct of suppliers or customers is harming competitors. Some recent investigations by the CC include inquiries into the UK supermarket sector, airports and the market for classified directory advertising services. Markets under investigation are referred to the CC by the OFT. The OFT may refer a market to the CC where it has reasonable grounds to suspect that one or more features of a market prevents, restricts or distorts competition in relation to the supply or acquisition of goods or services in the United Kingdom (or part of the United Kingdom). Alternatively, the OFT may accept undertakings to remedy any adverse effects on competition (or harmful effects on customers that result) that would otherwise form the subject of a reference. Once a reference has been made, the CC carries out a detailed investigation to determine whether any feature of the market prevents, restricts or distorts competition in relation to the supply of goods or services in the United Kingdom (or part of the United Kingdom). If it identifies an adverse effect on competition, it will then attempt to remedy the adverse effect, usually by making an order or seeking undertakings from market participants. Persons affected by a decision made as a result of a market investigation may apply to the CAT for a review of the decision.

Merger control In certain circumstances the OFT will review concentrations of undertakings (mergers, acquisitions, joint ventures) to consider whether the concentration may be expected to result in a ‘substantial lessening of competition’ in the relevant market. The United Kingdom’s merger control regime is discussed in detail in Chapter 3.3.

Institutional arrangements Inward investors needing to know more about the United Kingdom’s competition law regime can always contact the regulatory bodies themselves. The following section describes the various regulatory bodies that oversee and enforce competition rules in the United Kingdom. The Secretary of State for Business, Enterprise + Regulatory Reform represents the ‘political pillar’ of UK competition policy and has overall

40

Investment and Start-up Considerations

responsibility for the enforcement of the Chapter I and II prohibitions. He or she signs any secondary legislation and has various powers of appointment. Successive reforms, however, have reduced the role considerably. Direct intervention in operational issues by the Secretary of State is now restricted to so-called public interest issues only (discussed above). The OFT exists on a statutory basis as a corporate body and is the principal enforcement and policy body in relation to competition law in the United Kingdom. The general functions of the OFT include the following: •

Obtaining, compiling and reviewing information about matters relating to the carrying on of its functions (eg market investigations, merger references and investigations under the competition legislation).

•

Making the public aware of the ways in which competition may benefit consumers and the economy and giving information or advice in respect of its functions in this regard. This includes publishing educational materials and carrying out educational activities.

•

Providing information and advice to ministers on matters relating to any of its functions.

Sector regulators (concurrently with the OFT) enforce competition legislation applying to regulated utilities. These regulators include the following: •

OFWAT (water);

•

OFCOM (communications);

•

OFGEM (gas and electricity);

•

OFREG NI (gas and electricity in Northern Ireland);

•

ORR (railways); and

•

CAA (air transport).

The CC is an independent public body established under legislation. It replaced the former Monopolies and Mergers Commission. The CC conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries. Every inquiry is undertaken in response to a reference made to it by another authority, usually by the OFT but in certain circumstances the Secretary of State, or by the regulators under sector-specific legislative provisions relating to regulated industries. The CC has no power to conduct inquiries on its own initiative. The CAT has the power, amongst other things, to confirm, set aside or vary a decision of the Secretary of State, the OFT, the CC or regulators in specific sectors, or remit matters to the relevant authority. Specifically, its functions include the following: •

hearing claims for damages where an infringement of competition law has been established;

UK Competition Law and Policy

41

•

hearing representative claims for damages, brought by specified bodies on behalf of groups of named individual consumers, in respect of established breaches of those competition laws; and

•

reviewing decisions on mergers or market investigation references taken by the OFT, the CC or sector regulators.

Additional information relating to UK competition law and policy is available from the following websites: •

http://www.oft.gov.uk

•

http://www.competition-commission.org.uk

•

http://www.catribunal.org.uk/default.asp

2.4 Company Formation – Methods and Legal Implications Ian Saunders, Artaius Company Services Limited

Registration There is no formal requirement in the United Kingdom to register with a local commercial registry or the tax authorities before commencing business. A person wishing to start a business in the United Kingdom has a choice between the registration of an incorporated vehicle (a company) or an unincorporated vehicle (a sole trader or partnership).

Unincorporated vehicles Sole trader A person who carries on business as a sole trader is personally liable for all the debts and obligations incurred by the business; accordingly all of the business and personal assets can be called upon to meet payment of any liabilities incurred by the business. Partnership A partnership is usually governed by a written agreement, which binds the partners and is subject to the provisions of the Partnership Act 1890. With some exceptions, partnerships are limited to 20 partners. The partnership has no separate legal entity and a trader who carries on business through this vehicle is jointly and severally liable with the other

Company Formation – Methods and Legal Implications

43

partners for all debts and obligations incurred by the partnership while he or she is a partner. Furthermore, he or she is jointly and severally liable with the other partners for loss or damage to third parties by the wrongful acts or omissions of any partner in the ordinary course of the partnership business. Limited partnerships These are governed by the Limited Partnerships Act 1907. As long as there is one or more partner liable for all the debts and obligations of the partnership, the act allows a partner to limit his or her liability to the amount contributed by him or her by way of property or capital on joining the partnership. Such a partner is not entitled to take part in the management of the partnership.

Incorporated vehicles Corporations have a distinct legal personality separate from that of their members. The private company limited by shares (limited company) and public company limited by shares (public limited company, PLC) are the most important and common business corporations in the United Kingdom. There is no statutory minimum capital requirement for a limited company but the minimum capital requirement for a PLC is £50,000. If contributed in cash, only one quarter of the value of each issued share is required to be paid up in the PLC (effectively £12,500) for it to obtain a certificate to commence trading. A private company is prohibited by law from offering any of its shares to members of the public; so no offer of shares of any kind can be made. It is the vehicle used mostly for owner/managed companies and new business start-ups. A PLC can, under strict procedures, issue a prospectus and offer its shares to members of the public. There are other types of corporation that may be incorporated in accordance with the Companies Act 1985, which are as follows: Private company limited by guarantee and not having a share capital This vehicle is used chiefly by trade associations, clubs, charitable companies and management companies for apartment blocks. There is no share capital. Instead, each member ‘guarantees’ that in the event of the company being wound up they will pay a specified sum towards the funds. The articles of association govern the terms of membership of the companies. Unlimited companies, with or without a share capital The members’ liability is unlimited with this type of company. The chief advantage of this organization is that its accounts are not required to be submitted to Companies House and are thus not available for public inspection.

44

Investment and Start-up Considerations

Limited liability partnership (LLP) Introduced on 6 April 2001, a LLP comprises a corporate entity distinct from companies incorporated under the Companies Act, but sharing many characteristics. An LLP is a legal person quite separate from its members, with the capacity to contract in its own name. Members of an LLP enjoy limited liability; they do not have to be employees of the LLP. LLP incorporation A minimum of two people is required when the LLP is incorporated; they subscribe their names to an incorporation document. The LLP must carry on a lawful business with a view to profit. An LLP must prepare and publish accounts similar to those regarding a company and file an annual return accordingly. An LLP may change its name and registered office. Members may change. Unless members agree otherwise, they share profits and losses equally and may all participate in managing the LLP. Members may enter into an agreement that, among other things, deals with profit shares, involvement in management and remuneration. As with incorporating a company and settling its memorandum and articles of association, those intending to incorporate an LLP and drafting a Members Agreement should seek expert advice at an early stage. Members of an LLP are taxed as if the business was carried on by a partnership, rather than by a company. Community interest company (CIC) CICs are limited companies, with special additional features, created for the use of people who want to conduct a business or other activity for community benefit, and not purely for private advantage. This is achieved by a ‘community interest test’ and ‘asset lock’, which ensure that the CIC is established for community purposes and the assets and profits are dedicated to these purposes. Registration of a company as a CIC has to be approved by the regulator who also has a continuing monitoring and enforcement role.

The process of forming a company Private company limited by shares The great majority of companies formed in the United Kingdom are private companies limited by shares and the process of the formation of these companies will be examined first. 1.

Company name The proposed company name should be checked to ensure that it is not identical to an existing registered name or does not contain a word restricted or prohibited. The UK authority dealing with the registration

Company Formation – Methods and Legal Implications

45

of companies (Companies House) maintains a list of already registered names and restricted words. This is available at their website www.companieshouse.gov.uk/info Care should also be taken to avoid clashes with companies of similar names. Although this will not prevent the registration of the name, a new incorporator may find a subsequent objection to the new name has been made and in such cases Companies House has the power to direct a new company to change its name. New companies should also be advised to ensure their proposed name does not conflict with any registered trade or service marks. Further information can be obtained from the UK patent office at www.patent.gov.uk/tm. The company name chosen must end with the word ‘Limited’ or ‘Ltd’ and these words must not appear anywhere other than as the last word in the name. 2.

Shareholders A private company limited by shares can have one or more shareholders. The first shareholder(s) of the new company will be those persons who subscribe for shares in the memorandum of association of the company, which is a document required to be submitted for the incorporation and which is detailed below. Subsequent to the incorporation the directors of the company may allot further shares that are available in the ‘authorized capital’ of the company as stated in the memorandum of association. The liability of any shareholder is limited to any amounts unpaid on the shares agreed to be taken.

3.

Directors The directors of a company will be those persons who consent to act as such on Form 10 submitted with the incorporation papers. The directors are required to provide their full name and residential address, date of birth, nationality, business occupation and to list any other directorships held in the United Kingdom. There is no restriction on non-UK residents acting as directors, but there may be restrictions on what work some nationals who are not based in the European Economic Area can do in the United Kingdom. For further information please see the UK Home Office website at www.ind.homeoffice.gov.uk. A private limited company requires a minimum of one director. A UK or foreign registered corporation may be a director, but the Companies Act 2006 requires that at least one director must be an actual person. This section of the new act is likely to be implemented with effect from 1 October 2008. The directors will be responsible for managing the business and affairs of the company. As such, they are required to act at all times in the best interests of the company and are regarded as the equivalent of trustees of the company’s monies.

46

Investment and Start-up Considerations

4.

Secretary Currently, the company must have a secretary, who will be responsible with the directors for ensuring that the company meets its obligations with filing accounts and returns, etc, in good time. If there is only one director, this person may not also be the secretary. If there are two or more directors, one of these persons can also act as secretary. The new companies act removes the compulsion for a private company to have a secretary and this part of the act is likely to be implemented with effect from 6 April 2008.

5.

Registered office A company incorporated in England and Wales must have a registered office in either England or Wales and a company incorporated in Scotland must have a registered office in Scotland. A company is required by UK law to keep at its registered office registers of directors, shareholders, legal charges, debentures and minutes of directors’ and shareholders’ meetings. Certain of the registers must be made available for inspection by any member of the public presenting himself or herself to the registered office. The registered office should therefore be a place where such inspection can take place and where any legal notice can be served on the company.

Documents required by Companies House to form the company 1.

Memorandum of association This sets out the name of the company, whether the registered office is to be situated in England, Wales or Scotland, and its business activities (its Objects). The Objects of the company may be stated as ‘to carry on business as a general commercial company’, in which case the company may undertake any activity allowed under UK law. The memorandum also states that the liability of the members is limited – the authorized share capital of the company – and contains a page for the subscribers (or first shareholder or holders) to sign. The Companies Act 2006 removes the Objects requirements from the memorandum and makes this a very simple statement. This change is scheduled for implementation on 1 October 2008.

2. Articles of association These set out the rules for the running of the company’s internal affairs, ie the rules for meetings of directors and shareholders and the relationship between the owners (shareholders) and managers (directors), transferring of shares, etc. There is a default set of articles, which will be implied if no articles are submitted, but these are not always appropriate for a newly formed small company. It is therefore recommended that articles be submitted.

Company Formation – Methods and Legal Implications

47

Company registration agents will be prepared to supply both the memorandum and articles of association for a proposed company for a small fee. 3.

Form 10 This sets out the details of the directors and secretary of the company and its registered office address. It must be signed by these officers and by the subscribers to the memorandum and articles of association or an agent for the subscriber.

4.

Statutory declaration (Form 12) This must be signed by a director or the secretary in the presence of a commissioner for oaths, notary public or solicitor having the powers of a commissioner for oaths and is a statement that all the requirements of the Companies Act 1985 have been met.

5.

Cheque for Companies House fees Companies House require a cheque in the sum of £20 to complete the incorporation. If the documents submitted are in order, Companies House usually issues a Certificate of Incorporation within four to five working days.

UK company registration agents can assist with the whole process of forming a company and can arrange for the relevant declaration to be carried out very simply. In addition, it is possible for agents with the necessary software to file private limited company incorporations electronically at Companies House. This speeds up the process still further and companies can now be formed usually within 24 hours. An electronic formation will not require a statutory declaration on form 12 to be made and Companies House fee is reduced to £15.

Public company limited by shares The process for forming a public company is very similar to that of forming a private company; the differences are as follows: 1.

Company name The name must end with the words ‘public limited company’ or ‘PLC’

2.

Shareholders A PLC must have a minimum of two shareholders and must have an issued capital of £50,000 minimum.

3.

Directors There must be a minimum of two directors.

48

Investment and Start-up Considerations

4.

Secretary Must be qualified, ie a barrister, solicitor or advocate admitted in the United Kingdom, or be a qualified chartered accountant, certified accountant, certified management accountant or chartered secretary.

The documents required to be submitted to Companies House for the formation of the company are the same as for a private company, but the memorandum and articles of association must be suitable for the management of a public company. In addition, following incorporation, a public company must undertake a further declaration that it has met the minimum capital requirements and that it has paid up its capital as necessary (one quarter of the nominal value of each share). It will then be issued with a further certificate, allowing it to borrow money and trade.

Statutory requirements 1. Accounts Companies are required to submit accounts prepared in accordance with the Companies Act 1985. Companies House and the UK tax authorities must receive these not later than 10 months following the company’s year-end date (seven months for PLCs). The new companies act will reduce the time allowed for filing to nine months and six months, respectively. A company’s year-end will be set automatically by Companies House as the anniversary of the end of the month of incorporation, ie a company incorporated at any time during, for example, July 2007 will have a year-end of 31 July 2008. A company’s year-end can be changed by the submission of a form to Companies House and can be extended to a period of up to 18 months. However, directors of new companies should note that if this extension is made, the first set of accounts will still be due 22 months from the original incorporation date (19 months for PLCs), ie 10 months from the original year-end date (7 months for PLCs). 2. Annual return Companies are required to submit an annual return to Companies House within 28 days of the anniversary of the date of incorporation. This return sets out the current business activities, details of directors and secretary and shareholders of the company. A fee of £30 is payable to Companies House for this return. The fee can be reduced to £15 if the annual return is submitted electronically via Companies House Web-filing service or via an agent with the necessary software.

Company Formation – Methods and Legal Implications

3.

49

Other documents The Companies Act 1985 specifies that returns shall be made to Companies House in the event that the company undertakes certain actions. For example, the increase of capital, the issuing of shares, changes being made to the memorandum or articles of association, the granting of a charge over the company’s assets, changes to the details of any director or secretary or the resignation or new appointment of these officers. There are various time limits imposed for the submission of these returns and the officers of a company are advised to familiarize themselves with these requirements.

The management of a company’s statutory affairs (such as the submission of annual returns and changes to shareholders and directors) is often carried out by specialist company formation agents, company secretarial service providers, solicitors or accountants.

New companies act The Companies Act 2006 received Royal Assent on 8 November 2006 with the aim of cutting costs and red tape for businesses and in particular smaller companies. The act is being brought into effect in stages so as to avoid overwhelming Companies House systems and confusing companies and their agents. Removing the requirement for companies to keep registers of their directors’ interests in shares has already been implemented. Further sections of the act that allow private companies to be exempted from the requirement to have a company secretary and to hold annual general meetings will be implemented later. The act also includes for the first time a statutory statement of directors’ general duties. The idea is to make the law in this area more accessible and to allow easier changes to it where it no longer corresponds to modern business.

2.5 Commercial Banking Services Nick Stephens, HSBC

The information provided in this chapter and in Chapter 4.7 is drawn from the published material of HSBC but the services described are available from the other major banks offering commercial banking services in the United Kingdom. The commercial banking services available to international companies and UK banking practices are among the most reliable and sophisticated in the world.

Introduction In common with most businesses, a company setting up in the United Kingdom for the first time wants to make payments to suppliers and receive payments from customers and perhaps the parent company quickly and efficiently in sterling. It may also require a method of making and receiving routine planned payments in a cost-effective manner acknowledging that they can often be ‘bulked’ and arranged in advance. To stay in control of cashflow, the business needs to keep track of payments made, to have rapid advice on receipts and to have transaction data available in an easily accessible form in the United Kingdom, the parent headquarters and often at the offices of a third party that is undertaking back office, accounting and similar functions on its behalf. UK banks offer accounts in a wide range of currencies. However, the services described below may not be available in currencies other than sterling. The starting point of the banking relationship for the customer is the opening of a business current account and the issue of a cheque book. Cheques remain the simplest form of payment for low-volume transactions. However, cheque volumes peaked in 1990 and usage has fallen since then due to the wide range of alternative payment methods from card payments and direct debits to telephone and electronic banking services described in this chapter.

Commercial Banking Services

51

Many suppliers in the United Kingdom such as landlords and utility companies will demand a direct debit in their favour and view this as part of their credit assessment of a new (to UK) business with no (UK) credit history. A direct debit is an instruction from a customer to their bank authorizing an organization to collect varying amounts from their account. The customer must give the bank advanced notice of the collection. Direct debits save time, reduce costs and put cleared funds directly into the account of the collecting organization. A business current account may be interest bearing but the interest rate will be low and for this reason it can be linked with a business savings account, enabling surplus funds to earn a better rate. Larger sums can also be placed in the money market at current rates and varying notice periods or fixed terms.

Internet banking Internet banking allows 24-hour access to bank accounts and offers the following benefits: •

real-time balances on business accounts;

•

transaction details on individual accounts;

•

immediate transfers between customers’ own accounts;

•

payments of up to £100,000 per day using Bill Payments or BACS;

•

payments by priority payment;

•

forward date payments up to 45 days in advance;

•

viewing and cancellation of standing orders or direct debits;

•

delegated access to the service to other company users;

•

access to the accounts of your other businesses from a single logon, if required;

•

download of transaction details to Quicken© , Microsoft Money© or spreadsheet packages; and

•

security routines including unique ‘one-time’ passwords, automatic logoff after periods of inactivity and protected communication across the Internet using data encryption and digital certification.

Most full-service banks offer a priority payment facility providing a simple, cost-effective way of making payments from a PC. These enable customers to initiate same-day sterling and euro payments in the United Kingdom and urgent payments to beneficiaries outside the United Kingdom. Templates with details of regular beneficiaries may be held and payments submitted for transmission around the world at any time of the day or night.

52

Investment and Start-up Considerations

Making payments For companies wishing to make payments, the services that will be the most appropriate will vary depending on whether payments are made in the United Kingdom or overseas and upon the volumes and speed of payments required.

Making payments in the United Kingdom Services for customers in this category include cheques, various forms of debit or credit card and, increasingly, electronic payments through online or telephone banking. For a large number of payments each month with various payment times, the Automated Clearing House (ACH) (known in the United Kingdom as BACS) direct debits and credits are the norm. Software in the form of either easy-to-use dedicated Windows-based software packages that allow customers to make or collect payments direct from PCs within their organizations, or an option in PC and Internet banking packages are provided by banks. The software has inbuilt security, allowing full control of the payment process through creation/generation, authorization and transmission. Each action can be allocated to a specific ‘user’ with relevant authority. This solution caters for fully euro-denominated credit payments within the United Kingdom and payments in a wide range of currencies to a growing number of countries through reciprocal banking arrangements. With the onset of ever-increasingly sophistcated Internet and PC banking services, most banks have now withdrawn fax payment services for bulk payments. Payroll services usually provided by third-party bureaus that interface with the company’s bank provide a full calculation facility, the printing of pay slips, management reports and payments direct into employees’ accounts by wire transfer/BACS.

Card payments The differing key features of three types of card, available for both UK and overseas purchases as offered by HSBC, may be summarized as follows: •

Business Card – a credit card for everyday business expenses and purchases • Up to 56 days’ interest-free credit • Accepted worldwide wherever the Visa symbol is displayed • Separation of business from personal expenses with itemized monthly statements • Individual credit limits (minimum £500)

Commercial Banking Services

53

•

Personal identification numbers (PINs) can be given to cardholders enabling them to withdraw up to £300 per day from over 500,000 cash machines around the world (for a small charge) • Allows telephone and Internet purchases • No transaction fees on purchases •

Corporate Card – a credit card for companies with a large travel & entertainment (T & E) budget • • • • •

•

Up to 56 days’ interest-free credit Can be used worldwide wherever the Visa symbol is displayed Company chooses number of cards and maximum spending limit on each card Itemized monthly statement for each card with a choice of statement date extensive management information available

Debit Card – available to sole traders, partnerships and limited companies with sole signatures in place • • • • •

Chip and PIN-enabled card combines new technology in a chip card with the security of a four-digit PIN Saves the time and bother of writing out cheques Use the card to purchase goods and services wherever the Maestro symbol is displayed Enables cash withdrawal, balance enquiries and interaccount transfers through a network of self-service machines Card linked to an HSBC Business Current Account

Making payments overseas Companies making payments overseas and needing same-day or next-day payment are recommended to use their bank’s priority payments facility, which provides a fast and secure method of payment that can be sent to most countries in any tradeable currency. Payments to Eurozone countries will be received within one day. Payments outside the Eurozone will normally be received within four working days. This service can be accessed by the Internet or PC banking or by physically giving instructions to a branch either in person or exceptionally by fax where prior arrangements exist. Most banks require these instructions to be provided on a pre-printed and security-marked bank form. Some banks including HSBC now accept payment instructions by telephone if prior arrangements are made. Payments to all European Union (EU) and European Economic Area (EEA) countries will require Bank Identifier Code (BIC) and International Bank Account Number (IBAN) numbers for the beneficiary. Elsewhere SWIFT and branch and account number will be required.

54

Investment and Start-up Considerations

Payment instructions include: •

by credit to a specified bank account;

•

by payment to the beneficiary at a stated address; or

•

collected by the beneficiary upon production of appropriate identification.

If payment times of between three and six days are acceptable, HSBC offers to its customers its ‘Worldpay’ solution for the cost-effective transmission of low-value payments abroad from the customer’s local HSBC bank branch. Worldpay involves one simple document only and instructions received before 2.30 pm will be acted upon the same day. There is a fixed fee with no deduction of fees by the payee’s bank. The system is available for payments of £2,000 or less and may, for example, be used to pay salaries, fees and expenses to employees abroad and pay subscriptions to trade organizations and publications. The countries to which payments by this means may be made are Australia, Austria, Belgium, Canada, Cyprus, Denmark, Finland, France, Germany, Hong Kong SAR, Ireland, Italy (2,500 euros maximum), the Netherlands, New Zealand, Portugal, South Africa, Spain„ Switzerland and the United States. Other high street banks offer a similar service through their local branches. For non-urgent payments overseas or non-urgent payments in euros within the United Kingdom, international drafts are an appropriate alternative, offering the customer the following advantages: •

low cost;

•

ability to attach relevant documentation and correspondence;

•

no time limit within which a draft supplied by the bank has to be sent; and

•

drafts available in sterling and most currencies.

Cards provide an alternative payment method

Receiving payments within the United Kingdom In addition to payment by cheque, direct debit or cash, companies wishing to receive payment from the United Kingdom may consider two further alternatives: 1.

Banker’s draft – This provides a near certainty of payment upon presentation and is therefore attractive for the receipt of large sums, particularly where immediate delivery of goods or the transfer of title to property is concurrent.

2.

Electronic card processing – An efficient and swift system for dealing with sales transactions, which accepts all major credit cards via terminals provided by the bank and software providing monthly statements

Commercial Banking Services

55

showing the previous month’s card transactions. Companies preferring to outsource their invoice payments and collections may consider using their bank’s credit management service.

Receiving payments from abroad Inward payment Companies that request a wire transfer from the sender against full banking details may take advantage of their bank’s inward payment service. Banks in all EU and EEA countries will require BIC and IBAN numbers for the beneficiary. Elsewhere SWIFT and sorting code and account number will be required. The bank applies the appropriate exchange rate in force at the time of the transaction on receipt of a payment in currency that is to be credited to the customer’s sterling account and effects the credit. An advice with all details of the receipt, including exchange rate and commission, is mailed to the customer on the next working day. Cheque negotiations Most banks offer a cheque negotiation scheme to clear cheques received that are payable outside the United Kingdom, foreign currency cheques payable in the United Kingdom or sterling cheques drawn abroad. The proceeds of cheques credited to a customer’s sterling account are immediately made available subject to recourse, while costs are much lower than those incurred with cheque collection. A forward value date is applied when crediting a foreign currency account with funds of the same currency. The cheque negotiation scheme is also the only way in which the proceeds of travellers’ cheques payable outside the United Kingdom can be paid. Cheque collections Businesses receiving cheques payable outside the United Kingdom, foreign currency cheques payable in the United Kingdom or sterling cheques drawn abroad and wishing to be sure that the cheque is paid when funds are received, can take advantage of their bank’s cheque collection scheme. Proceeds of cheque collections are made available to the customer only when the funds have been received by the bank, unlike a cheque negotiation where the proceeds are made available before the cheque has been cleared. As a part of the service: • The bank will provide the exact date on which proceeds or advice of nonpayment will be received for certain cheques. • The collection process can be accelerated by requesting the bank to send cheques to the drawee bank by courier for an extra fee.

56

Investment and Start-up Considerations

• The bank’s international cheque-processing department monitors progress of each transaction and will chase for the proceeds or an advice of non-payment. •

Since receipt of proceeds usually means that a cheque has been paid, customers can use the cheque collections mechanism to withhold the release of goods or the provision of services where advance payment is an agreed term of business.

Foreign cheques can be paid in at any UK branch of most commercial banks. US dollar and European lockboxes If a company’s goods or services are bought by customers in the United States, prompt and efficient processing of cheques receivable is paramount. For example,HSBC provides a US Dollar Lockbox service whereby funds are credited up to 10 days faster to customers’ accounts by processing all cheques through the US clearing system rather than with traditional cheque negotiations. There is no need to open accounts with different banks in the United Kingdom and the United States, charges are fixed, paperwork is kept to a minimum and the documentation sent by the US customers is returned to the company. There is an equivalent Euro Lockbox system to process all cheques from customers based in continental Europe through the relevant European clearing system. Use of this system will result in the earliest possible crediting of cheques to their accounts, up to five days earlier than with traditional cheque negotiations. The transaction information provided can be linked to new or existing electronic balance reporting and payments services.

Cash management Physical cash management Standard physical cash management services include the time-saving facility of placing payments in self-sealing packets that can be handed over at branch counters and secure enquiry positions or deposited in automated payingin machines to be verified later, and a range of solutions available to bank customers receiving over £10,000 in cash every week. These include cash collection services by secure carrier from the customer’s own premises with delivery to the bank and cash in transit services where the collections are delivered to one of the bank’s network of cash centres across the United Kingdom. At many banks there is a parallel bulk cheque service for organizations receiving more than 100 cheques per week whereby cheques are collected by an authorized carrier from the customer’s outlets/premises and delivered to a cheque-processing centre within the UK network, which processes all branch and commercial cheque items.

Commercial Banking Services

57

Outsourcing payment collection Finally, for companies preferring to outsource payment collection there is the option of using their bank’s credit management service. Credit management is one of the three service elements of invoice finance (see Chapter 4.7) linked to credit protection and sales-linked finance services. For companies selling on credit terms to other businesses in the United Kingdom or overseas, full-service banks offer a credit management service providing consistent, professional credit control and efficient collection, which strikes a balance between the customer’s need to be paid and the maintenance of good public relations.

Opening a UK bank account Account opening formalities will vary in detail from bank to bank. However, in general the requirements for both UK registered and overseas registered companies will be: 1.

Business Customer Application Form • Giving details of the business requiring an account, its activities and ownership and details of the services required as well as instructions as to mailing addresses and other contact details.

2.

Mandate • Incorporates the resolution to open an account and gives signature instructions.

3.

Registration of UK company • A search is usually undertaken to confirm registration of the company, and sight of the Certificate of Incorporation or other proof of registration is usually required.

4.

Bank statements • If the company already has a bank account it is usual for a bank to review recent bank statements. For new businesses, bank statements of the parent company or directors/beneficial owners may be requested.

5. Audited accounts • If the company is subject to audit, the latest audited accounts for all businesses established for 18 months or longer are required. If the company is not subject to audit requirements, unaudited accounts will be accepted.

58

Investment and Start-up Considerations

Identification of key officials It is usual to require verification of the identity and personal residential address for at least two signatories on the account, one of whom must be a director. UK banks are also required to identify the beneficial owner(s)1 and/or principal controller(s)1 [if any] of the company if they are individuals and not one of the directors. If beneficial owners are corporate entities, a structure chart is required and there may be a need to identify key officials and beneficial owners of those entities in due course. Each signatory and/or beneficial owner and/or principal controller to be identified must provide original copies of a passport or National Identity Card and a separate proof of address such as a recent credit card statement or utility bill (not mobile phone). If any officers of the company are not resident in the United Kingdom, banks may also need a reference from their own bank. Certification of documents In all cases it is usual to require presentation of original documents/ID. However, arrangements can usually be made for these to be presented to and certified by bank branch offices or other officials such as a British Embassy, Consulate or High Commission, or a notary, lawyer, attorney or accountant. Practices vary from bank to bank and potential account holders should take time to ensure that they will be able to meet their chosen bank’s requirements.

Case study A privately owned Melbourne-based software company specializing in systems for financial services organizations and with a growing portfolio of clients in the United Kingdom decided to create a UK subsidiary to handle further UK and European sales and to provide technical support close to its clients and in the same time zone. Additional support and in particular accounting was to remain in Australia. The company’s bank in Melbourne did not offer a full service in the United Kingdom and the decision was made to open an account with a UK bank. Of primary importance was the ability to view and operate the account from Melbourne and there was a clear understanding that most transactions both in and out would be electronic. After consulting the UK bank a ‘pack’ was created including the following documents: •

Business current account application form

•

Business Internet banking application form

1 Individuals, shareholders with 25 per cent or more shareholding, a public quoted company or an individual providing significant financial support, influence or control.

Commercial Banking Services

59

•

Business telephone banking application form

•

Mandate authorizing any one of two Melbourne-based owner/directors (of the UK company), a UK-recruited director and the Melbourne-based finacial controller to sign cheques and authorize other transactions up to and including £2,000 and any two of those designated to sign cheques and authorize transactions above £2,000

•

Latest accounts of the parent company (unaudited as no Australian requirement for audit)

•

Certified copies of • UK company Certificate of Incorporation • Bank statements of three months from the parent company • Passports of two founders of the parent company each with a 40 per cent interest in the parent and thus the wholly owned UK subsidiary • Driver’s licence of one founder and recent credit card statement of the other

As the founders are also directors of the UK company and signatures on the account, no further identification or address verification was required. The ‘pack’ was couriered to the UK bank and after making its own credit checks the account was opened four days after receipt of the documents. Since opening the account, business cards have been issued to the UK director and three sales staff. The company has also leased cars for the UK-based sales staff from the bank, arranged insurance for employers’ liability, buildings contents and equipment and a ‘Key Man’ policy for the UK director (an appointment considered pivotal in pushing the company forward in Europe). The company is currently discussing a stakeholder pension scheme with its pensions advisers and the bank. With more and more European business in prospect, a Euro account will be opened and the bank is demonstrating a multi-currency upgrade to its business Internet Banking Service.

2.6 Finance for Companies Nick Stephens, HSBC

Fund-raising requirements Most businesses will need to raise finance at some stage in their development either to fund growth or to enhance short-term cashflow. Raising finance wisely and taxing efficiently can make a major contribution to a company’s profitability, whereas badly planned inappropriate finance may be burdensome. The first step in identifying appropriate financing solutions is to clarify the purpose for which a company needs to raise funds. Broadly, there are four main reasons for a company to seek external funding.

To assist cashflow In practice companies investing abroad for the first time rarely seek this type of working capital finance in the early stages of a project, preferring to fund from the head office. However, after a certain period that differs from company to company, the decision is invariably made that the new business should now be self-sufficient. Prudently, this decision will coincide with the point at which the parent considers the subsidiary to have developed a strong enough balance sheet to enable it to approach bankers in reasonable expectation of a positive response. The need for external support may be driven by the fact that your order book is increasing in volume and/or value, you need to take on more staff/buy more stock, your customers are demanding credit terms, your suppliers can offer you good early payment discounts or you may want to diversify in response to customer demand. Easily accessible solutions range from invoice financing services to an extended overdraft or the use of a bank business card or loan.

Finance for Companies

61

To finance international trade International trade can put a strain on a company’s cashflow and expose the business to a variety of risks. A number of specific solutions are available, depending on whether a company is engaged in import or export trade or both.

To acquire fixed assets The acquisition of new premises and the expansion or improvement of existing buildings may all require funding of a longer-term nature for which there are several solutions. Equally, a number of funding options are available for company acquisitions of equipment and business vehicles.

To fund business growth Companies needing a cash injection to facilitate growth should be sure to choose an option that supports their expansion plans constructively. The needs of a business planning to expand by organic growth may be very different from those of an enterprise expanding through franchising or a company growing through acquisition. Alternative solutions for all these funding scenarios are discussed in the sections that follow. As Chapter 2.5, the range of solutions is drawn from published HSBC material but all full-service UK banks offer a similar range.

Assisting cashflow Companies trading within the United Kingdom have access to a variety of financing services through the commercial banks.

Overdraft Often the most convenient way for a company to pre-arrange the working capital it needs to ride out the troughs in its business cycle is to arrange an overdraft facility with its bank. An overdraft is flexible in as much as you decide how much you use and interest is only paid on what you use and not what is available. It is usually available from 1 to 12 months and subject to regular review. Overdrafts are repayable on demand. The company will need to satisfy the bank as to why the money is needed, how much is required and for how long. Subject to a favourable credit assessment and agreement on the overdraft limit, the bank will confirm arrangements by a facility letter including details of arrangement or renewal fees. The bank

62

Investment and Start-up Considerations

may require tangible security, or the support of the parent company by way of guarantee or bank guarantee or standby documentary credit. Interest is charged at a pre-agreed rate and debited monthly or quarterly to suit the customer.

Business card The business card facility identified in Chapter 2.5 as a payment method can be used as a means of easing cashflow by taking advantage of an interest-free credit in paying for everyday expenses.

Invoice finance (factoring) Comprising three service elements – sales-linked finance, credit management and credit protection – invoice finance offers greater working capital flexibility, relief from the time and resource burden of chasing customers for payment and safeguard against bad debt to businesses selling in the United Kingdom or overseas on credit terms. Typically, up to 85 per cent of an invoice’s value can be advanced the next working day. Using this facility it may be possible to obtain more favourable terms from suppliers by paying earlier. Invoice finance is suitable for most businesses that sell business to business on credit terms with a sales turnover of £100,000 or more and is available as a stand-alone service for larger, longer-established companies. Invoice finance grows with your business and there is no need to keep increasing your borrowing facilities. This enables businesses to react quickly to market opportunities while keeping debtors under control. Other non-bank invoice finance houses offer services usually up to lower limits.

Invoice discounting Invoice discounting differs from invoice factoring only in as much as you manage debt collection and credit control. Credit protection remains an option. Businesses seeking this type of finance must have an annual turnover exceeding £1,000,000 and a proven track record and must be able to evidence profitability.

Financing international trade Loans and overdrafts Loans and overdrafts are the first source of finance for international trade, as in the normal course of domestic UK business. For longer-term needs,

Finance for Companies

63

fixed or variable rate loans in sterling or foreign currency are available from full-service banks with the repayment terms structured to suit a company’s business cashflow. Foreign currency loans on fixed terms are an attractive option for companies involved in international business. By taking out a loan in any major currency, a company can reduce its exposure to fluctuating exchange rates and is enabled to make and receive payments in the overseas currency without the cost and effort of conversion back into sterling. It opens an appropriate foreign currency account in the United Kingdom, which is simpler and may be more cost-effective than opening an account abroad. Foreign currency loans can be medium or short term and the borrower can have the option to repay in single or multi-currencies to suit its requirements. Where these facilities are not suitable and either the lender or the borrower requires more structure, the following services are available from those banks that specialize in the finance of international trade.

Discounting/negotiation of Export Documentary Credits Also known as letters of credit, Export Documentary Credits are a popular method of reducing the risks in overseas trade and are in global usage. They provide a measure of security for both the buyer and the seller. Having given credit to an overseas customer using an Export Documentary Credit, an exporter may find that the cashflow becomes tight during the credit period. If compliant documents have been presented to the bank, in most cases the bank will be able to give the exporter immediate value for the documents under the Documentary Credit, less a discount/negotiation fee.

Import Usance Documentary Credit By asking their bank to issue Documentary Credits on their behalf to buy goods, an importer reduces the risk of non-payment for the exporter and may enable itself to negotiate a period of credit, such as 30, 60 or 90 days, from the supplier, thereby giving itself the opportunity to sell on the goods before having to pay for them.

Import loans for traders There are two basic types of import loans. The first addresses the situation where a company has imported goods under an Import Documentary Credit, but has not received sufficient supplier credit to allow collection of any proceeds from selling on the goods. In this instance, an import loan can be used to pay the Documentary Credit on the due date. The loan is repaid when the proceeds are received from selling on the goods.

64

Investment and Start-up Considerations

In the second instance, import loans are taken out to cover situations where a company wishes to import goods without using trade finance instruments, but still needs structured borrowing. The bank will require some assurance that the proceeds from selling on the goods will be used specifically to repay any debt associated with the original purchase of the goods. Therefore, the bank will probably provide an import loan for each transaction, with a repayment date set to match the expected date for receipt of proceeds from any onward sale of the goods.

Export loans for manufacture If a company is the named beneficiary under an Export Documentary Credit advised to it by its bank but needs working capital to manufacture the goods to be sold, an export loan may be appropriate. The Export Documentary Credit and the export loan will be repaid once compliant documentation has been presented to the bank, with any surplus being credited to the exporter.

Financing export sales International commercial banks provide a range of services that allow companies to offer attractive open account terms to overseas customers, while protecting their business from the associated risks of severely delayed payment or non-payment. Export factoring is the finance (factoring) of export invoices and the terms are described in the paragraph on Invoice Finance (above). Additional advantages of this service include the ability to offer open account terms to overseas customers helping them compete with local suppliers. You can choose to invoice in one currency and be paid in another. The bank will use UK-based linguists, its own network and correspondent invoice factoring providers abroad to collect your payments. Such services iron out the risks of currency fluctuation, give professional assistance in assessing creditworthiness of potential customers and allow exporters to focus on negotiating the most appropriate terms.

Advances against export collection Documentary Collections are an alternative to the relative complexity and cost of Documentary Credits and provide a cost-effective, more secure alternative to trade on open account. Basically, the method relies on using the overseas customer’s bank as an intermediary. The exporting company sends the shipping documents to its own bank, which forwards them to the customer’s bank, with instructions to only release them in return for payment or a promise to pay at a later specified date. The exporter’s bank can advance funds against the subsequent collection of payment.

Finance for Companies

65

Acquiring fixed assets Property purchases The commercial mortgage is the most commonly used financial package to purchase existing or new business premises or to extend premises acquired previously. Mortgage finance is available from a number of financial institutions including life assurance companies and pension funds. Mortgages are also available from commercial banks, typically up to 80 per cent of the purchase price for new or existing buildings or the professional valuation – whichever is the lower. There are no set maximum amounts but typically there is a minimum amount for the sum borrowed. Loans from HSBC are for a minimum period of 2 years and a maximum period of 30 years. For loans up to £100,000 rates are charged at a margin over the bank’s base rate and for those of greater value variable rates linked to the London Inter-bank Borrowing Rate (LIBOR) are also available. Fixed interest loans are available for periods of 1 to 10 years. Interest is applied monthly with an optional moratorium on capital repayment of up to two years from drawdown.

Property-associated purchases The small business loan A quick and easy way to fund the refitting of premises or the purchase of new business equipment such as PCs, which will minimize the effect on cashflow, is through a small business loan. Small business loans available may typically be for any amount from £1,000 to £25,000. To assist budgeting, the interest rate is fixed from the start and loan repayments therefore remain the same even if bank base rates should rise. Repayment schedules can match the expected lifespan of the items purchased and may be spread over 12 months to 10 years with interest charged either monthly or quarterly. Banks usually offer an optional business loan protection plan under which the borrower’s payments are covered for one year against sickness and disability and repayment in full is provided in the event of death. The cover can be extended to up to four people and the insurance premium can be added to the loan as principal. The flexible business loan A similar type of facility is the flexible business loan, which HSBC offers to limited companies at variable rates for amounts over £10,000 and to all businesses at fixed or variable rates for amounts over £25,001 as a costeffective way for a company to finance fixed investment in the business or,

66

Investment and Start-up Considerations

indeed, business expansion. There is no maximum to the amount for which a loan application can be made. There is an option to pay interest either monthly or quarterly. Security may be required, which may in turn incur security fees and an arrangement fee will apply. Repayments may be spread over up to 15 years (10 years for fixed rates), although, in the case of equipment, the length of the loan is expected to match the useful life of the asset. For loans over £25, 001 a capital repayment holiday of up to two years may be taken. On certain types of loan, an option is granted to defer up to two monthly payments a year.

Vehicle acquisitions A range of alternative financing arrangements is available for the acquisition of vehicles and equipment, which are inappropriate for other fixed asset purchases. Contract hire Contract hire gives a business the use of a new car or light commercial vehicles for a pre-determined period of between two and four years based on an agreed mileage, at a fixed cost. The finance company will purchase the new vehicle at the beginning of the agreement and take on the risks associated with reselling it at the end, and for budgeting purposes a fixed cost maintenance package may be added to the agreement. The finance company will pass on the benefits of its buying power as both vehicles and maintenance are sourced and purchased at our preferential rates. Replacement vehicles are usually available in the event of an accident or breakdown, and tailored to suit your company’s needs and reduce ‘down time’ for your drivers a comprehensive Accident Management service is usually offered, covering the sourcing and processing of fast, high-quality accident repairs, with the minimum of involvement from your company or your drivers. This service offers balance sheet efficiency as you do not own the vehicle during the contract, which improves the balance sheet ratios, and the value added tax (VAT) recovered on purchase by the finance company is reflected in lower rental costs. Even if you have no tax shelter of your own, you will still benefit from the finance company’s ability to claim Writing Down Allowance, passed on through lower rentals. Contract hire is tax efficient in that it is usually allowable as a trading expense. Treatment of VAT varies according to whether the vehicle is also used for private purposes. The lender can give advice. Sale and leaseback Sale and leaseback is an agreement under which a fleet of vehicles is sold to a finance company which then leases them back on a tailored, fixed-term basis

Finance for Companies

67

using contract hire, allowing the immediate advantage of the savings and the security of contract hire. Each individual vehicle in a fleet is valued at a fair market rate. The finance company pays you this value and the vehicles are transferred onto a contract hire agreement. This agreement can be tailored to meet your individual business requirements. A fixed monthly payment covers the costs of regular servicing and maintenance and eliminates all residual value risk. Valuable capital can be released for more profitable use elsewhere in the business and the risks associated with selling and maintaining vehicles can be transferred to the finance company.

Equipment finance Finance packages are available from the equipment finance subsidiaries of commercial banks for the purchase or lease of equipment. Hire purchase enables a company to select its own supplier and negotiate its own deal, acquiring ownership at the end of the agreement. An asset loan for two to seven years can be used to finance equipment that has already been paid for in full by a business. Once a purchase is made, the loan is advanced and the bank or finance company takes a chattels mortgage over the asset as security. An Asset loan allows you to fund the asset without the long-term outlay, and make repayments over a period that suits your cash flow. Alternatively, a finance lease enables a business to have the use of an asset over a predetermined period without leading to ownership. At the end of the contract the rental can be extended or the lessee can sell the asset and retain a part of the proceeds. The principal difference between finance leasing and other forms of medium-term finance is that the bank retains legal ownership of the asset and claims the capital allowances against tax, which are reflected in reduced rentals. This form of finance can be particularly beneficial for businesses that are unable to benefit from the tax allowances themselves. As previously noted, a small business loan or a flexible business loan can also fund the purchase of equipment.

Funding business growth The most suitable finance product to help fund a company’s growth is based on its expansion plan. For example, a company planning to expand through franchising may need a bank Franchise Support service. Companies operating in the field of new technology will have special needs, while professionals wishing to buy into a partnership may require a Partnership Capital Loan. In each of these scenarios bank customers will require the attention and advice of a specialist service that leading banks are organized to provide. At a later stage, well-managed companies with ambitious long-term plans may require to raise equity capital to support their organic business expansion, to fund management buyouts or to provide the cash consideration for acquisitions.

68

Investment and Start-up Considerations

Structured finance Major commercial banks provide a range of complementary financial products giving structured solutions for complex financial needs. Funds are generally available from £1 million to £100 million to established companies with a proven record of cash generation. The structured finance may serve a variety of purposes from management buyout to acquisition of a business or company or for a specific working capital requirement. The three main types of finance product available are term loan facilities, revolving credit facilities and overdraft facilities. Term loan and revolving credit facilities both provide funding for a specific purpose, which is then repaid from the future cash flow of the corporate borrower. In previous sections of this chapter, overdraft facilities and a range of commonly used asset-based solutions have already been described.

Venture capital and equity funding The anatomy of venture capital and private equity finance in relation to specific niche market opportunities is discussed at length in Part 3. For established companies with an eye on stock market flotation and both institutional and private funds, the route to a stock exchange main market listing is explained in Chapter 3.1 while a more detailed account of the requirements for listing on the stock exchange’s Alternative Investment Market (AIM), which offers a cost-effective alternative for smaller companies with proven management to raise capital, is given in Chapter 3.1.

Interest rate risk management Interest rate volatility can affect your bottom line profit if you borrow on a variable rate and interest rates rise increasing your cost of funds. If on the other hand you hold cash investments and interest rates fall, your return on these funds will be reduced. There is a range of approaches to interest rate management, which could include fixing your rate with a fixed rate loan as described in this chapter or using interest rate swap. More flexible approaches can protect you against adverse movements in rates but allow you to benefit when rates move favourably. If your borrowings (including borrowings with other financial organizations) are in excess of £100,000 HSBC could protect you against increased interest costs if UK interest rates rise. By understanding your risks and the options available to you most major banks will assist you to developing and implement an interest rate strategy.

2.7 Financial Reporting and Accounting – An Overview Michael Bordoley with Jitendra Pattani and Bee Lean Chew, Wilder Coe

This chapter provides an overview of the financial reporting and accounting requirements of the majority of entities carrying out trading or investment activities within the United Kingdom.1 A detailed description of the various vehicles through which business activities can be carried out is contained in Chapter 2.4.

Introduction All entities carrying out business activities within the United Kingdom have an obligation to produce accounts summarizing the entity’s financial activities and results generally at least once a year. The accounts prepared normally cover a period of 12 months, though this can be varied (as described in Chapter 2.4). The period-end date to which these accounts are prepared is known as the accounting reference date (ARD). This chapter summarizes the various financial reporting requirements and practical accounting issues faced by any entity looking to carry out its business activities in the United Kingdom. 1 This overview does not, however, cover specially regulated entities such as charities and registered social landlords, which have specialized requirements.

70

Investment and Start-up Considerations

Format of accounts Unincorporated entities: sole trader/partnership There is no formal requirement for sole traders or partnerships to prepare annual accounts in accordance with any predetermined format. However, in submitting the annual tax return to HM Revenue and Customs (HMRC), it is expected that the entity is to provide backing accounts supporting the figures included in the tax return, and these accounts should be prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP).2 As a bare minimum, the sole trader or partnership will be expected to submit a statement of income and expenditure for the year with their tax return, prepared in accordance with UK GAAP.

Incorporated entities: companies limited by shares or by guarantee The most common types of entity are companies limited by shares incorporated under the Companies Act 1985. In terms of corporate financial reporting, the United Kingdom is currently undergoing a transitional phase in terms of its financial reporting requirements to the extent that it is aiming to achieve convergence with international reporting standards. On 1 January 2005, it became compulsory for all UK publicly listed companies preparing consolidated accounts to prepare them in accordance with International Financial Reporting Standards (IFRSs). This requirement is not mandatory for non-public companies, though these may opt for early adoption, and therefore there is currently a divergence in accounting treatment across companies in the United Kingdom. As with unincorporated entities, incorporated entities submit backing accounts with their annual tax returns. Again, there is no formal standard to which these accounts are prepared, and a detailed statement of income and expenditure will suffice.

Incorporated entities: limited liability partnerships Accounting rules as applied to companies apply in the same manner to limited liability partnerships (LLPs), where the format and regulations are as 2 As for most countries, entities engaging in business activities in the United Kingdom are required by national law or regulation to prepare financial statements that conform to a required set of generally accepted accounting principles. In the United Kingdom, the preparation of financial statements is governed by a combination of statute and standard practice, the whole of which comprises UK Generally Accepted Accounting Practice (UK GAAP). The latter is codified by the Consultative Committee of Accountancy Bodies (CCAB) in the form of Financial Reporting Standards (FRSs). Note that, prior to 1990, accounting standards were issued in the form of Statements of Standard Accounting Practice (SSAPs) – in so far as these have not been superseded by FRSs, the guidelines provided by SSAPs are still relevant in the preparation of financial statements.

Financial Reporting and Accounting – An Overview

71

set out in the Companies Act 1985, as amended by the Limited Liability Partnerships Act 2000. In respect of taxation requirements, provided the LLP carries on a trade or profession and is not purely an investment vehicle, it is considered to be tax-transparent, ie the LLP itself is not taxed on its income or capital gains. Instead, the members are taxed on their shares of the LLP’s profits and gains, in accordance with normal partnership rules.

Audit requirements Of the different vehicles through which a business can be carried out in the United Kingdom, only limited companies and LLPs are required to have their financial statements audited.

Definition of an audit An audit includes an examination of the financial statements by a registered auditor3 who, on completing the audit, makes a written report to the shareholders. It also includes an assessment of significant estimates and judgements? utilized by the directors in their preparation of the accounts, as well as the accounting policies adopted. The examination is performed on a test basis using evidence relevant to the amounts and disclosures shown in the financial statements. 3

For contact details of firms registered in the United Kingdom to carry out statutory audits: The Institute of Chartered Accountants in England and Wales Gloucester House 399 Silbury Boulevard Central Milton Keynes MK9 2HL www.icaew.co.uk The Institute of Chartered Accountants of Scotland CA House 21 Haymarket Yards Edinburgh EH12 5BH www.icas.org.uk The Institute of Chartered Accountants in Ireland CA House 83 Pembroke Road Dublin 4 www.icai.ie Association of Chartered Certified Accountants ACCA Connect 64 Finnieston Square Glasgow United Kingdom G3 8DT http://uk.accaglobal.com/

72

Investment and Start-up Considerations

On completion of the audit, the auditor will provide an opinion as to whether the financial statements provide a ‘true and fair’ view of: 1.

the state of the company’s affairs at the balance sheet date; and

2.

the profit or loss for the period under review.

In giving an opinion, the auditors state that they would have performed the audit with a view to obtaining reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud, other irregularities or errors. The opinion expressed within the audit report may be qualified should the audit uncover any areas of uncertainty or disagree with the directors’ treatment of items within the financial statements, or encounter any deficiency in evidence required to support amounts and disclosures in the financial statements. The extent of disclosure included within the audit report would depend on the degree to which the shortcoming would affect the reader of the financial statements.

‘True and fair’ concept This concept is a statutory requirement and central to the whole process of financial reporting in the United Kingdom. While there is no definitive guidance on what constitutes a ‘true and fair’ view, ‘[i]t is inherent in the nature of the concept that financial statements will not give a true and fair view without containing sufficient quantity and quality of information to satisfy the reasonable expectations of the readers to whom they are addressed.’4 The ‘true and fair’ concept is essentially dynamic in nature, and constantly evolves in response to changes in accounting and business practice. These changes are constantly monitored, and codifications of such changes are contained within the Financial Reporting Standards (FRSs), Statements of Standard Accounting Practice (SSAPs) and, most recently, IFRSs. For specialized activities such as charities and financial services, further guidance in the form of Statements of Recommended Practice (SORPs) is issued. While not statutory, the guidance provided in FRSs, SSAPs, IFRSs and SORPs is generally taken to be authoritative in the United Kingdom. Any departure from these principles would have to be clearly explained and justified in the financial statements. Finally, to emphasize the fundamental nature of this concept to UK financial reporting, it is important for anyone involved in the preparation of financial statements to note that the ‘true and fair’ concept can override the application of all FRSs, SSAPs and IFRSs, and the reasons for the override need to be disclosed in the financial statements. 4

Accounting Standards Board: Statement of Principles for Financial Reporting.

Financial Reporting and Accounting – An Overview

Table 2.7.1

73

Thresholds for audit exemption Single Company/LLP

Turnover

<£5,600,000

Gross assets

<£2,800,000

Size∗∗∗

Small

Group of Companies∗ <£6,720,000 gross∗∗ <£5,600,000 net∗∗ <£3,360,000 gross∗∗ <£2,800,000 net∗∗ Small

∗ A company/LLP will constitute part of a group where there is common ownership and control across all companies/LLPs within the group ∗∗ ‘Gross’ refers to the group’s aggregate result, inclusive of intercompany transactions and balances. ‘Net assets’ comprise the group’s consolidated results, ie exclusive of intercompany transactions and balances. ∗∗∗ A ‘small’ company/group is defined as one that fulfils at least two of the following conditions:

Company

Group

Annual turnover

<£5,600,000

Gross assets

<£2,800,000

Average number of employees

<50

<£6,720,000 gross <£5,600,000 net <£3,360,000 gross <£2,800,000 net <50

Materiality ‘Materiality’ is an expression of the relative significance of a particular matter in the context of the financial statements as a whole. An item would be considered material if its omission would reasonably be expected to influence the decisions of readers of the financial statements.

Exemption from an audit A company or LLP may be exempted from the statutory requirement to have its financial statements audited if it fulfils all the exemption criteria laid down by statute. The entitlement to audit exemption is based on three criteria: turnover, gross assets and the size of the company. All criteria have to be fulfilled to qualify for audit exemption. As at the time of writing, the thresholds for audit exemption are summarized in Table 2.7.1: Note that a subsidiary company or LLP contained within a group of companies that fulfils the above criteria will not be entitled to exemption from audit, regardless of its individual financial results, unless the group as a whole fulfils the small group criteria as detailed in Table 2.7.1. The following entities will not be entitled to exemption from audit, irrespective of size: •

Public limited companies

•

Banking or insurance companies

74

Investment and Start-up Considerations

•

Registered insurance brokers

•

Companies registered with the Financial Services Authority

•

Companies where the articles of association specify that an audit is required

• A member of a group of companies in which any member is: • a public company or entity that has publicly quoted shares or debentures; • registered with the Financial Services Authority; or • a person who carries on insurance market activity Finally, shareholders controlling 10 per cent or more of any company can override the audit exemption size criteria rule by exercising their statutory right to require an audit.

Practical accounting issues Any entity intending to carry out business activities within the United Kingdom should also be aware of the following issues:

Filing deadlines for financial statements Depending on the nature of the entity, financial statements must be filed with the relevant authorities within the specified timescales given in Table 2.7.2. Note that the filing deadline for companies and LLPs will change where the entity alters its ARD, for example, if a company changes its ARD, the filing deadline will be the later than the original filing deadline and three months after the application to extend the filing deadline. Late delivery of accounts to the Registrar of Companies will result in an automatic late filing

Table 2.7.2

Timescales for filing of financial statements

Business Vehicle

Filing Authority

Filing Deadline

Sole trader/partnership Company – private Company – public Limited liability partnership

No requirement to file annual accounts Registrar of Companies Within 10 months after the ARD Registrar of Companies Within 7 months after the ARD Registrar of Companies Within 10 months after the ARD

Financial Reporting and Accounting – An Overview

Table 2.7.3

75

Filing deadlines for submission of annual tax returns

Business Vehicle

Filing Deadline

Sole trader/partnership/LLP companies

By 31st January following the business’s ARD By 12 months following the business’s ARD

penalty, and is, technically, a criminal offence for which directors can be prosecuted.

Filing deadlines for tax returns All entities carrying out business activities within the United Kingdom are required to submit tax returns to the HMRC on an annual basis. Filing deadlines for submission of the annual tax return for the various entities are specified in Table 2.7.3.

Value added tax In the United Kingdom, there is a tax imposed on consumer expenditure called the value added tax (VAT). Most business transactions involve the supply of goods or services and VAT is payable if the supply is made: 1.

in the United Kingdom;

2.

by a taxable person; and

3.

in the course or furtherance of business and is not specifically exempted or zero-rated.

The regulation, monitoring and collection of VAT is currently undertaken by the HMRC. Forms detailing the breakdown of an entity’s VAT liability must be submitted on a periodic basis to the HMRC, as well as payment of net VAT due. An entity can opt to submit VAT returns monthly, quarterly or annually. Submission of the periodic returns is due by 30 days after the period-end. Payment of VAT is due 14 days after the submission deadline. It is compulsory for an entity that makes taxable supplies exceeding £61,000 per annum to register with the HMRC and submit VAT returns. Notification to the HMRC must be made within 30 days of the end of the month in which the value of taxable supplies first exceeds £61,000. The rate of VAT imposed on a supply depends on the type of supply made. There are three categories of supplies:

76

Investment and Start-up Considerations

1.

Exempt

2.

Zero-rated

3.

Standard-rated These are discussed in more detail in Chapter 2.9.

The operation of VAT has become increasingly complicated over the years since its introduction, and it is important to seek professional advice in the following situations: •

importing and exporting of goods or services (see Chapter 4.9 for more details on the provision of supplies within the European Union (EU))

•

supplies made by the entity are a mixture of different VAT categories

•

retail schemes

•

land and property transactions

•

self-supplies

Finally, more detailed guidance on an entity’s responsibilities under the VAT regime is contained on the website www.hmrc.gov.uk.

Payroll taxes Any person looking to pursue business activities in the United Kingdom will encounter payroll taxes if they are looking to employ staff. Payroll taxes are under the remit of the HMRC, who publish various booklets relating to how the system for collecting taxes is operated and the legislation that has to be complied with. In brief, the employer is responsible for reporting, collecting and remitting payroll taxes to the HMRC as well as operating the Department of Social Security’s (DSS) sick pay, maternity pay and paternity schemes. The employer must register with the HMRC to operate a payroll scheme. Upon registration the HMRC will provide the employer with guidelines on operating the scheme as well as copies of the necessary returns that have to be made to the HMRC over the course of the year. Tax and national insurance contributions are payable to the HMRC by the 19th of the month following which salaries are paid. In most businesses, the directors, and often the employees, have benefits that are not immediately taxed through the payroll system in place. Returns detailing such benefits and the national insurance contributions payable thereon are due on 19th July following the fiscal year in which the benefits are made available. More detailed guidance on an employer’s responsibilities for payroll operation is contained on the website www.hmrc.gov.uk.

Financial Reporting and Accounting – An Overview

77

Dividends and distribution of profits A company may distribute its available profits to its members (shareholders) by way of dividend at any point in the course of a financial year.5 Such distributions can only be made out of post-tax profits and must be in accordance with the rules and conditions laid down by the Companies Act 1985. The Companies Act does not provide who shall declare a dividend, and the usual practice in the United Kingdom is for the Articles of Association to specify that dividends are to be declared by the shareholders in the general meeting. It is also possible to specify in the articles that directors be given the power to declare dividends to the exclusion of general meetings. An important point to note is that, before declaring an interim dividend, ie a dividend paid between annual general meetings, the directors must satisfy themselves that the financial position of the company warrants the payment of such a dividend out of profits available for distribution,6 that is, net accumulated realized profits.7 If the company does not have positive reserves at the time of declaration of the dividend, the dividend is deemed to be an illegal distribution, and the directors may be prosecuted under civil law. The Companies Act imposes an additional capital maintenance requirement on public companies to ensure that the net worth of the company is at least equal to the amount of its capital. A public company can only distribute profit if: 1.

at the time of the distribution, the amount of its net assets, that is the total excess of assets over liabilities, is not less than the aggregate of its called-up share capital and its undistributable reserves8 ; and

2.

the distribution does not reduce the amount of the net assets to less than the aggregate of the company’s called-up share capital and its undistributable reserves.

5 This does not include distributions in the course of winding-up, bonus issues of paid-up shares and certain types of share redemption or reduction of share capital. 6 A statutory code of profits in the legal sense appears in sections 263 to 281 of the Companies Act 1985. 7 Section 263(3) of the Companies Act 1985 lays down the basic rule, which states that a company’s profits available for distribution are its accumulated, realized profits (on both revenue and capital items) not previously distributed or capitalized, less its accumulated realized losses (on both revenue and capital items) not written off in a proper reduction or reorganization of capital. 8 Undistributable reserves are defined as: i. the share premium account ii. the capital redemption reserve iii. the amount by which the company’s accumulated unrealized and uncapitalized profits exceed its accumulated unrealized losses not written off, and iv. any other reserves that the company is prohibited from distributing by statute or its memorandum or articles.

78

Investment and Start-up Considerations

A company should always prepare accounts reflecting its financial position at the date of the distribution of profits to avoid the illegal payment of dividends. For public companies, there is a statutory requirement that ‘relevant accounts’9 be prepared to the date a distribution is made to ensure its legality. For private companies, there is no such requirement but, from a practical viewpoint, this requirement should be adhered to. Note that even if the annual accounts prepared at a later stage show an insufficient figure of distributable profits, a dividend paid on the basis of the interim accounts will still be considered lawful.

9

Defined in section 270 of the Companies Act 1985.

2.8 Business Taxation Tim Cook, Wilder Coe

Introduction This chapter is divided into three parts: 1.

General tax considerations relating to various types of business entities formed to trade in the United Kingdom.

2.

Information as to the types of income, the payment of tax, and the rates of tax applicable.

3. A description of how taxable business income and gains are determined, and the deductibility of certain income and capital expenditure.

General tax considerations on UK business formations In determining the method of trading in the United Kingdom commerciality must determine the vehicle to be used: corporation, branch, limited liability partnership (LLP) or general partnership. Each type of entity has its own merits and downsides. Below are some comments about the alternatives.

Representative office versus permanent establishment If it is not wished that a taxable entity or legal presence in the United Kingdom be created then care has to be taken to ensure that any presence in the United Kingdom is purely representative without the creation of a permanent establishment (PE). The comprehensive list of double tax agreements (DTAs) between the United Kingdom and other trading nations will

80

Investment and Start-up Considerations

set out what will contribute to the creation of a PE and therefore bring the foreign entity within the UK tax regime. The basic difference between the two, and what establishes whether or not there is a PE, is whether the overseas entity is trading with the United Kingdom or is trading in the United Kingdom. From 1 January 2003 under provisions of the Finance Act 2003 (FA2003) non-resident companies are only liable to corporation tax in the United Kingdom if they carry on a trade via a PE. Otherwise they will be liable to income tax. Under the FA2003 provisions a company has a PE if it has: •

a fixed place of business in the United Kingdom;

•

an agent acting on behalf of the company who habitually exercises authority to do business on behalf of the company.

If a foreign company has a PE it is chargeable to tax on the profits wherever arising, which are attributable to that PE. The losses arising in a PE may be available for offset against the profits in the main country of residence of the foreign company. As losses frequently arise in the initial periods of trading, PEs are frequently set up for the first periods of trading, with incorporation following at a later date (see below). Factors influencing the decision will be complex and will include the nature of the activities, the ability to enter into contracts or commit the foreign entity to a course of action. Care and advice are necessary.

Branch versus subsidiary The UK branch of a foreign company is taxable on the profits arising in the United Kingdom. The calculation is as for a separate entity (eg a subsidiary) so that transactions will need to be on a proper commercial basis. Profits arising in the branch can be remitted to the head office without restriction and without any form of withholding tax. Branches come within the normal corporation tax methods of calculation, and so if the profits are high enough the branch will be liable to pay corporation tax in four equal quarterly instalments. In assessing this, the number of associated companies on a worldwide basis has to be taken into account (see below). If the UK entity is a subsidiary then, subject to the appropriate DTA, withholding tax might be applicable, but only on certain specific types of income. There is no UK withholding tax on the payment of dividends. There is little or no difference in the UK taxation position arising from trading through either a UK branch or a UK subsidiary. In both cases the rules relating to thin capitalization will need to be considered (see below). The subsidiary is a separate legal entity in the United Kingdom and so normally any claims would stop at that level. A branch is part of the overseas entity and so any claim could be followed through to the overseas entity.

Business Taxation

81

Direct investment versus holding company structure Direct investment through a branch, corporation or partnership is easy to establish and will normally be the preferred method. There are usually no adverse taxation consequences and ongoing administration and compliance is at a minimum. Sometimes however a UK holding company route can be appropriate. This is dependent upon the functions and activities of the UK business entity, the need for financing both in the United Kingdom and elsewhere, exit strategies and the interaction with other non-UK entities.

Residence Taxability in the United Kingdom will come from residence here. Incorporation in the United Kingdom or elsewhere does not determine the residence status of a company. A simple accepted guideline is that residence is where the ‘central management and control’ of the company resides. This is where the strategy of the company and decisions relating to that strategy are formulated and actioned.

Value added tax The harmonization of value added tax (VAT) within the European Union (EU) means that generally goods can be moved around the EU without undue VAT consequences. When goods are imported from outside the EU, import VAT is payable. From that point onwards the goods are freely moveable between EU countries. Any business investing or trading in the United Kingdom will have to consider whether or not it has a ‘business establishment’ for UK VAT purposes. The rules for the establishment of a ‘business establishment’ are different from those applicable to the residence position of the company. Other general VAT rules will also apply.

Different types of income The UK tax system works on a basis of taxation under which each type of income is subject to specific rules as to how it will be calculated. The main types of income are set out below with a general description of the method of calculation of the income.

Companies and branches Trading income The starting point for the calculation of taxable business income is the profit shown in the accounts of the entity – the accounting treatment of expenditure

82

Investment and Start-up Considerations

is often the key to how the expense will be treated for taxation purposes. This will become much more the situation in the future as international accounting standards become standardized on a worldwide basis. The account’s profit is then adjusted to exclude certain expenditure not allowable under UK taxation rules, and then this revised profit is adjusted to grant various taxation-only allowances and reliefs that are not part of the accounting records. The calculations relating to general expenditure incurred in the United Kingdom apply whatever the nature of the entity in the United Kingdom. The treatment of charges from the foreign entity can differ in the United Kingdom depending upon whether the UK entity is a PE or a separate legal entity such as a limited company. Some of the adjustments are set out below. This list is not exhaustive and advice should be taken in respect of any particular item of expenditure. Not allowed •

Entertainment

•

Certain legal and professional charges

•

Capital expenditure or depreciation (see comments on capital allowances below)

•

General provisions in respect of any expenditure

•

Fines and illegal payments

•

Gifts

Allowed • All employee costs are generally deductible if there is a business element. However, if the employee receives a benefit – under UK tax law this can be quite complex – the employee can have an additional tax charge and the employer an additional National Insurance (NI) charge. • Accounts depreciation is replaced by Capital Allowances (see below) under a complex but comprehensive system – allowances run from 4 per cent up to 150 per cent depending on the nature of the expenditure. Capital expenditure disallowed in the accounts might obtain an allowance if it falls within the Capital Allowances regime. •

Specific provisions for certain types of expenditure, eg bad debts.

Deduction depending upon the nature of UK entity • Although interest and royalty payments by a UK company will be deductible (subject to transfer pricing rules), payments to a head office by a PE will not be deductible. Relief could be obtained if the payments were to a foreign affiliate, a separate legal entity. •

Management charges can be deductible in both cases, subject to transfer pricing rules. In the case of a company the charge could be based upon the

Business Taxation

83

services provided by the offshore parent. In the case of a PE the allocation could be on a ‘share’ basis of total costs, provided they can be shown to be used by the UK PE. Land and property Income from land and property is taxable under different sections of the taxes acts in the United Kingdom depending upon whether the property is situated in the United Kingdom or overseas. However, the rules for calculating the profit are essentially the same. Income and expenses from all UK sources are pooled and treated as a separate rental business, with a separate business in respect of overseas properties. The calculations of the profits generally follow the rules for general trading activities, and accounts must be prepared on an accruals basis and in accordance with generally accepted accounting principles. Where commercial properties are involved, capital allowances may be obtained for certain capital expenditure, but no relief can be claimed for such expenditure on residential properties. Certain other allowances might possibly be available for residential lettings, but this will depend upon the type of letting. Losses from a commercial letting business can, in a company, be offset against other general income of the same or later accounting periods while the same trade is being carried on. Interest Interest is, as with other company income, usually taxed on an accruals basis. However, certain types of income under this heading have different treatments. Care has to be taken on the receipt of income out of the ordinary to ascertain the correct taxation treatment. The company regime differs from the position for individuals mentioned below. Capital gains The capital gains arising from the sale of assets is added to other profits for the year in the company and taxed at the same rates. In calculating the gain, costs of purchase and sale can be taken into account. If there have been improvements to the asset after original purchase, and the improvements are still reflected in the asset at the date of sale, the costs of the improvements can be deducted from the sale proceeds in calculating the gain. The original cost, and any other allowable expenditure, is indexed upwards from the date the expenditure is incurred up to the date of sale. The date of sale is taken as the date of exchange of contracts binding seller and purchaser to the sale. The indexation rates are announced monthly and are broadly the retail price indices. Dividends With the abolition of the imputation system no refundable tax credit is now given at the shareholder level. Individual shareholders do receive a notional

84

Investment and Start-up Considerations

tax credit that covers their UK liability unless they are liable at the higher rates of income tax. Corporations receive no credit, but no further tax is due.

Individuals and partnerships Income The income from a partnership is allocated to the partners in accordance with the partnership agreement. The income so allocated, from each source or type of income, is then assessed on the individual partner – be it a company or an individual. An individual’s income is calculated in the same way as for a company where there is a ‘trading’ aspect. The calculations and points made above with reference to Trading Income, Land and Property, and Investment Income are therefore the same for individuals. The other types of income and capital gains are dealt with differently, and the differences are set out below. Interest In the main, for individuals, interest and other investment income will have been received after deduction of lower tax rate (20 per cent). The income is assessed on the arising basis and not the accruals basis used for companies. Individuals liable at higher tax rate (40 per cent) will have to pay the difference from 20 per cent up to 40 per cent. Capital gains The basis of calculation of the gain arising is exactly the same as for companies in respect of the deduction of costs from the sale proceeds. However, indexation relief is only available up to April 1998. From this date a new relief, taper relief, applies. The effect of taper relief is to reduce the amount of gain chargeable to tax dependent upon the period of ownership of the asset. Frequently the effect of the taper relief is shown as a tax percentage. Different rates of relief apply to the asset depending upon whether it is a business asset or a general investment asset. For business assets the maximum taper relief of 75 per cent is reached after only two years of ownership and has the effect of reducing the maximum tax rate from 40 per cent to 10 per cent. Investment assets achieve maximum relief of 40 per cent after 10 years. The maximum tax rate therefore reduces from 40 per cent to 24 per cent.

Land and property As indicated above profits are calculated in the same way for companies and individuals. However, if losses are incurred they are treated differently. The company position is as set out above. For individuals the losses, if they arise from letting of commercial properties, can be offset against the general

Business Taxation

85

income of the year. Alternatively, they will be carried forward and used against future income from the same trade. Where the losses arise from residential lettings they can only be carried forward, and not offset against other income.

Dividends Dividends from UK companies and qualifying unit trust received by a UK resident are deemed for taxation purposes to have had notional tax of 10 per cent deducted before receipt. If the individual is not liable for tax at the highest rate the notional credit covers any liability due. If the individual does not pay tax no refund of the notional tax can be obtained. If tax is paid at the highest level a further 25 per cent tax will be due on the net dividend received.

Payment of tax Companies The corporation tax liabilities of companies are payable nine months and one day after the end of the accounting period. Accounting periods generally run for a period of 12 months to the same accounting date each year. If the accounting period is extended or shortened special rules apply to the method of calculation of profits, capital allowances, etc, and adjustments will be made to the tax payment dates. Large companies pay on a quarterly instalment method based upon an estimate of the current year’s corporation tax liability. The basic definition of a large company is one with profits in excess of £1.5 million (for the 2007 period). Various rules apply to companies in the first years in which they come into the large company definition to ascertain in which accounting they have to start the quarterly payments. When there are associated companies the £1.5 million lower limit is divided between the companies. Associated companies include overseas companies so in large groups it is possible that the quarterly instalment procedures will apply at much lower profit levels.

Applicable tax rates These rates apply to all income and gains

Small Companies Rate Main Rate

Taxable Profits/Gains

Tax Rate (per cent)

£0 to £300, 000 >£1,500,000

20 30

The above rates apply for the year ended 31 March 2008.

86

Investment and Start-up Considerations

If profit is above the small companies profit maximum of £300, 000, but below the main rate threshold of £1, 500, 000, marginal calculation applies to the excess over £300, 000. The effect is to bring the tax at £1, 500, 000 back to 30 per cent. The result is that tax in the margin has an effective rate of 32.5 per cent. The small companies’ rate threshold of £300, 000 is divided between all associated companies. Thus if there are four associated companies each would be entitled to £75, 000 of profit taxable at the 20 per cent rate before going into marginal calculations. Associated companies include both UK and overseas companies.

Partnerships Tax within a partnership is based upon the profits allocated to each partner. Each partner is responsible for their own tax liability. If the partner is a limited company the rates are as shown for companies above. If the partner is an individual the rates are those applying to individuals as set out below: Applicable tax rates

Starting Rate Next slice of income of Balance

Taxable Income/Gains

Tax Rate (Per Cent)

£0 to £2,230 £32,370 >34,600

10 22 40

The rates of tax are applied cumulatively. The above rates apply for the year ended 5 April 2008. Each individual who is a partner will be entitled to offset against the allocated profit share allowances and reliefs, according to their personal circumstances. Payment of tax In respect of trading income from a partnership the tax is payable twice yearly on 31 January within the year of assessment and on 31 July following the year of assessment. Special rules apply on commencement of trade. Once the trade is running the payments are based upon the profits earned in the previous year. In the January tax payment, adjustments are made to correct the payments on accounts made based on the previous year’s profits to the actual tax due on the profits shown in the accounts. The result of this is that where profits are rising the January payment will always be the greater payment. If profits are falling, so that it is expected that the tax due in total will be less than that paid for the previous year, claims to reduce the payments can be made. However, if the calculation is inaccurate, leading to an underpayment of tax, interest will be charged. In extreme cases there can also be penalties.

Business Taxation

87

Capital allowances The UK system of capital allowances is comprehensive and covers the majority of assets from general plant and machinery (which includes fixtures, fittings, computers) to allowances on certain types of buildings, intangible assets, patents, research and development expenditure, etc. The allowances are based upon the cost to the entity, and where connected parties are concerned (eg acquisitions from the head office in the case of a PE or from a parent in the case of a separate company) the cost to the UK entity will broadly be as follows: Acquired from: Head Office Plant and Machinery

Market value

Hotels/Industrial Buildings

Calculated written down value for tax purposes Book value

Intangible Assets

Foreign Associate Lowest of actual cost, book value or market value Calculated written down value for tax purposes Market value

Certain assets have an initial allowance that varies from 40 per cent to 100 per cent of the cost. Thereafter the most common annual allowance is 25 per cent of the balance brought forward after previous allowances have been deducted. Although not necessarily a capital allowance relief, mention should be made of special allowances available to companies for expenditure on research and development. Depending upon the size of the company, relief of up to 175 per cent of the expenditure can be obtained. This relief is normally by deduction against profits, reducing the taxable amounts. In some cases, where the company has losses and so obtains no immediate relief, cash credits can be paid to the company in place of the corporation tax deduction.

Losses Trading losses are calculated in the same way as trading profits. Capital allowances can increase losses or change a profit into a loss. Once determined a loss can be utilized in a variety of ways. Examples are as given below: •

Offset against total profits, income and gains of the year in which the loss arises.

•

Offset against total profits, income and gains of the year prior to the year in which the loss arises.

88

Investment and Start-up Considerations

•

Carried forward indefinitely against profits of the trade arising in later accounting periods.

•

Surrendered to other UK group or consortium companies in the year in which the loss arises for offset against the income and gains of those companies in that year.

• The surrender to other group companies can include surrenders between PEs and subsidiaries. Where a company that has losses arising from previous trading activities is acquired, care has to be taken to try to ensure that those losses are available to the new owners of the company. Consideration has to be given to the way in which the trade will be carried on after the change of ownership.

Rollover relief Where a company disposes of a business asset within a list of types of qualifying assets (see below) and reinvests the proceeds into other assets within the list of qualifying assets, the capital gain arising on the sale can be deferred until the sale of the second asset. Rollover can be applied on all subsequent sales until the ultimate final sale without reinvestment. The list of the main qualifying asset types is as follows: Class 1A 1B 2 3 4

Asset Land and buildings Fixed plant and machinery Ships, aircraft and hovercraft Satellites, space stations and spacecraft Goodwill

Other less common assets are also included.

Thin capitalization Funding of the UK company must also be on a commercial basis or adjustments can be made under the Transfer Pricing rules (already mentioned) or, where the UK company is a 75 per cent or greater subsidiary of an overseas company, under the rules relating to thin capitalization. There are requirements for appropriate debt/equity ratios, and of course if the lending is intragroup, on the interest rates applied. The reason for the legislation is to stop ‘overfinancing’ of a company allowing the profits to be extracted by way of interest charges. At the moment parts of the legislation are under review and discussion to ensure that they are in line with EU tax harmonization rules generally.

Business Taxation

89

Stamp duty land tax/stamp duty From 1 December 2003 stamp duty land tax (SDLT) replaced the old stamp duty regime with respect to land and property transactions in the United Kingdom. As with corporation tax and income tax in the United Kingdom, SDLT is a self-assessment tax and the obligation to notify the Inland Revenue that a transfer has taken place falls on the person paying the tax – the purchaser. Under Stamp Duty the tax was payable on the completion of the contract. This gave rise to various arrangements to postpone payment. As a result, although the SDLT is also payable on completion of the contract there are provisions that charge the tax on substantial completion of the contract. Under English Law this could be on the exchange of contracts. Substantial completion is not defined but is, in broad terms, receipt of most of the consideration, taking possession of the property, the entitlement to receive the rents or profits from the property.

Rates of tax The rate of SDLT depends upon whether the property is residential or commercial. The rates of tax are not on slices of value. If a value is within one of the slices shown below the whole of the price is subject to tax at that rate. For example, if the residential value is £125, 000 no tax is payable. If the value is £125, 001 the rate on the whole is 1 per cent, or £1, 250.01. The rates are as follows: Residential Property Consideration Up to £125,000 £125,001 to £250,000 £250,001 to £500,000 Over £500,000

Non-residential or Mixed Property Per cent

Consideration

Per cent

0 1 3 4

Up to £150,000 £150,001 to £250,000 £250,001 to £500,000 Over £500,000

0 1 3 4

Where transactions are linked the aggregate consideration determines the rate of the tax payable.

2.9 Key Business Taxation Planning Pointers Tim Cook, Wilder Coe

Introduction This chapter carries on from the overview in Chapter 2.8 and sets out planning pointers, both in terms of taxation savings and for avoiding an increased charge. It describes the taxation consequences of various courses of action.

Taxation consequences of operation via a UK resident company 1.

Profits will be liable to corporation tax (CT).

2. The gain on the eventual sale of shares of the UK company is likely to be exempt from UK tax if held offshore. 3.

In several jurisdictions the sale by the resident company of shares in a non-resident company (eg UK company) will be exempt. In most jurisdictions individuals would have a liability.

4. The timing and manner of repatriation of profits can be flexible and assist in planning in the offshore jurisdiction. 5.

European Union (EU) parent companies might be able to claim that the UK loss-making subsidiary should be included in local tax consolidations.

6.

Disclosures by UK companies are limited to the activities of the company itself. In the case of a permanent establishment (PE) the UK Inland Revenue might require information about non-UK transactions to determine and agree liabilities to CT.

Key Business Taxation Planning Pointers

7.

91

Royalties and interest paid by a UK company to overseas associates are tax deductible if on arm’s length terms. Payments made by a PE to its parent/head office are not deductible.

8. Any problems, if applicable, in setting up a PE and subsequently incorporating it are avoided. These might include a tax charge in the foreign jurisdiction on the transfer of assets from the PE to a foreign subsidiary. Generally there are no UK tax consequences on the incorporation.

Key tax planning issues Purchase of shares The acquisition of the shares of a company means that the purchaser also acquires within the company all of the assets and liabilities, both known and unknown. The company is a continuing legal entity and a change in its ownership does not affect its obligations from the past. Because of this indemnities are needed on any share acquisition in respect of a full statement of liabilities and indemnity for other liabilities arising after the acquisition. It should be noted that the acquisition of the company means that there is no uplift in the value of the assets held by the company. Any gains on these assets remain in the company and will be taxable on the company on a sale of those assets. This inbuilt liability needs to be reflected in the price paid for the shares. However, if the owner of the shares is non-resident and remains so, no capital gains tax would be payable on the share disposal and so inbuilt gains would only be of concern in assessing the price to be paid for the shares. Purchase of assets The purchase of assets from a company does mean that the vehicle into which they are purchased is ‘clean’ with no unknown liabilities. The new vehicle will have acquired the assets at current value and so there will be no inbuilt gains to take into consideration in the future. This can be of advantage where the assets might have to be sold prior to any future disposal of the company.

Tax grouping The association of companies can have an effect in the United Kingdom on the rate of tax payable by both resident companies and branches. There are different types of tax grouping in relation to trading profits and capital gains, and also the surrendering of losses between companies with economic interests such as where a company is owned by a consortium. Association normally comes from common control of companies. Thus, if the same individual, or group of individuals, has control of companies, those

92

Investment and Start-up Considerations

companies, for UK taxation purposes, will be associated (and connected). This has an effect in the following ways: • Transfers of assets between associated companies must be at an arm’s length value. Where this does not happen the Inland Revenue can deal with the calculation of tax as though it had been at arm’s length by substituting the open market value for the actual transfer value. • The number of associated companies will affect the rate of tax where the small company rate is involved (on profits up to £300,000). The limit of £300,000 will be divided between the associated companies. Grouping comes from direct shareholdings of one company by another. The share percentages of such holdings are followed through. If for example Company A held 80 per cent of the ordinary capital of Company B, which in turn held 90 per cent of the ordinary capital of Company C, then A would be said to have an interest of 72 per cent (80 per cent × 90 per cent) of C. If the percentages held are 51 per cent or more, ie up to 75 per cent, the companies would be group companies for capital gains tax purposes. If the percentages followed through are above 75 per cent the companies are group companies for all UK CT purposes. The effect of a grouping >75 per cent is to allow: •

transfers of assets within the group without taxation consequence and without need for open market value to be used; and

•

trading losses and capital losses to be surrendered between group companies, so that the tax rates can be averaged for best effect.

Transfer of a UK PE to a UK company As mentioned in Chapter 2.8 it can be the best solution, if losses are expected in the initial trading periods, to start trade in a UK branch by way of a PE so that the losses can be utilized in the overseas jurisdiction (subject to the taxation laws in that jurisdiction). When the entity becomes profitable, the UK trade could then be transferred to a UK company. The usual route would be for the foreign parent to incorporate a company in the United Kingdom and then transfer the trade and assets of the PE to that company. Using the group rules mentioned above the transfer in the United Kingdom would be achieved without taxation consequences. Care would have to be given in considering whether the transfer triggered any offshore liability to the parent making the transfer. Frequently, any losses incurred in the UK branch can be carried over into the subsidiary for use against future profits in the new company. One of the

Key Business Taxation Planning Pointers

93

possible benefits from this route is that the losses initially arising in the UK branch can be utilized twice.

Sale of a UK PE Unlike the situation for the sale of the shares of a UK company mentioned above, the situation with regard to the sale of the assets (including goodwill) of a branch or PE of an overseas company will differ. The PE is resident and trading in the United Kingdom and is thus taxable on the sale of its UK assets. The foreign company (head office) will be taxable at 30 per cent on the gain, subject to indexation relief (see Chapter 2.8). Assets owned by individuals for at least two years (provided they are business assets) will suffer capital gains tax at a maximum of 10 per cent because of the taper relief provisions (see Chapter 2.8).

Controlled foreign companies (CFC) When considering the best structure, overseas investors will need to take account of the use of low-tax third countries for functions such as holding trading, financing or management. Using such countries complicates the structure and there will need to be detailed consideration of CFC rules in all countries affected by the structure. In using such low-tax jurisdictions transfer pricing legislation will also be a factor (see below).

Investment in UK properties If property is acquired in the United Kingdom by a non-resident individual, or a non-resident company, for rental return purposes coupled with capital gain on disposal, the taxation position differs in terms of rates applying. An individual, even though non-resident, will be taxable at the rates set out in Chapter 2.8. Thus the highest rate could be 40 per cent. A nonresident company however pays tax on such income at a flat rate of (currently) 22 per cent. Special administrative provisions apply in both cases in that, if there is not a collection agent in the United Kingdom, tax will have to be deducted at source on the gross rental by the tenant. The individual or company would then have to claim a refund in respect of any expenses available to offset against the income.

Repatriation of profits In general there are few UK taxation implications in repatriation of profits to the parent company or head office. There are no taxes on distributions

94

Investment and Start-up Considerations

so a remittance of retained profits, in any form, does not attract a liability. There is no withholding tax on UK dividends paid to offshore shareholders. As mentioned in Chapter 2.8, there is a notional tax on dividends and for non-resident individuals this is deemed to cover their UK liability. Nonresident companies receiving dividends from UK resident companies are similarly protected from additional tax. Under the provisions of certain tax treaties a refund of 50 per cent of the tax credit can be repaid where the shareholder is a company holding 10 per cent or more of the UK company. However, other provisions provide in most cases for a 5 per cent UK tax to be deducted from the grossed up dividend (the cash dividend plus the tax credit refund). The effect of this is to almost cancel out the benefit of the refund – probably leaving the refund at only 0.2 per cent of the UK company pre-tax profits.

Transfer pricing The UK legislation relating to transfer pricing can impact on any transaction carried out between the UK entity (whatever its nature) and any foreign-associated entity. The rules are similar in most jurisdictions and any resulting double taxation can usually be resolved under the double tax agreements (DTAs). The broad expectation is that any transaction between a UK entity and its associated foreign entities will be on normal commercial terms and that no tax advantage will be obtained by the pricing method used. If it is not, the legislation allows adjustment to recalculate profits to what they would be under an ‘arm’s length’ transaction. It also allows for the charging of penalties of up to 100 per cent of the tax due. The adjustments to recalculate the profits only apply if UK profits are understated. There is no adjustment if they are overstated. Transactions that could therefore be affected include the following: •

sales of products;

•

services provided;

•

financing;

•

licensing;

•

management fees; and

•

property leases and other transactions.

The onus, under UK compliance rules for the submission of returns, is for the UK taxpayer to confirm that all related party transactions are carried out on an arm’s length basis. In cases where the transfer pricing determination of arm’s length transactions might be very complex it is possible to agree arrangements and methods in advance under Advance Pricing Agreements with the Inland Revenue.

Key Business Taxation Planning Pointers

95

Value added tax All foreign businesses operating in the United Kingdom likely need to register for value added tax (VAT). This is so even if the profits generated by their supplies are not liable to UK tax. VAT is chargeable on the supply of goods or services made in the course of business. For UK VAT to be chargeable the place of supply must be within the United Kingdom. Different rules apply for goods and services and can be complex. Each transaction or type of transaction contemplated should be considered for VAT purposes before the first supply is made. Supplies in the United Kingdom for VAT purposes are divided into different categories to establish if tax is payable, and if so the rate of tax. The rates and categories are as follows: •

Zero rate: 0 per cent VAT applies on certain transactions. The supply is still a taxable supply, so there is still a requirement to register the business.

•

Lower rate: 5 per cent VAT applies on a limited number of transactions. These are mainly in relation to public corporations and will not affect most trading companies.

•

Standard rate: 17.5 per cent applies as the standard rate on the majority of transactions.

•

Exempt supplies: certain transactions are exempt from VAT. This means that no VAT is chargeable, but also that no refund of input VAT on costs associated with the supplies can be obtained.

Compliance Any business with activities undertaken in the United Kingdom, where the value of supplies is (currently) in excess of £64,000 per annum, must register for VAT. It is also possible to voluntarily register even though supplies will be less than this figure. This could be the case where it was expected to incur substantial costs, eg during the start-up of the business, so as to enable refund of the VAT incurred on purchases. It is possible for groups of companies to register for VAT as a single VAT entity, thus requiring a single return only. Also transactions between group members will be disregarded for VAT purposes. Ordinarily, intergroup transactions such as management charges are liable to VAT at 17.5 per cent. VAT is self-assessed and registered persons are required to submit returns on a periodic (usually quarterly) basis and account for tax due with the return.

2.10 Outsourcing Alfred Levy, Artaius Ltd

General principles In most businesses the management team and skilled staff have specialist abilities. These skills are usually entrepreneurial and cover the creative parts of the company such as design and production, purchasing, selling, training, manufacturing and the specialist services side of the company. These relate to the core roles of the specific business. In addition to the roles above there are many functions common to most businesses, which require completely different skill sets. This involves the processes covering most functions normally incorporated in the back office, financial and administration departments of the company. In the embryonic stages of a business many teams do not have the experience or skill sets to overcome the hurdles of the administrative ‘red tape’ in the United Kingdom that faces management. As a company begins to grow, cash flow can become a major problem, as can budgetary control and reporting upon results. Credit control, bookkeeping, issuing of invoices, payment of suppliers, payroll, value added tax (VAT) and corporation tax can all present formidable problems that can cause management to lose the focus on the important core functions that differentiate one business from the next. The solution, of course, is to outsource the day-to-day routine processes to a service company that specializes in ensuring that the whole administration and financial accounting process operates efficiently and acts as tools for management rather than as an impediment. These operations, which are under the control of an entirely separate organization, are known as business or financial outsourcing.

Outsourcing

97

Specialists undertaking the outsourcing role in the United Kingdom Over the last few years a number of specialist firms have set themselves up in the United Kingdom to meet the demand for outsourced business and financial services. The company offering outsourced services normally comprises a team that ranges from data entry clerks to experienced bookkeepers, management accountants, financial directors and business development advisers. Most of the team will have commercial backgrounds although a number of the qualified accountants will have had a wide experience working for professional firms and in commerce. In addition to their own team the outsourcing company may well subcontract out, but control other processes such as insurance, HR management, recruitment or procurement of office equipment and phone systems.

The benefits of outsourcing In the United Kingdom some of these companies, including Artaius Ltd, who have written this chapter, will charge fixed monthly fees, no matter what work they undertake. By spreading the time of each team member amongst a portfolio of clients, the resulting charge to a business will, in most cases, be less than employing the staff itself. One should bear in mind that most businesses when they set up are relatively small. However, they still need everything from a part-time bookkeeper to a payroll operator, a VAT expert, a management and cost accountant, a credit controller and a financial director. However, they cannot expect to employ these people full-time, and in the United Kingdom part-time specialists are rare and expensive. So the benefits of outsourcing are in having a supply of experts processing all the paperwork and working through all the red tape efficiently at a fixed affordable monthly price. In the United Kingdom employment legislation is complex, and can be quite onerous for the employer. It is quite difficult to terminate an employment contract after one year and there is a grave danger that the ex-employee could claim ‘Unfair Dismissal’ in the United Kingdom. The courts usually tend to be biased towards the employee and damages can often be substantial sums of money. A further benefit relates to the automatic support given should there be illness, holidays or absence for any other reason. The outsourcing company can always provide the support required, whereas the company that performs the back office functions in-house cannot normally afford to double up on the headcount. The use of Web-based and hosted accounting software enables simultaneous access to be gained to the UK company’s accounts and bookkeeping in the United Kingdom and at the head office in the home country. This can allow interrogation of the software at each of the locations or input of data. The rights of each user can be limited to give whatever level of access is

98

Investment and Start-up Considerations

required. This system is very popular with overseas companies, because the process will enable the chief financial officer (CFO) and the finance team of the parent company to keep some level of control over the accounting records of the UK entity. The ‘hosting’ of the data will mean that it is live and real-time for anyone throughout the world.

The range of possible outsourced services On set-up of a company 1.

Formation of a UK limited company with an agreed name.

2.

Dealing with all the statutory formalities including the following • • • •

appointment of Directors and Secretary; situation of Registered Office; preparation of all Company Annual Returns; writing up of statutory books.

3.

Registering a company for VAT.

4.

Registering a company for ‘Pay As You Earn’ (PAYE).

5. Arranging for preparation of UK Contracts of Employment. 6.

Preparing a chart of accounts.

7.

Compiling a business plan incorporating budgetary forecasts.

8.

Setting up credit procedures.

9.

Introduction to UK banks and assessing the formalities of opening a bank account.

10.

Introduction to insurance companies to ensure relevant insurance policies are in place.

11.

Introduction to marketing and PR consultants.

12.

Introduction to specialist solicitors to draw up terms and conditions, and to immigration lawyers and monitoring of the process.

13. Treasury control – Internet banking, issuing and signing cheques on behalf of the company. Organizing cheque signatories and procedures.

Once the company is established Acting as back office and all that this entails: 1.

stock and order processing

2.

pre-sales credit control

Outsourcing

3.

preparation of sales invoices

4.

sending sales invoices to customers

5.

post-sales credit control

99

Maintenance of all accounting records: 1.

sales ledger (Accounts Receivables)

2.

bought ledger (Accounts Payable)

3.

nominal ledger

4.

inventory control

5.

bank reconciliations

6.

payroll processing

7.

maintenance and submission of VAT returns

8.

agreement of suppliers’ statements

Production of management information: 1.

weekly management information

2.

monthly management accounts

3.

production and interpretation of key performance indicators

4.

comparison of actual results with forecasts

Liaison with overseas holding companies: 1.

preparation of accounts in accordance with overseas head office timetable

2.

reporting in-depth using any format required on any accounting matters, complying with international accounting standards

Liaison with government bodies: 1.

dealing with all statistical returns for VAT purposes

2.

dealing with all PAYE returns

3.

dealing with Corporation Tax Returns

4.

dealing with data as required by the UK Data Protection Act

100

Investment and Start-up Considerations

Liaison with statutory UK auditors: 1.

Preparing year-end file in the format required by all UK firms of chartered accountants

2.

Dealing with all audit queries

3.

Ensuring that all group audit timetables are adhered to

Conclusion Outsourcing in the United Kingdom is a growing service industry, offering skills to businesses at an economic price, which those organizations could not readily acquire or control independently without imposing a hefty financial burden upon themselves. The result is a fixed overhead that leaves the company free to concentrate upon their core activities, knowing that the administration and financial side of the business will run smoothly, seamlessly and efficiently.

Part 3 Key Investment Sectors and Locations

3.1 AIM – The Alternative Investment Market of the London Stock Exchange Jonathan Martin, Watson, Farley & Williams LLP

Introduction London is now widely regarded as the world’s leading international equity marketplace, with over 600 foreign companies listed on its markets. The London Stock Exchange (LSE) has been at the forefront of this development. A key part of this has been the success of AIM – the Alternative Investment Market.

Alternative Investment Market The LSE launched AIM in 1995, as an alternative market for smaller growing companies, targeting businesses that either did not yet qualify for listing on London’s main market (the Official List) or were otherwise not ready for this step. When the LSE launched AIM, it wished to provide a route to the capital markets for companies that were at a relatively early stage in their

104

Key Investment Sectors and Locations

development and smaller in size and resources than companies on its main market. Consequently, they required a more balanced and less burdensome regulatory environment in which to operate than was available on other markets. AIM was therefore structured with a measured level of regulation and with limited entry criteria. The intention was to create an infrastructure that would enable companies to focus on growing their businesses rather having to devote an inappropriate amount of management time and resources to regulatory compliance. This had to be balanced with the need to ensure the continued integrity of the market and the maintenance and enhancement of its reputation as a safe and effective place to do business. The result has been a highly successful capital raising market that now enjoys a global reputation.

The growth of AIM From its modest beginnings, AIM grew steadily and, by the start of 2003, more than 1,000 companies had joined the market. In 2003, a further 162 companies were admitted. AIM then began to grow more rapidly. The number of admissions in 2004 jumped to 355, and in 2005 a further 519 companies joined the market, taking the number of admissions to more than 2,000, double the number from three years previously. In 2006, a further 462 companies joined and by 31 March 2007 a total of over 2,500 companies had admitted to AIM from the time of its initial launch 12 years previously. As of 31 August 2007, there were 1,685 companies on AIM, with a total market capitalization of over £100 billion. The AIM market has matured in recent years. Companies from all sectors are now represented on the market, the number of international (ie non-UK) companies admitted to AIM has grown strongly, average company size has increased significantly and the liquidity of the market has shown strong development. The increasing maturity of the market has also been demonstrated in the amount of funds raised by AIM companies. The graph in Figure 3.1.1 shows the growth in admission numbers and in the amount raised by AIM companies. In 2004, the total amount raised by AIM companies, by way of initial public offering (IPO) or secondary fundraising, reached £4.6 billon, more than double the previous year’s figure. In 2005, the figure was £8.9 billon, and in 2006 a total of £15.7 billon was raised, again almost double the figure for the previous year. This was even more remarkable in view of the slightly moderated admission and IPO numbers in 2006 compared to in 2005 – twice as much money was raised by a smaller number of companies. In 2006, AIM raised more money than NASDAQ for the first time. This development reflected both the increase in quality of the companies joining AIM and the average size of companies seeking funds. It also demonstrated the increasing appetite among investors for AIM stocks.

The Alternative Investment Market of the London Stock Exchange

105

16,000 14,000

Admissions

Admissions

500

12,000

519

Funds raised

462

400

355 277

300 200 123 100

145

75

8,000 6,000

177 107

10,000

160

162

102

0

4,000

Funds raised (£Millions)

600

2,000 0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Figure 3.1.1

Admission numbers and amounts raised annually

International companies Possibly the most significant development for AIM in recent years has been the growth in international admissions. As of 31 August 2007, there were officially 330 non-UK companies on AIM, from some 30 or so jurisdictions representing approximately 20 per cent of the market. However, this does not take account of businesses that have incorporated a UK holding company into their group structure, a strategy adopted by many companies in view of certain benefits of doing so. Taking these companies into account, the proportion of international businesses on AIM is estimated to be well over 25 per cent; a figure that is growing as the rate of international admissions increases. In 2006, more than 40 per cent of funds raised on AIM was raised by non-UK businesses. Much of this growth in international business has been driven by companies from Australia, Canada, China and, significantly, the United States. As a result of the regulatory environment in the United States, and the difficulties faced by small or midcap companies in the United States to raise equity funds on its domestic exchanges, an increasing number of US businesses have elected to pursue an AIM strategy. As of 31 August 2007, more than 70 US businesses were trading on AIM, from just a handful three years previously. The Sarbanes–Oxley Act has acted as a catalyst for this development, but is rarely the principal or only reason for a business to choose AIM in preference to the US markets. AIM is a market more suited to a smaller growing business than other exchanges, including those in North America. The AIM market is attuned to the needs of these companies. Besides its appropriate level of regulation and relative ease of entry, AIM has a highly developed infrastructure of advisory firms focused upon the market, specializing in this area. This includes the nominated advisers (or Nomads) that provide the corporate advisory function needed for such companies, assess

106

Key Investment Sectors and Locations

the suitability of companies wishing to join AIM under delegated authority from the LSE and, in many cases, also provide broking and fund-raising services for their corporate clients.

Market capitalization The average market capitalization of AIM companies is approximately £40 million. This compares to an average market capitalization of companies listed on NASDAQ, for example, of approximately £500 million. AIM is, however, home to companies with the broadest range of size and market capitalization. Many AIM companies have a market capitalization of £10 million or less. However, most AIM companies have market capitalizations of between £10 million and £100 million. As of 31 August 2007, 91 AIM companies had a market capitalization of more than £250 million, with three of these having a market capitalization of more than £1 billion. The distribution of market capitalization across the value range is illustrated in Figure 3.1.2. The average size of AIM companies is increasing. This has been part of a clear trend towards greater quality. International businesses tend to have larger market capitalizations than UK companies on AIM and the vast majority of companies with a market capitalization below £10 million are UK businesses. 450

Number of companies

400

359

350 300

275

250 200 150 100

242

227

183

171 104

68

50

20

3

Figure 3.1.2

00 1, 0 ve r

O

0– 1, 00

0

0 50

25

0–

50

50 –2

50

10 0

–1 00

0 –5 25

25 10 –

5– 10

5 2–

0–

2

0

Market value range £m

Reasons for listing There are a number of reasons for a company to seek a public listing. These include the following:

The Alternative Investment Market of the London Stock Exchange

107

• Accessing capital for growth •

Creating a market for its shares

•

Obtaining an objective market valuation of its business

•

Raising its profile

•

Creating the ability to fund acquisitions with share capital

•

Providing incentives to employees through share ownership

Reasons for choosing AIM AIM provides all of the above benefits to a pubic company. In addition, AIM may be contrasted with other exchanges by virtue of the following: • Absence of onerous admission criteria •

More straightforward admission process

•

Simple secondary fund-raising procedure

•

Easier acquisition rules

•

More balanced regulatory environment

AIM admission criteria AIM imposes a few eligibility criteria on companies wishing to join the market: • There is no minimum requirement for a particular percentage of shares to be held in public hands. •

No trading record is required.

• Admission documents do not require pre-vetting by a regulatory authority. • There is no minimum market capitalization. Most other established exchanges require a particular length of audited trading history and a minimum market capitalization and for a certain percentage of shares to be held in public hands. In most cases, a prospectus or registration statement must be submitted to and approved by a regulatory authority in advance of listing, which can be onerous in terms of both timing and cost. Although there are relatively few regulatory criteria for a company to qualify for admission to AIM, one of the essential foundations of the AIM

108

Key Investment Sectors and Locations

market is the position occupied by the Nomads, which act as the gatekeepers of the market.

Advisers Nominated advisers Nomads are corporate finance advisers who have been approved by the LSE. Their functions are to assist with the admission process and thereafter to advise on, and ensure compliance with, the ongoing requirements of AIM. The Nomad’s principal role in the admission process is to confirm that the company and its securities are suitable for admission. Following admission, the Nomad is responsible for advising the directors of the company as to their ongoing obligations and for reviewing the company’s actual trading performance and financial condition against any profit forecast, estimate or projection included in the admission document or published elsewhere. In view of their responsibilities to the LSE, Nomads are required to carry out extensive due diligence on their clients in advance of admission. In February 2007, the LSE introduced a new rule book for Nomads, The AIM Rules for Nominated Advisers, which codified the role and responsibilities of Nomads based on existing best market practice. While most Nomad firms conducted their businesses in accordance with best market practice in any event, the LSE was keen to ensure that all firms adopted the same standards in their review of prospective AIM companies. The system of delegated authority from the LSE to the Nomads forms one of the bedrocks of the balanced regulatory environment upon which AIM is based. It is a system that has been accepted by investors and has worked extremely well. Investor confidence in the system is reflected in the rapidly increasing amount of funds being invested in AIM securities and the moderate additional rules that AIM has introduced are likely to enhance investor confidence still further.

Brokers Every AIM company is also required to appoint and retain a broker at all times. Brokers are approved as such by the LSE. The function of these firms is to provide market support for trading in the company’s securities and to undertake fund-raising activities for the company. The broker will also generally provide research and institutional sales support for the company and provide information about the company to the market. In many cases, the Nomad and broker functions are combined within the same firm, although in separate divisions. There is no requirement for a single firm to adopt both roles and some companies prefer for their Nomad to be independent of their broker.

The Alternative Investment Market of the London Stock Exchange

109

Other advisers In addition to a Nomad and a broker, the company wishing to admit to AIM will need to engage legal counsel, reporting accountants and in most cases a public relations firm. The role of legal counsel will be to provide advice to the company on the legal and regulatory requirements for admission to AIM, advise on applicable securities laws, and play a principal role in the preparation and finalization of the admission document, working closely with the Nomad in this regard. The lawyers will also advise on any required corporate reorganization, any required amendments to the company’s constitutional documents, the terms of directors’ service contracts and the duties and responsibilities of the directors under applicable law and regulation. The legal advisers will also undertake a legal due diligence review covering matters such as the company’s contractual arrangements, employment agreements, legal and regulatory compliance and litigation as well as any other matters required by the Nomad in order to satisfy itself that the company is suitable for admission to AIM. The Nomad and broker will also engage their own legal counsel to provide independent advice on legal matters, in relation to the negotiation of the placing (or underwriting) agreement. The reporting accountants, who are distinct from the company’s own auditors, will undertake a review of the company’s financial position and financial reporting procedures, will generally produce a report containing the results of its financial due diligence review and will also prepare with the directors a working capital report to demonstrate that the company will have sufficient working capital for at least 12 months following admission. The role of the financial public relations firm will be to generate press and investor interest in the initial and any subsequent fund-raisings and to raise the profile of the company generally. The public relations firm will also work with the Nomad, the company and its other advisers in agreeing the content of public statements.

The admission process Under the standard admission procedure, a company wishing to admit to AIM will be required to produce a formal admission document or prospectus that will include all relevant information on the company and its business. The content of the admission document is governed by the AIM rules and is otherwise determined by reference to UK securities law. Most AIM admission transactions are accompanied by a fund-raising to institutional investors. If the fund-raising constitutes a public offer of securities and is made to more than 100 persons in any member state of the European Union (EU) and is not otherwise exempted, a full prospectus under the EU Prospectus Directive

110

Key Investment Sectors and Locations

will be required. Such a document will require pre-vetting and approval of the UK Listing Authority prior to admission of the company to AIM. For this reason, it is rare for a company admitting to AIM to seek to raise funds through a public offer and the vast majority of transactions are undertaken by way of an institutional placing only, exempt from the full prospectus and UKLA approval requirements. The admission document will provide the basis upon which investors subscribe for shares. The broker will undertake a fund-raising exercise, generally based on a marketing presentation and a near-final version of the admission document. An AIM transaction is broadly similar to any other listing event, the principal difference being the absence of a regulatory approval process. AIM has also introduced a streamlined secondary listing procedure, which is available to companies already listed on certain designated international stock markets. In such cases, companies can benefit from a streamlined regime under which the requirement to produce an admission document is replaced by an obligation to issue an expanded pre-admission announcement. The exchanges falling in the scope of the streamlined secondary listing procedure include the following: • Australian Stock Exchange •

Euronext

•

NASDAQ

•

NYSE

•

Official List

• Toronto Stock Exchange

Cost and timing Although every AIM admission transaction is different, and while issues of both timing and cost will depend upon a number of factors, in most cases the admission process can be expected to take three to four months to complete. Some transactions are implemented in a shorter timescale, while others take longer, but this is a fairly reliable guide. Similar variables apply in relation to the cost of an AIM admission. The largest single element of cost for an AIM admission with a fund-raising is the commission payable to the broker or investment bank. This will generally be between 3 and 5 per cent of funds raised. Other costs include the cost of legal counsel and of the reporting accountants and auditors. As a guide, companies would commonly expect the total cost of an IPO on AIM to be approximately 7 to 8 per cent of funds raised. This does, of course, depend upon the size of the fund-raising.

The Alternative Investment Market of the London Stock Exchange

111

Requirements following admission Once admitted to AIM, companies must comply with the AIM rules, as well as with applicable securities law. The AIM rules are written in plain English and are less prescriptively detailed than the rules on other merger markets. AIM companies must provide certain information to the market on a regular basis and specifically upon the occurrence of certain events. To ensure that the market is kept fully informed, AIM companies are obliged to make similar ongoing disclosures to those required by companies on the other major exchanges, to ensure that the market is aware of the financial position of the company and its prospects. Each AIM company is also required to publish accounts prepared in accordance with International Accounting Standards (IAS) for financial periods commencing on or after 1 January 2007 (prior to which the relevant standards were IAS, UK Generally Accepted Accounting Practice (GAAP) or US GAAP), as well as six-monthly interim results. Each AIM company is also required to notify the market of any changes in shareholdings of directors and to provide information to the market concerning substantial or related party transactions. It should be noted that shareholder approval is generally not required for substantial transactions, which contrasts AIM with other markets. The only exception to this is in the case of a reverse takeover or a disposal resulting in a fundamental change of business, which requires the approval of shareholders in advance of the transaction.

Corporate governance The United Kingdom has high standards of corporate governance applicable to public companies The Combined Code on Corporate Governance is mandatory for all companies listed on the Official List. Although the Combined Code does not apply to companies trading on AIM, most AIM companies seek to adhere to the provisions of the code so far as practicable, including by ensuring that the roles of chairman and chief executive are exercised by separate individuals and that there is a balance between executive and non-executive directors on a board. In 2005, the Quoted Companies Alliance issued Corporate Governance Guidelines for AIM companies and, although this guidance has no formal regulatory status, it does reflect a consensus position of the AIM advisory and investing community and reflects the key provisions of the Combined Code.

Tax benefits For UK taxpayers, an investment in shares traded on AIM can provide certain tax benefits by way of tax reliefs that may be available to them. This will include certain reliefs on gains realized on the disposal of shares held by

112

Key Investment Sectors and Locations

individual investors or trustees, the holding over of certain gains made on disposal and certain other reliefs and benefits. Such tax benefits and reliefs are designed to encourage investment in AIM stocks, which have generally been companies in the early stages of their development.

Conclusion AIM is a highly attractive marketplace for smaller growing companies. It welcomes international businesses and offers a balanced level of regulation appropriate to the companies it targets. AIM has become the leading IPO market in the world, and its growing maturity is set to continue to attract business and investors from around the world in increasing numbers.

3.2 Roles of the Nomad and the Broker on the Alternative Investment Market Tony Rawlinson and Simon Sacerdoti, City Financial Associates Limited

Introduction A company seeking admission to the Alternative Investment Market (AIM) is required by the AIM rules to have a nominated adviser (referred to as a Nomad) and a broker. These advisers are so important to the life of a company on AIM that following admission to AIM all AIM companies are also required to retain a Nomad and a broker at all times. Indeed, if a company finds itself without a Nomad, its shares will be suspended from trading on AIM, and if it is still without a Nomad after a month, its listing will be cancelled. A Nomad is a corporate finance adviser that has been approved by the London Stock Exchange to act in the role of nominated adviser. It is responsible to the London Stock Exchange for ensuring that companies for which it acts adhere to the various rules and regulations applicable to AIM companies. The Nomad is privy to confidential, and often price-sensitive, information on the company. Although its primary duty of care is to the London Stock Exchange, the Nomad’s client is the company. The function of the company’s broker is to raise funds and manage the market in the company’s shares. The broker may also make a market in the company’s shares and produce research on the company, although these functions are not required by AIM. Brokers are dual-facing with their corporate broking teams acting for AIM and other corporate clients and their private

114

Key Investment Sectors and Locations

client or institutional sales teams acting for institutions or private individuals who invest in companies’ shares and who are therefore not privy to confidential corporate information. We examine the roles and responsibilities of both advisers in more detail below.

Nomad When the London Stock Exchange created AIM in 1995, it recognized the need to establish a flexible but effective way to regulate the market without overburdening the sort of younger, more entrepreneurial companies it wished to attract. The exchange decided to do this by creating a new type of corporate finance adviser, the Nomad, which would have a responsibility to the exchange for determining the suitability of a new applicant to AIM, and also an ongoing responsibility for monitoring the company and ensuring its compliance with the relevant regulations. Effectively, the exchange outsourced the regulation of AIM to the Nomads. The London Stock Exchange itself acknowledges on its website that the reputation and success of AIM since its launch is largely due to the dedication and professionalism of the network of Nomads. The introduction of the AIM Rules for Nominated Advisers in February 2007 codified the role and responsibilities of a Nomad, as well as the process and criteria that must be satisfied by a firm in order to become and remain registered as a Nomad, which include demonstrating a certain level of recent relevant experience and employing a minimum number of qualified executives each of whom must have the requisite level of relevant experience. As well as acting as a regulator, Nomads offer companies the sort of advice that one would expect from a corporate finance adviser, and from a company’s point of view, the role of the Nomad is to guide the company through the process of admission to trading on AIM, and through its life thereafter as a publicly quoted company. At the time of writing, there were approximately 85 firms registered as Nomads.

Obligations The AIM Rules for Nominated Advisers set out the obligations of a Nomad in respect of companies for which it is the nominated adviser. The key responsibilities of a Nomad to the exchange in respect of a company for which it acts are as follows: General obligations • To assess the appropriateness of a company on its application to AIM, and also when it takes on a company as its client. If a Nomad believes a company to which it is nominated adviser is no longer appropriate for AIM, it has a responsibility to contact the exchange and discuss this.

Roles of the Nomad and the Broker on the Alternative Investment Market

115

• To comply with the AIM Rules for Companies, the AIM Rules for Nominated Advisers, and with any supplementary rules, procedures, notices, guidance, requirement, decision or direction issued by the exchange. • To act at all times with due skill and care. Nominated adviser’s responsibilities • To advise and guide a company on its responsibilities and obligations both in respect of admission and on an ongoing basis. It must be available to give this advice and guidance to the companies for which it acts at all times and should allocate at least two appropriately qualified staff to be responsible for each such company.

Information obligations • To provide the exchange with any information that it reasonably requires, having first satisfied itself that the information provided is correct, complete and not misleading. • To liaise with the exchange when requested to do so either by the exchange or by a company for which it acts. • To seek the advice of the exchange on any uncertainty on the application or interpretation of the AIM rules, or on any concerns over the reputation or integrity of AIM. • To advise the exchange as soon as practicable if it believes that it or an AIM company has breached the AIM rules. • To notify the exchange in the approved manner on being appointed as Nomad to a company, or ceasing to act as Nomad to a company.

Independence and conflicts • To demonstrate independence (both of the firm and its individual executives) from the companies for which it acts. • To avoid any actual or apparent conflict of interest.

Procedures, staff and records • To follow the prescribed procedures, employ appropriately qualified staff and maintain sufficient records. It is interesting to note that the stated responsibilities of a Nomad under the AIM rules are all of a regulatory nature, and are owed to the exchange

116

Key Investment Sectors and Locations

rather than the company for which it acts. It may, of course, subject to these responsibilities and obligations, also provide advice to these companies. It is the dual role of regulator and adviser that makes the relationship between a company and its Nomad such a unique one.

Responsibilities A schedule to the AIM Rules for Nominated Advisers contains a set of principles, with subsidiary actions, that a Nomad must follow in order to comply with its obligations. This codifies what had become best practice into required practice. The principles are as follows: •

In assessing the appropriateness of an applicant and its securities for AIM, a nominated adviser should achieve a sound understanding of the applicant and its business.

•

In assessing the appropriateness of an applicant and its securities for AIM, a nominated adviser should (i) investigate and consider the suitability of each director and proposed director of the applicant; and (ii) consider the efficacy of the board as a whole for the company’s needs, in each case having in mind that the company will be admitted to trading on a UK public market.

• The nominated adviser should oversee the due diligence process, satisfying itself that it is appropriate to the applicant and transaction and that any material issues arising from it are dealt with or otherwise do not affect the appropriateness of the applicant for AIM. • The nominated adviser should oversee and be actively involved in the preparation of the admission document, satisfying itself (in order to be able to give the nominated adviser’s declaration) that it has been prepared in compliance with the AIM Rules for Companies with due verification having been undertaken. • The nominated adviser should satisfy itself that the applicant has in place sufficient systems, procedures and controls in order to comply with the AIM Rules for Companies and should satisfy itself that the applicant understands its obligations under the AIM Rules for Companies. • The nominated adviser should maintain regular contact with an AIM company for which it acts, in particular so that it can assess whether (i) the nominated adviser is being kept up-to-date with developments at the AIM company and (ii) the AIM company continues to understand its obligations under the AIM Rules for Companies. • The nominated adviser should undertake a prior review of relevant notifications made by an AIM company with a view to ensuring compliance with the AIM Rules for Companies.

Roles of the Nomad and the Broker on the Alternative Investment Market

117

• The nominated adviser should monitor (or have in place procedures with third parties for monitoring) the trading activity in securities of an AIM company for which it acts, especially when there is unpublished pricesensitive information in relation to the AIM company. • The nominated adviser should advise the AIM company on any changes to the board of directors the AIM company proposes to make, including (i) investigating and considering the suitability of proposed new directors and (ii) considering the effect any changes have in the efficacy of the board as a whole for the company’s needs, in each case having in mind that the company is admitted to trading on a UK public market.

The relationship in practice In practice an AIM company’s relationship with its Nomad is one of the most important adviser relationships it will have. The Nomad is available to advise the company, but can also be held accountable by the exchange if the company does not comply with the AIM rules, for example if it does not announce an announceable event or is late in posting its accounts. Accordingly, there must be regular communication between the company and the Nomad on all matters, including the trading performance of the business; its budgets and plans, any milestones that are reached or expected to be reached and any issues relating to directors and shareholders. The Nomad will need to be provided with full information on the progress of the business. This will typically include receiving copies of budgets, board pack and regular management accounts; discussing any significant events in the business (both positive and negative); understanding any changes to shareholdings; and attendance at certain key board meetings.

Broker A broker is a securities house and must be a member of the London Stock Exchange. Its sole role under the AIM rules is to use its best endeavours to find matching business if there is no registered market maker in a company’s shares. However, in practice, the broker is a key adviser in the process of raising money in association with an admission to AIM or a secondary fundraising, and in maintaining a sustainable market in a company’s shares. The broker is normally responsible for running the fund-raising process, including advising on marketing materials, effecting introductions to potential investors and coordinating the logistics of collecting funds and issuing shares. Usually a company’s broker also acts as a point of contact between the investment community and the company and, when requested, coordinates transactions in the company’s shares with a view to maintaining an orderly

118

Key Investment Sectors and Locations

market in those shares. It may also advise the company on investment conditions and the pricing of its securities; and may produce research on the company for dissemination to the market.

Structure Typically, a broker is divided into the company-facing corporate finance and corporate broking part of the firm, and the market-facing part of the firm. The corporate finance team advises client companies and is privy to confidential, often price-sensitive, information on the company. It is focused on servicing the needs of the company, and its key function is to manage the broker’s input into a flotation or other transaction. The market-facing part of the firm includes sales people, who are engaged in selling the company’s shares to institutional and other investor clients of the broking firm, and analysts, who are responsible for producing independent research on clients and other companies. This part of the firm is only entitled to receive information that is in the public domain, and once it receives information, it is deemed to be in the public domain. Because these two parts of the broker have different objectives and are responsible to different clients (the company as opposed to the market), there are strict rules governing the interactions between them. These centre around protecting the confidentiality of information by the use of procedures that create and maintain a Chinese Wall.

Integrated house or separate advisers Many city firms offer both Nomad and broker services, and it is quite common for a company to appoint such an integrated house to both roles. When this occurs, strict Chinese Walls separate the Nomad and broker functions, as in most cases information to which the Nomad is privy (in its role as quasi-regulator and corporate finance adviser to the company) must not be disclosed to the market-facing part of the broker. Some companies prefer to keep the roles separate, choosing to appoint two distinct firms to fill these roles in order to safeguard the confidentiality of price-sensitive information and to ensure the independence of advice they are given.

Further information Further information on the roles and responsibilities of Nomads and brokers may be found on the London Stock Exchange website www. londonstockexchange.com, in particular about the AIM Rules for Companies and the AIM Rules for Nominated Advisers.

3.3 Mergers & Acquisitions and Joint Ventures Jonathan Martin and Tanvir Dhanoa, Watson, Farley & Williams LLP

Introduction The phrase ‘mergers and acquisitions’ (M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the purchase, sale and merging of different companies. Unlike in certain jurisdictions (notably the United States), in the United Kingdom there is technically no concept of true merger, in the sense of two or more separate entities combining to form one continuing entity (although the term ‘mergers and acquisitions’ is used in the United Kingdom). The term ‘acquisition’ is used to describe a wide variety of transactions involving the sale and purchase of either a business or a company. Through the acquisition of a UK target, an inward investor is able to gain immediate local presence, expertise and name recognition. The same principal issues are common to most acquisitions, whatever the size or nature of the parties or the entity being acquired. The basic forms of business combination are as follows: •

purchase of shares of the target company

•

purchase of the target’s underlying business

•

joint venture arrangements

This chapter is divided into four sections. The first considers the private acquisition of companies and businesses, the second deals with the

120

Key Investment Sectors and Locations

acquisition of public companies and the third covers joint ventures. The final section provides an overview of merger control.

Private company and business acquisitions Structure – shares or assets There are generally two methods of acquiring a business. One is to buy the shares of the company that owns the business, the other is to buy the assets that make up the business. In either case, the buyer will achieve its commercial objective of acquiring the business that is being run by the target company, although the legal effect of the two types of acquisition is fundamentally different. If shares in a company are purchased, all its assets, liabilities and obligations are acquired (even those that the buyer does not know about). The contract is made between the buyer and the owner of the shares as seller. There is no change in the ownership of the business – it remains in the ownership of the company. Alternatively, the business may be purchased either in its entirety, as a going concern together with all its assets and liabilities, or, if appropriate, only those identified assets and liabilities that the buyer agrees to acquire. The contract is made between the buyer and the owner of the business, who may be an individual, a partnership or a company. A share sale is generally the quickest way to effect an acquisition because this only requires a share transfer. On a business sale, by contrast, transfer arrangements will need to be put in place for each asset being purchased. Tax issues will also play a central role in determining which route is the best one to follow.

Exclusivity As an acquisition will involve a prospective buyer investing a substantial amount of time, effort and money, the buyer will often require the seller to agree to not negotiate with other parties for a given period while it conducts its due diligence exercise (investigation of the target business). An exclusivity (or ‘lock-out’) period for the buyer will often be agreed in a separate exclusivity agreement.

Confidentiality agreement As most acquisitions will involve the buyer having access to significant information about the target business (and, to a certain extent, the seller and its group), some of which will be confidential, it is standard practice for a seller to ask any prospective buyer to enter into a confidentiality agreement requiring the buyer and its professional advisers to treat all disclosed

Mergers & Acquisitions and Joint Ventures

121

information as confidential and to agree that the disclosed information may only be used for the purposes of the acquisition or otherwise with the seller’s consent.

Due diligence For acquisitions subject to English law, the principle of caveat emptor, or buyer beware, will apply, which effectively means that there is only limited statutory and common law protection for a buyer under English law. It is therefore essential for a buyer to learn as much as possible about the target business and the issues that will be relevant to the acquisition as early as possible in the acquisition procedure through the process of due diligence. Due diligence is intended to identify risks so that they can be allocated between the buyer and the seller. The review usually comprises legal, financial, tax and commercial due diligence. The review will help to determine the contractual protections required from the seller and the risks the buyer should avoid completely. The information-gathering process will aim to identify information that may impact upon the negotiation process and, in particular, on the price the buyer is prepared to pay. The buyer will seek to obtain contractual protection from the seller in relation to issues of concern to it and other risks in the form of warranties and indemnities in the acquisition agreement.

Warranties In simple terms, these are contractual promises made by the seller to the buyer regarding the state of affairs of the target company or business. If a warranty proves to be untrue and the value of the company or business is thereby reduced, the buyer can claim damages from the seller. Warranties serve two main purposes: one is to elicit information about the business from the seller by way of disclosure or qualification of the warranties, a process linked to the due diligence investigation discussed above. Warranties also provide a buyer with a remedy (a claim for breach of warranty) if the statements made about the company or business later prove to be incorrect and the acquisition turns out to be other than as bargained for. Warranties therefore provide a form of retrospective price adjustment.

Indemnities A buyer may seek further contractual protection in the form of indemnities included in the acquisition agreement (or sometimes in a separate deed). An indemnity is essentially a promise to reimburse the buyer in respect of a designated type of liability, should it arise in the future. The purpose of an indemnity is to provide a guaranteed remedy for the buyer where a breach

122

Key Investment Sectors and Locations

of warranty may not give rise to a claim in damages or to provide a specific remedy that might not otherwise be available at law.

Stamp duty Stamp duty is the tax payable when property or shares are transferred. ‘Stamp Duty Land Tax’ is payable when real property or land is bought and either ‘Stamp Duty’ or ‘Stamp Duty Reserve Tax’ is payable when shares are transferred. On an acquisition of shares, the buyer pays stamp duty at 0.5 per cent of the purchase price. On an acquisition of a business, the buyer pays stamp duty only on those assets that are taxable (essentially land and shares). On the purchase of commercial land, no stamp duty is payable if the value of the property does not exceed £150,000. Stamp duty on the purchase of real estate above this value is payable at varying rates up to 4 per cent.

Schemes of arrangement A scheme of arrangement is a statutory procedure for business combinations effected under Section 425 of Companies Act 1985 whereby a company may make a compromise or arrangement with its members or creditors. A company can affect virtually any kind of internal reorganization, merger or demerger restructuring under this section. The scheme requires approval by a majority in number representing three-quarters in value of the members or creditors who vote at the meeting convened for the purpose of considering the scheme. It also requires court approval. Schemes of arrangement are becoming increasingly popular and an inward investor should consider whether a conventional takeover offer or a scheme of arrangement would be the most appropriate method to acquire a target.

Public company acquisitions The takeover market The United Kingdom has a long history of takeover activity. Takeover activity has increased significantly since the Takeover Panel commenced work in 1968 and approximately three quarters of all public takeover offers in the European Union (EU) occur in the United Kingdom. There are several reasons for this growth, including that corporate balance sheets appear to be healthier than ever before and corporate earnings expectations remain positive. In addition, the rising popularity of the Alternative Investment Market (AIM) has continued and has generated significant takeover activity as companies on the market mature and consolidation of businesses becomes an

Mergers & Acquisitions and Joint Ventures

123

attractive opportunity. For further discussion on the AIM Market, refer to Chapter 3.1.

Regulation of takeovers Transactions involving the acquisition of control of a public company (takeovers), and those involving the sale and purchase of public companies whose shares are listed on the London Stock Exchange, are subject to considerable additional regulation: • The City Code on Takeovers and Mergers (the Takeover Code) is a set of rules developed by the Panel on Takeovers and Mergers (the Takeover Panel) and regulates takeovers in the United Kingdom. The Takeover Code applies to offers for public companies resident in the United Kingdom, the Channel Islands and the Isle of Man, irrespective of where their shares are listed or publicly marketed. • The Listing, Prospectus and Disclosure Rules are made by the Financial Services Authority (FSA) and regulate the process by which a company listed on the London Stock Exchange can make acquisitions or disposals. • The Criminal Justice Act 1993, together with the Listing Rules, Disclosure Rules and Takeover Code, regulates insider dealing. • The Companies Act 1985 contains the main legislation governing the formation and administration of companies. • The Financial Services and Markets Act 2000 (FSMA) regulates the conduct of investment business and makes provision for the official listing of securities, public offers of securities and investment advertisement. •

Merger control provisions – the takeover of a UK company may require approval from the competition authorities of the EU or the United Kingdom.

Outline of a takeover Takeovers are public transactions, and the Takeover Code prescribes a strict timetable to be adhered to. Unlike a private acquisition, it is not possible to simply announce the completion of a takeover. Under the Takeover Code, a takeover must be carried out publicly and any takeover offer made has to be held open for a fixed period of time. This in turn means that a potential rival bidder may make a competing offer to the target’s shareholders. In a ‘recommended bid’, target shareholders are recommended to accept the offer by the target’s directors. A ‘hostile bid’, on the other hand, is an offer not supported by the target.

124

Key Investment Sectors and Locations

Joint ventures A joint venture describes a commercial arrangement between two or more economically independent entities for the purpose of pursuing an agreed commercial goal in which the joint venturers share in agreed proportions the financing and control of the enterprise, and the profits and losses it makes.

International joint ventures Joint ventures are vital to the development of international business and an alliance with a local partner can provide an inward investor with an important means of business expansion, access to new markets, distribution networks and greater resources as well as sharing of risks with a partner. International joint ventures (where an overseas party combines with a local party to undertake joint business in that local jurisdiction) will require consideration of a number of issues, including choosing the type of legal structure most appropriate to the joint venture vehicle, tax considerations, restrictions on foreign participation and licensing issues and the requirement for governmental consents.

Joint venture vehicles Joint ventures may be structured through limited partnerships, limited liability partnerships or unincorporated associations. However, the most common joint venture vehicle is the limited company.

Contributions and funding Initial finance may be injected into the joint venture company in a number of ways. One of these would be a straightforward subscription by the partners for shares in the joint venture company in consideration for a contribution of cash or non-cash assets. Alternatively, capital may be injected by way of loan, either from the joint venture partners or from third party lenders. The parties will also need to consider in advance how future finance is to be provided to the joint venture vehicle.

Management It is common for the partners to retain some level of control and influence in the joint venture’s decision-making process, either through representation on the board of directors or through requiring certain key decisions to be referred to shareholders. The level of each party’s control will depend

Mergers & Acquisitions and Joint Ventures

125

on their respective shareholdings. The management structure should be reflected clearly in the joint venture agreement.

The joint venture agreement The written agreement between partners should set out the precise terms and conditions agreed between them and provide a framework for the ongoing alliance. It should cover the following: •

the structure of the joint venture;

•

the objectives of the joint venture;

•

financial contributions that each partner is to make;

•

management and control of the joint venture (eg the right to appoint directors and each partner’s voting rights);

•

how profits, losses and liabilities are to be shared;

•

how any disputes between the partners will be resolved;

•

how the joint venture can be terminated.

Merger control Merger control provisions exist under both UK and European law. Inward investors merging with, acquiring, or entering into a joint venture with a UK company should be aware that the merger may require notification to the Office of Fair Trading (OFT) to assess its effect on competition in the relevant markets. Although notification to the OFT is a voluntary system, the overwhelming majority of mergers that meet or exceed the qualifying threshold criteria (see below) are notified in one form or the other, to eliminate the risk of incuring only potential regulatory penalties. A merger will be considered as ‘qualifying’, or requiring notification where: •

two or more companies, at least one of which carries out business in the United Kingdom, cease to be distinct (brought under common ownership or control); and

either •

the merging companies supply or consume goods or services that form part of the same market, and after the merger takes place, they will supply or acquire 25 per cent or more of those goods or services in the United Kingdom as a whole or in a substantial part of it;

126

Key Investment Sectors and Locations

or •

the annual UK turnover of the company being taken over exceeds £70 million.

It should be noted that larger mergers that have a ‘Community dimension’ will be reviewed by the European Commission under the European Community Merger Regulation (ECMR) rather than the OFT or the UK Competition Commission. A concentration will qualify under the ECMR where the aggregate worldwide turnover of the parties exceeds 5 billion euros and the EU-wide turnover of each of at least two parties exceeds 250 million euros unless each of the parties achieves more than two-thirds of its aggregate EU-wide turnover in the United Kingdom. In specific circumstances smaller UK mergers may also be assessed under the ECMR. For this to occur the concentration must meet certain turnover thresholds in the United Kingdom and at least two other EU member states. Notification under the ECMR is mandatory.

3.4 Financial Services Jonathan Reuvid

Overview The United Kingdom has maintained its position as one of the world’s most advanced financial centres based on its reputation for financial probity and integrity. The City of London (the City) contributes about 2.5 per cent to the United Kingdom’s GDP, holds a global market share of about 4.3 per cent in foreign equities trading and holds market leadership of 31 per cent in foreign exchange trading. Although the City predominates, the United Kingdom has several other major financial centres, with the Edinburgh and Glasgow cluster ranking amongst Europe’s 10 largest. Throughout the United Kingdom more than 1 million people are employed in financial services. The reasons why the City has maintained its pole position lie in the breadth and depth of its capabilities, its flexibility in adapting to change and the dynamic pace of innovation that it continues to stimulate. For a time, it was forecast that the centre of gravity in European capital markets and banking might shift from London to Frankfurt with the establishment of the Eurozone and the location there of the European Central Bank. However, that threat has receded and there is no reason to doubt the City’s continuing strength. London provides an interface between European Finance and the global market. It is Europe’s largest international banking centre with an estimated 41 per cent share of all European Union (EU’s) financial services.

Banks Although the number of banks in the City waxes and wanes, both increasing as foreign banks grow and expand their international presence and declining as banks merge and rationalize operations, there are estimated to be more than 400 banks operating in London, of which some 300 are foreign-owned,

128

Key Investment Sectors and Locations

including banks from the other member states of the expanded EU, other European countries, the Middle East, Asia and Africa.

Islamic banking Indeed, the City is fast becoming the premier international centre of Islamic finance outside the Muslim world. The established UK banks are extending their product ranges accordingly and the City is committed to ensuring fair competitive conditions for Sharia’a compliant financial products. The London-based Islamic Banking Institute, founded in 1991, lists 23 banks offering Islamic finance products, more than the rest of Europe combined.

International lending The volume of international lending with more syndicated loans completed in London than anywhere else is more than twice the value of loans completed in the United States or Germany. There are said to be more than US $3,000 billion managed on behalf of foreign clients by foreign banks in the City. The City is a world leader in cross-border lending, with an estimated 20 per cent market share.

Foreign exchange trading and bond issues London is the world’s most important centre for foreign exchange trading with about a one-third market share of the US $2,700 billion that changes hands every day. The City has flourished since the formation of the Eurozone in the issue of bonds. The majority of bond issues are in Eurobonds, of which some 60 per cent originate in the City; an estimated 70 per cent of bond trading takes place in London. Overall, UK international bond issues were at the level of US $350 billion in 2005 against US $200 billion each in Spain and the United States, its two nearest rivals. Many foreign banks have also located their trade and project finance centres in London rather than their home territories. The secondary markets in which existing bank debt and trade finance instruments are bought and sold one with the other are also concentrated in London.

Investment banking Perhaps the most striking change in the composition of City institutions over the past 20 years has been the restructuring of investment banking following the spate of M&A activity by foreign banks that acquired almost all the former privately owned British merchant banks and integrated them into their London-based banking operations.

Financial Services

129

More recently, there has been a marked power shift in investment banking and trading business, with leading Wall Street banks such as Citigroup, Goldman Sachs, Lehman Brothers, Merrill Lynch, JPMorgan and Morgan Stanley relocating senior management of some global operations from New York to London. The shift reflects the lighter regulation in London and current trends in relative revenue growth, with Europe considered to be growing at twice the rate of the United States and Asia three times faster. As a result of the restructuring of City banking institutions, London draws on a global pool of skills attracted not only by its concentration of capital but by the energy it generates. The City’s professional institutions have 600,000 members in fields such as accountancy, insurance and securities, with 25 per cent living overseas.

Capital markets London is the pre-eminent global equity marketplace with a 2005 full-year turnover approaching US $2,500 billion and the London Stock Exchange remains the leading international stock exchange. As described in Chapter 3.1, the Alternative Investment Market (AIM) market, launched 12 years ago, has more than 600 foreign companies’ shares listed. As of April 2007, a total of 1,639 companies were listed on AIM, having a market capitalization in excess of £100 billion. The lighter regulation of AIM, in comparison with that of NASDAQ in New York, has made London a more attractive destination for international flotation by medium-sized companies from emerging markets. In 2006 the initial public offering (IPO) volume of the London Stock Exchange, including AIM, exceeded US $55 billion compared to US $47 by the New York Stock Exchange and NASDAQ combined. According to McKinsey and Mercer Oliver Wyman, the United Kingdom accounted for 47 per cent of European revenues from investment banking and capital markets in 2005 against Germany’s share of 12 per cent share by Germany. London is also Europe’s leading centre for the management of hedge funds and derivatives, having played a key innovative role in the evolution of these products. The total value of European hedge fund assets based in the United Kingdom grew fourfold between 2002 and 2006 and had reached US $300 billion by the end of 2005. In March 2006 the Financial Services Authority (FSA), which regulates UK financial markets, approved the marketing of hedge funds to retail investors in the United Kingdom, opening up opportunities for further growth. In exchange-traded derivatives, London accounts for more than 75 per cent of Europe’s 41 per cent global market share and its share of the global overthe-counter (OTC) derivatives market is over 40 per cent. While London is the world’s leading fund management centre ahead of New York, with more funds invested in the City than in the next ten leading European financial centres together, there are private equity and venture capital funds located outside as well as within London. Edinburgh is a strong base for fund management expertise, while specialist funds focused

130

Key Investment Sectors and Locations

on leading-edge technology sectors are located near the centres where these specific sectors are themselves concentrated (see Chapters 3.8 and 5.3). Attractive tax breaks exist to encourage private investors to invest in Venture Capital Trusts that specialize in the equity funding of early stage and start-up business opportunities. Inflows to venture have recovered satisfactorily since 2003 after the blow-out of the tech bubble in 2000 and 2001 but are dwarfed by current levels of private equity funding of buyouts.

Other markets Insurance With the origins of the insurance industry rooted in Lloyds of London, which remains the best-known name in the sector for specialist and unusual insurance requirements, London is the world’s leading market for international insurance. The diversity and number of insurance companies and brokers, both British and foreign-owned, that are clustered around Lloyds in the City has helped London to maintain its unique position. London remains the dominant location for aviation and marine insurance reflecting the traditional Lloyds role as a centre for marine business. In 2004, maritime business alone in London generated overseas earnings of more than £1.3 million while worldwide premium income reached £153 billion. The UK life and pensions market, in spite of the problems encountered by private pension funds over the past few years, is about twice the size of its nearest European rivals.

Other exchanges Metals trading The London Metals Exchange transacts over 90 per cent of all international business in non-ferrous metal futures. The annual value of its trading is some US $3 trillion. The Baltic Exchange Nearly 50 per cent of the worldwide tanker chartering business and 40 per cent of worldwide dry-bulk business is conducted through the 2000 members of the Baltic Exchange in London. International carbon emissions’ futures market London’s international carbon emissions’ (ICE) futures market is the leading European derivatives exchange for energy products.

Financial Services

131

London’s competitive strengths The competitive strength of London as a world financial centre is based on a series of complementary factors that together provide a compelling argument for doing business there.

Effective, appropriate regulation The FSA presides over a regulatory environment that is at the same time transparent and effective without being oppressive. The FSA has avoided the overregulation of the Sarbanes–Oxley Act that reformed company accounting and reporting in the wake of the collapse of the US energy giant, Enron, and other well-publicized cases. However, the City’s long experience of international companies as investors and in their raising of capital in London has given it a clear understanding of the requirements of other non-UK financial services regulations and the FSA is mindful of the perils of underregulation where investor protection is threatened. Concerns have been expressed recently by key investors and competitors about the quality of new IPOs from emerging markets such as Russia and Kazakhstan on secondary markets, where no primary listing elsewhere is required. The FSA has already responded with plans to add many of the key protections missing from the ‘light-touch’ secondary listing rules in respect of investment vehicles such as hedge funds and private equity.

Language and geographical location With English as the international language of business and law, London has attracted many and diverse professional and support firms. For example, more than 200 foreign law firms including more than 100 from the United States have opened offices in London, which has become a centre of excellence for contract law and for arbitration in dispute resolution as an alternative to more expensive legal action. The location of London in a time zone midway between the United States and Asian markets is highly favourable in assisting the uninterrupted flow of global business; aided by low-cost communications technology, doing business in London can be particularly cost-effective.

Education An estimated 275,000 overseas students are studying in the United Kingdom in fields such as accountancy, insurance and securities. In 2004, the University of Chicago Business School relocated from Barcelona to London citing as its rationale London’s position as ‘the top European city in which to conduct business’.

3.5 The UK Commercial Property Market EMEA Research, Jones Lang LaSalle, London, UK

Background Property market size The UK commercial real estate market is one of the most established and transparent markets in the world. It plays an important role in the UK economy, making a significant contribution to fixed capital investment. At the end of 2003, the total value of the commercial property in the United Kingdom was estimated to be worth £661 billion, with 33 per cent in retail property, 26 per cent in offices and 21 per cent in industrial. The remaining 20 per cent covers hotels, pubs, leisure, utilities and public service buildings. Over half of commercial real estate is owned for investment purposes, with the remainder owner-occupied by individual companies and the government. The Commercial Floorspace Survey published by the Office of the Deputy Prime Minister (ODPM), Valuation Office Agency (VOA) and University College London (UCL) show that in 2005 there was 570 million square metres of commercial floorspace in England and Wales of which 65 per cent was in factories and warehouses, with retail accounting for 18 per cent and offices 17 per cent (Table 3.5.1). Office is further split between different uses, with 83 per cent classified as commercial offices, and the remainder as other offices. These statistics are summarized in Table 3.5.1. There is a wide variation in commercial stocks in the United Kingdom, with the greatest amount located in the northwest and Yorkshire and the Humber, although Greater London has a high proportion of office and retail space. The total stock of offices in Greater London totals 31 million square

The UK Commercial Property Market

Table 3.5.1

133

Non-domestic premises in England and Wales (2005)

Retail Premises Offices Commercial Offices Other Offices Factories Warehouses Total

Number of Hereditaments

Floorspace (000s square metres)

548,221 324,981 275,527 49,454 262,156 200,895 1,336,253

103,095 97,875 80,916 16,959 220,392 149,007 570,369

Source: ODPM, VOA, UCL.

metres, of which 19 million square metres (61 per cent) is in the core West End, City and Docklands submarkets.

Structure of the industry The UK property industry comprises many professions and organizations with different disciplines providing advice on a range of activities. Firms engaging in surveying, agency, real estate consultancy and service provision activities represent the backbone of the industry. There are of course other players involved in real estate including financial institutions, planning, legal firms and architectural practices that are regulated by separate organizations and rules. In the United Kingdom the main body representing the surveying profession is the Royal Institution of Chartered Surveyors (RICS), which ensures standards are maintained. Table 3.5.2 provides a brief summary of the key players in the marketplace.

Economy and the property market The relationship between the economy and the property market The UK real estate is strongly linked to the economy, thus understanding the dynamics of the economy and its future performance is vital to those involved in both the investment and leasing markets. Figure 3.5.1 shows a strong relationship between (1) employment growth in Central London and the amount of office space acquired by firms. Of course, firms may hoard available space or use it more intensively as their employment requirements change. The strength of the relationship signifies the linkage between business activity and employment and demand (take-up) for office space. In Figure 3.5.2 retail rents show a close relationship with consumer spending growth. As consumers increase their spending, so the profitability of

134

Key Investment Sectors and Locations

Table 3.5.2

Key players in the marketplace and their roles

Player

Role

Real Estate Consultancy Firms

These firms, ranging from multinational firms such as Jones Lang LaSalle, CBRE and others to small independent organizations, are the backbone of the profession. These firms provide advice to a variety of organizations on the sale, acquisition and disposal of space. They are also involved in the valuation and management of real estate and they provide investment advice and strategy work for the major pension fund and other institutional investors. Firms also provide holistic advice to major corporate organizations in terms of their occupational requirements and strategies. This advice is backed up by research-based work supplied either in-house or through independent providers. Some of the larger firms also have in-house teams auctioneers, planners and building surveyors.

Auctioneers

Auctioneers, who are surveyors themselves, deal with the sale of property via auctions, as opposed the traditional method of private treaty. Auctions are generally used for the sale of secondary property, especially smaller lot sizes (though not always) to private individuals and property companies.

Planners

Planners oversee and determine applications within their respective areas. They are, however, also employed within firms of surveyors in advising developers and other parties in the submission and appeals to planning applications.

Property Research Organizations

In recent years there has been an increase in the number of independent research organizations providing advice on specific aspects/investment advice and market-based data.

Solicitors

Solicitors provide a range of services including advice on transactions, leases, litigation and on the structural form of property investment vehicles.

Banks

Banks (high street, investment and merchant) and building societies provide the funding to investors for the acquisition and development of schemes.

Insurance and Pension Funds

Insurance and pension funds are key investors in commercial real estate and employ significant teams in the management of these portfolios. Firms may not be restricted to the United Kingdom, with a significant number of overseas funds also investing in the United Kingdom.

Property Companies

Property companies, both listed and private, are major players in the market, holding land for development opportunities and investment purposes. Given the discount to net asset value, many property companies have delisted and gone private in recent years.

Private Individuals

In recent years private individuals have become a significant player in the market, investing and trading in property. While a significant number invest in secondary lower-value lot sizes, in recent years they have also become owners of more substantial assets.

Construction Companies

Construction companies are important to developers undertaking the construction and fit-out of buildings. Some construction firms may also hold property.

Adapted from Brett 1997.

The UK Commercial Property Market

135

mplo men (lef a is) a is)

60 40 20 00 –2 0 –4 0

2002

2000

1998

1996

1994

1992

1990

1988

1986

correl coef 0 63

1984

–6 0

( 000s s m) 1800 1600 1400 1200 1000 800 600 400 200 0

2006

)

2004

( o 80

a e up (ri

Figure 3.5.1 Central London office market: employment growth and demand (take-up). Note: Employment refers to employment in financial, business services and public administration in Greater London. Source: Jones Lang LaSalle, Experian Business Strategies (employment data)

eal re ail ren s (lef a is) ( o

onsumer spendin (ri

)

a is)

( o

28

) 80

23

60

18

40

13

20

08

00

03

–2 0

–0 2

Figure 3.5.2 rents.

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

–0 7

orrel coef 0 72

–4 0

UK retail property market: consumer spending and retail

Source: IPD, ONS

retailers and the ability to pay higher rents increases. The relationship is very strong (the correlation coefficient takes a value of 0.72). We can observe that the slowdown in consumer spending growth in the last few years is mirrored in a similar trend exhibited by retail rent growth. Total returns (which is a combination of rental income from property and the change in the price of property) is closely related to GDP growth as Figure 3.5.3 illustrates. The recession of the early 1990s resulted in negative returns from property. As a consequence, investors lost confidence in

136

Key Investment Sectors and Locations All proper o al re urns (ri (lef a is)

o

a is)

30

10

20

8

10

6

0

4

–10

2

–20

0

orrel coef 0 7

–30

Figure 3.5.3

2006

2004

2002

2000

1998

1996

1994

1992

1990

–4

1988

–50

1986

–2 1984

–40

UK all property: GDP and total returns.

Source: IPD, ONS

the property market. In the recent global downturn, unlike the stock markets, the property sector performed well and offered investors steady returns. This performance has reinstated confidence in the sector.

Useful economic data sources Given the linkages between the economy and property market activity, the availability of data and access to information describing economic activity is essential for investors. In the United Kingdom there is a vast array of economic data published on the UK economy throughout the year, including both official data provided by the Office of National Statistics and other surveybased data provided by various representative and trades bodies, including most notably the Confederation of British Industry (CBI) and the Chartered Institute.1 Table 3.5.3 summarizes a number of key pieces of survey data, which are important in understanding the performance of the economy, both immediately and in the future. Much of these data are freely available for current periods, although some historical time-series data are only available by subscription. All official UK statistics are currently available free of charge.

1 A measure of the closeness of a relationship is the correlation coefficient. A value of 1 signifies a perfect relationship. The value of 0.77 obtained for employment and office takeup represents a strong relationship of purchasing supply (CIPS). These databases cover the economy at the national, regional and local levels.

Financial Stability

Business Sentiment Consumer Confidence Business Activity

Treasury Forecasts Business Sentiment

Survey data on manufacturing, retail and financial services sectors Indicator of confidence on a range of measures Survey data on orders, employment, capacity utilization, cashflows Review of the financial stability of the UK economy

Size and growth of the economy and its component sectors Index of production showing output in various production/manufacturing industries Current bank base rate and background to rate decision Level of sales Levels of employment, unemployment and earnings at UK and regional level Finance rates often used on loans for real estate Current rate of inflation and contributory factors Inflation report, providing the current outlook for inflation and the UK economy Independent forecasts of various economic data over two and four years Survey data on business activity, including output and employment, for the manufacturing and service sectors

Comment

Data sources for UK economic statistics

Inflation Outlook

Inflation

Swap rates

Retail Sales Labour Market

Interest Rate

Economic Growth (GDP) Industrial Production

Data

Table 3.5.3

Chartered Institute of Purchasing Supply Confederation of British Industry Martin Hamblin GFK British Chambers of Commerce Bank of England

Monthly

Biannual

Quarterly

Monthly and quarterly Monthly

HM Treasury

Bank of England

National Statistics

Financial Times

National Statistics National Statistics

Monthly

Quarterly

Monthly

Daily

Monthly Monthly

Bank of England

National Statistics

Monthly

Monthly

National Statistics

Provider

Quarterly

Released

www.bankofengland.co.uk

www.britishchambers.org.uk

www.martinhamblin-gfk.com

www.cbi.org.uk

www.cips.org

www.hm-treasury.gov.uk

www.bankofengland.co.uk

www.statistics.gov.uk

www.ft.com

www.statistics.gov.uk www.statistics.gov.uk

www.bankofengland.co.uk

www.statistics.gov.uk

www.statistics.gov.uk

Internet Link

138

Key Investment Sectors and Locations

Leasing structure of the UK property market The United Kingdom has a distinctive leasing system that both overseas occupiers and investors need to understand. Leasing products vary, and include fully serviced offices on short-term contracts to traditional space on longer-term contracts. Some firms may also wish to outsource space needs to a specialist provider, for example, Land Securities Trillium or Mapeley. When seeking to secure premises in the United Kingdom it is always appropriate to seek advice from a professionally qualified surveyor. The following sections outline the various characteristics of the traditional institutional lease in the United Kingdom.

Lease length Traditionally, an occupier will enter into a lease (subject to the legislative framework), which may provide rights for renewal, or other obligations, expressed or otherwise by law. The length of lease will be a matter for negotiation, or could be restricted on the assignment of a lease. In recent years the average length of a typical institutional style lease has fallen from under 20 years to below 15 years. Lease lengths are typically longer for retail property as retailers traditionally seek longer leases particularly in order to recoup the cost of their fit-out. Figure 3.5.4 below highlights the change in lease lengths over time for the main sectors. The graph shows that average lease lengths have fallen in three sectors in response to modern business requirements. The industrial sector showed the

eriod ( ears)

23

All re ails

All offices

All indus rials

18

13

Figure 3.5.4 Source: IPD/BPF

2004 2005

2003

2002

2001

2000

1999

1998

1997

1996

1995

8

Changes in lease length for the main sectors (1995–2005).

The UK Commercial Property Market

139

largest fall in average lease from 16.7 years in 1995 to 9.7 years in 2004/2005. Office leases showed the second largest fall from 15.3 years to 11.6 years over the same period. In taking a lease for a long period of time, occupiers need to be aware of the possible restrictions that may arise should they seek to assign a lease. The Landlord and Tenant (Covenants) Act 1995 led to a change in rules regarding ‘privity of contract’. For leases entered into before this act, the obligations between the original landlord and tenant remain enforceable even if the lease has been transferred or assigned. Leases entered into after this act was introduced are subject to this restriction, releasing the tenant from any future obligations on the transfer or assignment of the lease. Of course, there may be restrictions placed in the terms of the lease in respect of, for example, the financial standing of the tenant.

Rent review Leases will contain provision for rent reviews, the period and nature of review being set out in the terms of the lease as agreed between the landlord and tenant. Traditionally, rent reviews in the United Kingdom will be every five years to the then open market value, subject to an upwards-only clause, preventing the rent from falling below the passing rent (should rents have fallen). The rent at review will be subject to negotiation between the two parties with reference to rents recently agreed (comparables) for similar premises in the open market. Sometimes the lease will have another basis on which the rent will be reviewed. This could be that rents are reviewed by a fixed percentage, to a certain sum, or are set to rise by the then rate of inflation, possibly with a cap or collar to restrict the level of increase. The exact nature of the review will be specified in the lease. With the length of leases shortening, there is now a higher proportion of leases that are not subject to a rent review.

Repairing obligations The general obligation to repair is placed on the tenant to undertake, or pay for (often in the case of a multi-tenanted building by way of a service charge) all necessary repairs, even if these pre-date the lease. This is typically referred to as an FRI (Full Repairing and Insuring) lease. Special provisions can be incorporated into the lease, which may limit the obligations to keep the property in its initial condition at the time the lease is granted, and a special Schedule of Condition can be attached to the lease. In some limited circumstances the lease may limit repairs to the interior of the property, with the landlord undertaking the external repairs, otherwise referred to as IRI (Internal Repairing and Insuring) lease.

140

Key Investment Sectors and Locations

Incentives and other obligations Some leases may contain additional provisions such as the inclusion of a break clause in which one or both of the parties are able to determine the lease at a certain point in time and subject to any penalties agreed between the parties. There may also be a time period specified by which the parties must serve their notice to break the lease. In addition to break options a lease may contain other incentives such as a rent-free period. This is often provided for a short period, say three to six months to allow the tenant to undertake fit-out works, although at times when leasing activity is slow the level of rent-free may increase dependent on the negotiations. At the time of signing the lease, the landlord may require the tenant to provide a deposit covering rent for a certain period of time. A guarantee may also be required against the obligations for the term of the lease that may be enforced even if a business fails.

Lease reform Following the recent government review of leasing practice in the United Kingdom the government has decided not to take any legislative action against leasing practice for the time being. Nevertheless, some concerns remain and the government has reiterated that it will continue to monitor practice over the next three years to ensure flexibility continues to be offered and provided. The government also intends to review the law on assignment and subletting, including legislative options, to enhance flexibilities, whilst not jeopardizing the investment market. In addition to the cost of renting and professional fees, occupiers will also have a liability to other occupational and leasing costs, including taxation and running/maintenance charges.

Taxation, management and transactions costs On taking a lease (or even acquiring premises freehold) stamp duty will be payable on the transfer of the property. The freehold rates are outlined in Table 3.5.4. As of 1 December 2003, new rates came into force for leases, with the rate set at 1 per cent of the net present value of the rental stream, discounted at a rate of 3.5 per cent. An individual will be exempt from liability where the net present value of the income stream is below £150,000. Further details on stamp duty are available at www.inlandrevenue.gov.uk. And the current rates are outlined in Table 3.5.4. It is recommended that professional advice be sought with regard to the tax implications, including value added tax.

The UK Commercial Property Market

Table 3.5.4

141

Stamp duty rates (as of December 2006)

Value Band

Rate (per cent)

Up to £60,000 £150,000, no more than £250,000 £250,000, no more than £500,000 Over £500,000

0 1 3 4

Source: Inland Revenue.

The other form of tax is the Stamp Duty Land Tax (SDLT). The SDLT is a tax on transactions, not documents. When a property or land is purchased, the buyer must fill in a land transaction return (SDLT1) and send it to HMRC. The conveyancer/solicitor acting on behalf of the purchaser normally completes the return as part of handling the transaction. But legally, the purchasers are responsible for the information submitted. There are also further costs. Occupiers are required to pay business rates to provide a contribution to the provision of local services. In simple terms the rates payable are based as follows: (rateable value × multiplier) less any relief. The multiplier, known as the uniform business rate, is set by the rating authorities and increases by the rate of inflation each year. The rateable value is also subject to a five-year review. More specific information on the level of rates, relief, exemptions and reviews can be obtained from the valuation office (www.voa.gov.uk). Specific running costs on the property (service charges) will also be payable and will vary depending on the location, size and age of building. The provision of air conditioning will also have an impact. Table 3.5.5 provides an outline of the likely costs (per square metre) based on both air-conditioned and non-air-conditioned buildings in various locations of the United Kingdom. In recent years service charge costs have risen above the rate of inflation, with maintenance, insurance and security charges adding to the increase. The trend towards shorter leases is also likely to lead to planned maintenance programme over three and five years.

Table 3.5.5

Average office occupancy costs (2005)

London – City London – West End Greater London South East Midlands Outer Regions UK Average

Air-Conditioned

Non-air-Conditioned

76.42 67.92 60.00 65.12 43.32 51.13 60.01

58.34 50.00 44.24 30.46 43.80 43.38 44.28

Units: Sterlings per square metre. Source: Jones Lang LaSalle, Office Oscar 2005.

142

Key Investment Sectors and Locations

A further factor that occupiers may wish to consider is the potential impact of the accountancy standards FRS12, which requires companies to list leasehold liabilities on the balance sheet. This could act as a driver towards shorter leases.

The structure of UK property investment Investor categories The investment market comprises a number of players ranging from the traditional institutional investor to the private individual. The institutions are the dominant players and include life, general insurance and pension funds. These include those based in the United Kingdom, and also in Europe, the United States and other countries. Examples include Grosvenor, Scottish Widows and Legal and General. In addition, there are a number of property companies (quoted and private) that are not only involved in development, but also hold property for investment purposes. Examples of these include land securities British Land, Hammerson, Slough Estates and Quintain. There are also a number of private (high net worth) individuals and other indirect property investment vehicles, such as limited partnerships and property unit trusts (PUTs) that have holdings in commercial real estate. Estimating the total level of investment in commercial property is not easy. Figure 3.5.5 is taken from the 2006 IPD Digest showing estimates based on a number of combined sources of data equating to £384 billion worth of investment, around 55 per cent of the total level of investment. The estimates put a total value for invested core commercial property of £254 billion, 52 per cent of total value of UK retail, office and industrial stock. The largest categories of owners are UK insurance and pension funds (28 per cent) followed by overseas investors (15 per cent) and UK unlisted and listed companies (15 per cent and 14 per cent, respectively). One particular trend in recent years has been that of the significant increase in activity from private individuals within the property market. This activity has been driven by a number of factors, including the performance of alternative assets such as equities, the low cost of finance, increased knowledge and the diversification benefits of holding real estate. Property was the strongest performing asset class over 2006, recording a total return of 18.1 per cent, according to the IPD Digest 2006. This significantly outperformed equities and gilts, which recorded comparable total returns of 16.8 per cent and −0.1 per cent, respectively. Figure 3.5.6 shows that property has now outperformed equities and gilts when looking over time horizons of 3, 5, 10, 15 and 20 years. The strength of demand from private investors is evident from Figure 3.5.7, which shows the historical trend in activity within the auction

The UK Commercial Property Market priva e inves ors 3

radi ional es a es c ari ies 5

143

O er inves ors 5 ins i u ions 28

imi ed par ners ips 7

ni ised pooled funds 8

unlis ed proper companies 15

Overseas inves ors 15 lis ed proper companies 14

Figure 3.5.5

Total investment by main types of owner.

Source: DTZ, IPD, ONS, UBS Warburg

All proper

20

ui ies

il s

15

10 5

0

2006

as 3 rs

as 5 rs

as 10 rs

as 20 rs

–5

Figure 3.5.6

Property, equities and gilts – total returns

room based on a four-quarter moving average to eliminate the seasonal levels of activity. It is clear that since late 1999, when private individuals started to enter the market, the level of turnover has increased dramatically from £156 million in the first quarter of 2000 to £406 million by the fourth

144

Key Investment Sectors and Locations £m 500

Amount sold in room

450 400 350 300 250 200 150 100 50

Figure 3.5.7

2

4

2

4

2

4

2

4

2

4

2

4

2

4

1987

1988

1990

1991

1993

1994

1996

1997

1999

2000

2002

2003

2005

2006

1985

4

0

Auction room activity (1985–2006).

Source: Jones Lang LaSalle/IPD ARAS

quarter of 2006. A similar trend is evident in the overall commercial investment market with the proportion of acquisitions by private investors (both by value and number) increasing from 3 per cent in 1999 to over 10 per cent in 2006 (source: Propertydata). This shift can be partially attributed to the low cost of finance and fundability of property, in which the level of returns measured by the yield is greater than the cost of finance. However, this has changed over 2006 (as shown in Figure 3.5.8). Given the sheer weight of money, prime yields have compressed to a level below the cost of financing; thus property is no longer self-financing. Under such circumstances stock selection and asset management will become a lot more important and prime assets that can generate rental growth will be highly sought after. In addition, the recent rise in interest rates to 5.25 per cent, coupled with the prospect of further rises in the short term to tackle higher-than-expected inflation, will have an impact on leveraged investors. That said, economic growth is expected to remain solid in the United Kingdom over the next few years, driven by strong corporate performance, particularly in financial and business services, plus continued immigration translating into employment growth. Hence, there is no reason to expect a drastic downturn in the commercial property market. Although returns are lower, this should result in a market characterized by a more even spread of buyers and sellers, thereby adjusting prices to a more affordable level. The graph shows that Short term financing rates now exceed the average IPD equivalent yield, while prime yields have been compressed to such an extent that they are now lower than 15-year gilts.

The UK Commercial Property Market ll prime ield 15 ear il

5 ear s ap avera e e uivalen

145

ield

9 8 7 6 5 4

an Apr ul Oc an Apr ul Oc an Apr ul Oc an Apr ul Oc an Apr ul Oc an Apr ul Oc an Apr ul Oc an

00 00 00 00 01 01 01 01 02 02 02 02 03 03 03 03 04 04 04 04 05 05 05 05 06 06 06 06 07

3

Figure 3.5.8

Property yield gap.

Source: Jones Lang LaSalle/IPD; Bloomberg

Property lending The level of lending to real estate increased significantly since the mid-1990s, reflecting not only the demand from individuals and institutional investors at a time of strong investment performance but also the willingness of banks and other financial institutions to lend. The level of lending is based on figures from the Bank of England (Figure 3.5.9), in which the total amounttautological outstanding to real estate topped £160 billion by the end of the fourth quarter of 2006. This compares with to £41 billion at the time of the last peak (September 1999). Figures from the Bank of England do not cover the whole market, and exclude securitizations, conduit lending, lending by building societies and offshore loans. Including this data, the total amount outstanding is estimated to be closer to £200 billion. Although the latest Bank of England lending data showed continued growth in lending to real estate, with the total outstanding debt in sterling increasing by £5.5 billion to £161 billion in the final quarter of 2006, it is worth highlighting that the rate of expansion slipped over the last quarter, with lending up by £5.5 billion compared with an increase of £6.3 billion in the previous quarter. This may be the first sign of a gradual slowdown in lending as leveraged investors are hit by higher borrowing costs.

Property investment products The traditional sectors are offices, retail and industrials. Offices are often located and clustered within the main towns and cities, although more recently there has been a trend towards out-of-town business parks. Retail

146

Key Investment Sectors and Locations

12

o al ou s andin o real es a e in s erlin eal es a e as propor ion (All lendin )

6 4

ropor ion of all lendin

10 8

2

Figure 3.5.9

Mar 06

ep 04

Mar 03

ep 01

Mar 00

ep 98

Mar 97

ep 95

Mar 94

ep 92

0 Mar 91

Amoun £bn

Bank lending to real estate 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0

Bank lending to real estate.

Source: Bank of England

is split into a number of sectors; these include standard shops, shopping centres and retail warehouses. The latter are retail units based on retail parks and include DIY operators (eg Homebase and B&Q), electrical outlets (Comet and Currys) and, more recently, some high street names such as Next and Marks & Spencer. Industrial premises include various types, ranging from standard industrial and manufacturing units to distribution warehouses and high-tech accommodation, which often includes an element of office accommodation. Although trends in these sectors are determined by different influences, aspects of property environment such as leasing and availability of performance indicators are common to all sectors. One of the most noticeable trends over 2006 has been increased investment activity in the new growth sectors, notably hotels and residential. An investor has a number of options to enter the UK property investment market. They range from directly owning a building to indirect (securitized or non-securitized) vehicles. Market conditions and other parameters such as the investors’ objectives and the portfolio structure require that the investor seeks professional advice to identify the most appropriate option for entering the UK market. A brief description of the main options is given in Table 3.5.6. In January 2007 real estate investment trusts (REITs) were launched in the United Kingdom. REITs are designed to offer investors income and capital appreciation from rented property assets in a tax-efficient way, with a return more closely aligned with direct property investment. This is achieved by taking away the ‘double taxation’ (corporation tax plus the tax on dividends) of ordinary property funds. The introduction of UK REITs created an opportunity for a wide range of investors to invest in property as an asset class by creating a more liquid and tax-efficient vehicle.

The UK Commercial Property Market

Table 3.5.6

147

Investment options

Direct Investment Property Owner

Direct ownership of buildings. Liquidity problems (unable to sell the property fast with no impact on selling price) are highlighted but as the holding horizon lengthens and portfolio is reviewed regularly, liquidity risks are reduced. Investor can purchase directly but auctions is also an option for investment requiring smaller capital outlays (say less than £15 million).

Indirect Securitized Vehicles Property Shares

Shares of property developers and property investment companies. They help create a diversified portfolio at low cost but prices are affected by general stock market trends and exhibit greater volatility than direct investments. They usually trade at a discount to net asset value (similar to REITs in the United States), which has led many firms to go private in the United Kingdom.

Property Bonds and Commercial MortgagesBacked Securities

Securitization of loans/income streams. They create a liquid and tradable property-backed asset. An appealing feature is that they transfer credit risk to lenders and they are rated by S&P. Future streams of revenues are rather weak and a criticism relates to unrealistic assessments of mortgage lending values; also they are not so liquid.

Other Indirect Vehicles Property Unit Trusts (PUTs)

Twenty seven funds that hold a wide mix of properties or specialize in a particular sector. Usually managed by insurance companies or they can be listed. HSBC have made a secondary market. PUTs are closest to offering a truly tax-effective investment vehicle with low initial capital outlay and achieving diversification. However, unit holders are exposed to falling markets. Because demand for investment in property is derived largely from more sophisticated investors the majority of property unit trusts are unauthorized providing less regulation, and therefore greater flexibility in the operation of the fund.

Limited Property Partnerships

Legal entity with two or more partners with limited liability. The taxation regime is similar to that for partnerships. There is no tax relief for the interest paid on monies borrowed to invest in an investment limited partnership. Limited partnerships are not taxed but partners are. They facilitate access to specific property assets such as shopping centres, factory outlet centres, residential and leisure investment, which require specialist and intensive management with limited liability. Property limited partnerships can be less liquid than buildings and there is no established secondary market for limited partnership shares. Moreover, there is no agreement on the method of valuing limited partnership shares.

Property Derivatives

Forward contracts: purchase or sale of instrument, the price of which is linked to the IPD indices of property values, at the current price, with delivery and settlement at a specified date. Swap: exchange of one vehicle for another to change the maturity, quality or mix of assets.

148

Key Investment Sectors and Locations

Table 3.5.7

Performance indicators

Indicator

Definitions/Description

Sources

Estimated rental values (ERVs)

Valuation or appraisal estimates of the rent that a property might reasonably be expected to command in the open market at the valuation date reflecting the terms of any existing lease. Series related both to prime and secondary properties.

IPD and real estate consultancy firms

Market rents

Rents achieved and achievable in the open market.

Jones Lang LaSalle 50 centres, selected real estate consultancy firms

Income return

Net income receivable per time period expressed as a percentage of the capital value over the period. Net income is rent passing excluding management costs, ground rent and other irrecoverable expenditure.

IPD, selected real estate consultancy firms

Capital growth

The increase in values net of capital expenditure as a percentage of the initial capital value.

IPD, real estate consultancy firms

Total returns

A measure of investment return showing overall performance of the portfolio; it is the summation of capital value growth and net income return.

IPD, real estate consultancy firms

Income returns, capital growth and total returns by style

Total returns produced by style for growth and value properties; the sample of properties is split into highand low-yielding property.

Jones Lang LaSalle

Initial yield

Rent passing (net of ground rent) as a percentage of the capital value.

IPD, real estate consultancy firms

Refers to both prime and secondary properties. Equivalent yield

Discount rate that equates the future income flows to the current capital value; Both prime and secondary properties are covered.

IPD, real estate consultancy firms

Yield impact

Indicates impact on capital values due to changes in equivalent yield in standing investments.

IPD, real estate consultancy firms

Rent void

Rental value in vacant tenancies divided by current income in all tenancies.

IPD, real estate consultancy firms

Demand (take-up, supply, absorption), vacancy, completions

Indicators to monitor the demand for commercial space, the availability of space by different building grade, expected completions, building starts. This information is available to local markets.

Real estate consultancy firms

The UK Commercial Property Market

149

Performance indicators and market transparency There is a wealth of indicators for property performance in the United Kingdom that investors can monitor to gauge performance by property sector and region. The availability of these indicators and data facilitates the construction of benchmarks against which investors assess the performance of their funds. The main database is that of the Investment Property Databank (IPD), which compiles a wide range of property performance data (www.ipdindex. co.uk). In December 2006 IPD covered 12,137 properties with a total value of £192 billion, which is about half of the total investments of UK institutions and listed property companies. The frequency of the main performance indicators outlined in Table 3.5.7 depends on the particular indicator but most of them are available annually, semi-annually and quarterly. A good number of them are produced monthly. Obviously, as frequency increases the samples upon which these indicators are based become smaller. These indicators cover both the main sector and subsectors.

Bibliography Brett, M. (1997), ‘Property & Money’, Estates Gazette, London Commercial and Industrial Floorspace and Rateable Value Statistics 2005 in England & Wales, ODPM Freemans Guide to the Property Industry, Freemans Publishing 2000 Understanding Commercial Property Investment; A Guide for Financial Advisers (2003) Seven Dials Consulting (and sponsored by IPF, RICS and BPF).

3.6 Residential Property Investment Lucian Cook, Director, Savills Residential Research

Background Financially driven investment in the UK residential property market falls into a series of different categories, the primary of which are the following: •

Institutionally owned residential stock forming part of a wider estate or portfolio.

•

Privately owned residential stock again forming part of a wider estate or portfolio.

•

Niche portfolio investment targeted at specific sectors such as student or retirement housing.

•

Privately owned buy-to-let investments where smaller investors have directly invested in one or more properties.

•

Direct and indirect investment vehicles such as property funds, listed and unlisted property companies and real estate investment trusts (REITs).

In addition to these medium- and longer-term investment categories further investment in residential stock occurs through short-term speculators looking either to sell properties at a profit or to unlock additional value through planning.

Size and growth of the market In total the UK housing market is worth an estimated £3.7 trillion, although the majority of stock is in the hands of private owner occupiers, with the

Residential Property Investment

151

12,000 10,000 8,000 6,000 4,000 2,000

Figure 3.6.1

2 2006

1 2006

2 2005

1 2005

2 2004

1 2004

2 2003

1 2003

2 2002

1 2002

2 2001

1 2001

2 2000

1 2000

2 1999

1 1999

0

Net additional lending – buy-to-let market.

Source: Savills Research.

private rented sector accounting for only approximately 10.60 per cent of all stock in 2005 according to figures produced by the Department for Central and Local Government. In a historical context, levels of private rental stock fell dramatically over the post-war period until the early 1990s as a result of a drive for home ownership over this period and the impact of both rent control and tenant security of tenure on the performance and liquidity of residential property as an investment asset. In the 1990s the level of private rented stock stabilized, coinciding with the introduction of Assured Shorthold Tenancies, which allowed market rents to be changed under fixed-term tenancies. It has subsequently grown in the period since 2000; this recent growth has been fuelled to a significant degree by the increase in direct residential property investment through the buy-to-let market charted in Figure 3.6.1. In 2006 buy-to-let investors accounted for 70 per cent of all acquisitions in the investment market, with lending to facilitate these purchases having grown significantly since the development of residential buy-to-let lending products in the late 1990s. As a result the buy-to-let sector alone is anticipated to currently support borrowing in the order of 150 billion.

Historic returns Returns from UK residential property for the period until the end of 2006 are detailed in Table 3.6.1, being broken down between net income yield and capital growth.

152

Key Investment Sectors and Locations

Table 3.6.1

UK Residential property returns Income Return (per cent)

Capital Growth (per cent)

Total Net Return (per cent)

4.21 4.67 6.01 6.88

9.08 11.76 11.08 8.59

13.29 16.43 17.09 15.46

2006 Last 5 years Last 10 years Last 20 years Source: Savills Research.

35 30 api al ro ncome re urn

25 20 15 10

Figure 3.6.2

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

–5

1994

0

1993

5

UK residential income and total returns.

Source: Savills Research.

In common with other property asset classes and as shown in Figure 3.6.2, income yield compression has been evident in the residential sector over the period of the past 10 years, although this has been offset by strong but variable levels of capital growth to generate total returns competitive with other asset classes. Historic returns vary by both type of property and location (the latter variations are shown in Figure 3.6.3), with capital growth having the largest impact by region.

Direct investment As detailed above, capital growth has dominated total returns in the residential investment market with net income returns under increasing pressure and dependent upon a range of factors including;

Residential Property Investment

153

30

25

api al ro ncome re urn

20

15

10

5

Figure 3.6.3

co land

ales

ou es

ondon

ou as

as ern

es Midlands

as Midlands

Nor

Nor es

0

Five-year residential investment returns by region (to 2006).

Source: Savills Research.

•

levels of market-led rental growth;

•

non-payment of rent;

•

void rates (periods when properties are vacant); and

•

running costs including repairs, insurance and management and reletting costs.

Further, with a high proportion of buy-to-let investors funding their purchaser through a mortgage, net cash generated out of rent will often be relatively small after costs of interest and any capital repayments for these buyers. Accordingly, for many smaller investors’ prospects for capital growth are a key driver of investment, with accumulated equity often then being applied to expand their portfolio. In this environment individuals directly investing in residential property are exposed to variable income streams, relatively high levels of regulation and, in cases where acquisitions have been funded through borrowing, the potential for variable interest repayments (unless a fixed rate mortgage is adopted). Where larger portfolios of residential property are held some of this risk will be diversified across a number of properties, with owners also often enjoying economies of scale and looking to manage their properties on a more proactive basis. For these investors close management of void rates, debtor days and the relationship between gross and net yields will be the norm. They are also those most likely to be able to minimize the cost of complying

154

Key Investment Sectors and Locations

with increasing regulations such as gas safety inspections and the tenancy deposit scheme.

Specialist markets The legacy of a historically heavily regulated residential lettings market is that there remain a number of Protected Tenancies within the private rent sector, although they are largely constrained to tenancies that came into effect prior to 15 January 1989. These Protected Tenancies remain subject to rent control, with tenants also having security of tenure for their lifetime. The impacts of this are twofold in that they limit net income returns and result in restricted capital values. Whilst it would be expected that longerheld portfolios would contain some properties subject to these tenancies, the latter of these features and the corresponding potential for capital growth over and above that generated by the private market has resulted in some investors actively seeking to build up portfolios of these properties. Other sectors generally seen to offer opportunities not presented by investment in the mainstream residential market include student and retirement housing, both of which have attracted interest from private investors, institutions and funds.

Indirect investment Given some of the risks inherent in direct property investment, the limited ability for many to spread that risk or benefit from access to a range of property types and geographical locations through multiple investments, and the lumpy nature of direct investment, indirect investment vehicles will hold attraction for some investors. In particular, the development of UK REITs and the growth of selfinvested personal pensions (SIPPs) are likely to be key factors in attracting private capital to invest indirectly in the private rented sector. Both provide tax advantages to investors, although in the case of REITs, the products currently available on the market are relatively limited. This said, the exposure of both UK institutions and non-listed real estate investment vehicles has grown significantly in the recent past, with 13 funds having been launched since 2000. Many funds will spread their residential investment across a number of countries and regions in the search for undervalued stock with capacity for future capital growth, meaning that increasing residential stock is an international investment commodity.

Future outlook Prospects for future investor returns from residential portfolios are closely linked to the capacity for further capital growth. In this respect there are

Residential Property Investment

155

signs of a general slowing in house price inflation, in light of four successive 25 base point interest rate increases since August 2006 and affordability pressure at the bottom end of the market especially for first-time buyers. This needs to be set against the context of a continued strong demand for home ownership and the fact that many existing home owners (whether owner occupiers or buy-to-let investors) have insulated themselves against increases in interest rates through the use of fixed-rate mortgages. Accordingly, Savills are predicting house price growth of 7 per cent in 2007 with medium-term five-year growth rates nearer 6 per cent, with the highest rates of growth anticipated in London and the east and southeast of England.

3.7 Agricultural Property Investment Richard Binning, Savills

UK property has traditionally been considered as a stable investment, and within the property market rural and agricultural property is considered the most stable sector. For this reason, it has been a popular part of many large investment portfolios of both individual and corporate funds. Farmland can be a spectacularly good investment and, for many, this has been the case over the last 25 years. For others, the story has been more mundane. What makes the difference?

Timing Farmland can be a very good investment if done for the right reasons and with the right land. However, as with all investments, timing of trading makes a huge difference to short- and medium-term performance. The high demand for a relatively fixed stock of farmhouses has boosted the investment performance of farms, and the provision of land for development can be an extremely profitable activity. Total investment returns from high-performance farming of arable land, including growth in capital value, averaged 6.5 per cent per annum over the 10 years to December 2003. This compares favourably with the return from equities and gilts, although the comparison is highly sensitive to the timing of investment. In 2004, 42 per cent of the farms handled by Savills were bought by ‘lifestyle buyers’ from outside farming.

The market condition As Figure 3.7.1 illustrates, the reform of the Common Agricultural Policy (CAP) and related uncertainty over subsidy levels have significantly

Agricultural Property Investment

157

800,000 Farmland traded in England

700,000

Farmland publiclymarketed in England

600,000

Farmland publiclymarketed in Scotland

Acres

500,000 400,000 300,000 200,000 100,000 0 1945

Figure 3.7.1

1951

1957

1963

1969

1975

1981

1987

1993

1999

2005

Farmland traded from 1945 to 2005

restricted the volume of farmland traded through 2004 and early 2005 to a level of about 50 per cent of the pre-Foot & Mouth market. This position has been compounded by an increased demand. The reasons include rising confidence in soft commodity prices, lack of alternative investments and the residential market continuing to grow. This has led to farmland prices being driven up, as Figure 3.7.2 demonstrates. A very recent Royal Institution of Chartered Surveyors (RICS) report suggested this rise to be about 30 per cent in the last year. Savills’ own research suggests the average price of farmland has risen by over 50 per cent since the beginning of 2004. All lowland types and grades, VP ex houses & quotas South East

South West West Midlands

East Midlands Yorkshire, North & NW

Eastern Wales GB

Scotland

3000 2500

£/acre

2000 1500 1000 500

Farmland prices from 2003 to 2005.

Source: Savills research

Dec-06

Dec-05

Dec-04

Dec-03

Dec-02

Jun-01

Dec-01

Jun-00

Dec-00

Jun-99

Dec-99

Jun-98

Dec-98

Jun-97

Dec-97

Jun-96

Dec-96

Jun-95

Dec-95

Jun-94

Dec-94

Jun-93

Figure 3.7.2

Dec-93

0

158

Key Investment Sectors and Locations

Tenure Let land portfolios generated a return of almost 20 per cent to investors in 2002, and total returns in 2003 were well into double figures. This follows a period when returns averaged around 15 per cent per annum over both 3 and 10 years as initial yields dropped. This is a niche market with generally low turnover and wide variation in the nature of the asset. Initial yields vary in a range of less than 1 to 7 per cent. Mis-pricing is a hazard for the uninformed in such a market, so buyers and sellers should trade with care. Those pension and life funds that bought farmland heavily in the late 1970s in a rising market (only to be part of a rush out of agriculture in the mid-1980s in a falling market) tend to be disappointed with their experience of agricultural investment. On the other hand, some of those funds have retained a reserve of strategic land with development hope value, which in many cases has paid off handsomely.

Development With agricultural land typically worth between £3,000 and £4,000 per acre and greenfield residential building land worth anything from £350,000 to £2.5 million per acre depending on location, the provision of land for development can be an extremely profitable pastime. It is also an increasingly complicated activity, with government steering new housing development towards ‘brownfield’ land (ie previously developed land) and looking to secure a proportion of affordable housing within the development mix. Glossy syndicated offerings of land with development potential are increasingly common. Buyers beware – planning permission is the principal constraint and without it your new investment is highly unlikely to be one of the top performers of the next 25 years!

Tax Taxation advantages tend to be a significant secondary reason for holding land. A 100 per cent relief from Inheritance Tax after a qualifying period of ownership, which can be two years, is a valuable means of passing wealth to the next generation. For instance, if land is held for 10 years before death then this could add more than 3 per cent a year to the effective investment return from land, although other ways of avoiding tax are possible. There have been rumours that this tax position could be reviewed. The value in rolling over capital gains into farmland, thus deferring Capital Gains Tax, is less than it was before the introduction of business asset taper relief. Nevertheless, this could add around 0.7 per cent per annum to investment returns over a 25-year period. Figure 3.7.3 charts changes in the

Agricultural Property Investment

159

Initial net yields 10 9

il s

n and farmin

esiden ial proper ommercial proper

e land

8 7 6 5 4 3 2 1 0

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 (f,cs )

Figure 3.7.3

Comparative net investment returns

Source: IPD/WM/Savills Research forecast for 2006. In hand farming based on top 25 per cent cereal farmers

net returns from different types of property against gilts from 1993 to 2005 and the relative returns forecast for 2006.

Conclusion All in all, there are many good reasons to own a slice of the British countryside, with lifestyle motives tending to be high amongst them. From an investment perspective, there has been, and will continue to be, great variation in the returns from land ownership, depending on its location and characteristics. As ever, stock selection is the key to good investment return.

3.8 Technology and Innovation – The Cambridge Phenomenon Alan Barrell and Mark Littlewood, Library House, Cambridge

Introduction Paradoxically, the East of England is both one of the most rural regions in the country and one of the most high-tech. The industrial structure of the region has changed dramatically over the centuries. Thetford in Norfolk – north of Cambridge – was the first great centre of the wool trade in England. The wool trade migrated to the North West of England in the 19th century during the first Industrial Revolution. The fishing industry has also declined – fewer than 100 fishing people now cast their nets along the coastline of the region. Leather goods, especially footwear, moved northwest into the West Midlands region in the early part of the 20th century. Farming and agricultural industry in general – including bio-agriculture – remain in place. Since the 1960s, however, something very profound has happened to this rural part of England, and the area surrounding Cambridge in particular. It has become the most developed cluster of technology and innovation-based companies in Europe. Thanks primarily to the accelerated development of Cambridge as a high-technology location, it has become the most developed region from the perspective of its capacity to attract, and show returns for, investors in innovation-based businesses. It is in the immediate vicinity of Cambridge that this effect is most noticeable.

Technology and Innovation – The Cambridge Phenomenon

161

Cambridge, an ancient seat of learning, is situated at the heart of the East of England. It is 56 miles northeast of London and is now an important geographical location between the industrial West Midlands of England and the East Coast ports.

Cambridge’s contribution to technology and innovation Cambridge’s importance to the UK economy today is primarily as a hotbed of innovation and as a magnet for technology investors across the world. It is a stunning fact that companies in the Cambridgeshire area (population just 454,000, or approximately 0.75 per cent of the UK total) received around 25 per cent of the private investment into innovation-based businesses in the UK in 2002.

Ingredients of success It is generally acknowledged that there are three separate sets of institutions: the university, corporate research laboratories and a range of technical consultancies, which have combined to give the city of Cambridge a strong technology skills base. This has produced world-class research, plenty of commercial know-how and sufficient business management expertise to develop a track record of success.

The university Cambridge University has played a pivotal role in the transformation of the region, the city and the surrounding area from being a medieval seat of learning to a great educational centre and wealth-creating knowledge-based business centre – a transformation that has taken more than 40 years and has been largely ‘bottom up’, a result of building communities of common purpose and matching the aspirations with achievements, rather than through ‘top down’ government policy, intervention or funding. There is sense of common purpose of integration and coherence at the university. This culture change has been as important as the superb science base available in Cambridge University, the intellectual capital of academics and business people and the development of support structures in enabling the formation and sustenance of many new companies in the area.

Technology consultancies The formation of the current commercial cluster began in 1960, when a spinout from Cambridge University – Cambridge Consultants Ltd – gave birth

162

Key Investment Sectors and Locations

to a family of technology providers and consultancies, and the cluster grew from there. The university and many of these consultancies retain strong links – both formally and informally. Graduates of the university often find themselves running projects to commercialize the work of others. The technical consultancies are a vital part in the process of bridging the gap between academic research and commercial application. They have also been instrumental in blending technology transfer expertise with business creation skills and seed funding in a number of innovative ways. Institutional research and development Institutional change has been at the heart of the progress seen in enabling Cambridge University to commercialize research to the benefit of cluster development and to encourage investments from major corporations such as Microsoft, Hitachi, Toshiba, GlaxoSmithKline, The Wellcome Trust, Marconi and others.

Other success factors Cultural change Another major factor in enabling the growth of the cluster has been culture change – culture in terms of the generation of a more entrepreneurial spirit – and especially the development of a belief in the common purpose in the entire community. This has been both morale boosting and inspirational and also reflected in terms of financial resources, for example government financing of the Entrepreneurship Centre and the Cambridge Massachusetts Institute. These have been important factors in bringing the university closer still to the business community and in enabling the university to develop commercial programmes internally. Government attention and support – not to mention funding – have been significant stimuli in bringing necessary institutional change to the university. The economic viability of the Cambridge sub-region is not in doubt. Growth in GDP per capita of 6.5 per cent has been confirmed and is ahead of virtually all such results in European and US sub-regions. Job creation has also been impressive. Connectivity and infrastructure Cambridge and the East of England are served by two international airports – Stansted (40 minutes’ journey) and Luton (a 1-hour journey). Heathrow and Gatwick International Airports are 2 hours’ travel time away – so reasonably accessible. Rail links with London are good and services frequent to the City (50 minutes’ journey time).

Technology and Innovation – The Cambridge Phenomenon

163

The Cambridge cluster Companies in the Cambridge cluster Much of the work for this chapter has been drawn from the work of Library House in its seminal, Cambridge Cluster Report, 2003, an indepth analysis of information covering every single innovation-based company within 45 minutes’ drive of Cambridge. In completing work on the Cambridge Cluster Report, Library House conducted 12,500 hours of research, filtering over 2,000 companies in the area. Library House is a research organization supporting investors in making investment decisions. It has a restricted definition of ‘innovation based’ companies that excludes sales, marketing, distribution and service companies. In 2003, Library House found, based on this strict definition, 898 innovationbased companies employing 28,209 people. The average company has 31 employees. Of the seven top-level sectors, the information technology (IT) sector is the predominant sector in the cluster, containing 536 companies, which represents 59.7 per cent of the cluster, followed by life sciences containing 202 companies, which represents 22.5 per cent of the cluster. When the entire cluster is viewed at the next level down, as 40 unique sectors, a different story emerges. Table 3.8.1 illustrates the breakdown of the top-level structures in the cluster and Figure 3.8.1 shows the employment figures in the different sectors. Within the IT sector, application software is the largest single sub-sector with 160 companies, followed by electronic equipment and instruments with 106 companies. Table 3.8.2 illustrates the substructure of the IT sector. At the sub-sector level, instead of a cluster clearly dominated solely by IT, three sub-sectors stand out: application software, biotechnology and electronic equipment and instruments, representing 160, 153 and 106 companies, respectively. These three sub-sectors contain 46.6 per cent of all the companies within the cluster, which shows the concentration within the cluster and, furthermore, the importance of biotechnology, which is obscured at the top level. Table 3.8.1

Top-level structures in the Cambridge cluster

Sector IT Life sciences Industrials Telecoms services Materials Consumer

Number of companies

Employment

536 202 63 49 25 21 n/a

14,418 6,626 2,602 2,862 1,238 Energy 2 n/a

Note: Figures exclude employment from companies headquartered outside Cambridge.

164

Key Investment Sectors and Locations 2

Energy Consumer discretionary

21

Materials

25

Telecommunication services

49

Industrials

63

Life sciences

202

Information technology

536 0

100

200

300

400

500

600

no. of companies

Figure 3.8.1

Table 3.8.2

Employment in the Cambridge Cluster

Structure of the IT sector in the Cambridge cluster

Sub-sector Application software Instruments Internet IT services Systems software Communications hardware Peripherals Others

Number of companies

Employment

160 106 53 37 34 29 29 88

4,208 2,947 668 659 881 885 1,128 3,042

Figure 3.8.2 illustrates the primary sub-sector classification of the cluster by number of companies, and Table 3.8.3 lists the significant companies in order of rank. These and other sub-sectors are best understood by looking at them in detail at the category and sub-category level. A selection of the largest or most interesting is described below.

Application software The largest sub-sector within the IT sector is application software. This subsector comprises 160 companies and represents 17.8 per cent of the total IT sector. Companies producing business application software dominate the application software sub-sector. The 71 companies in this category represent 44 per cent of all companies within the application software sub-sector.

Technology and Innovation – The Cambridge Phenomenon Office electronics

165

2 6 6

Semiconductorequip. and materials

6 Semiconductors

10 16

It systems

19 23

Computerstorage and peripherals

29 29 34

Systems software

38 Internet softwareand services

53 106

Applicationsoftware

160 0

20

40

60

80

100 120 140 160 180

Figure 3.8.2 Number of companies in primary sub-sectors of the Cambridge Cluster Three categories trail business application software: graphics software (11.3 per cent), communications software (8.8 per cent) and industrial applications (7.5 per cent). All other categories are smaller than five per cent.

Biotechnology Seventy-six per cent of life science start-ups in the cluster are biotechnology start-ups. Biotechnology is dominated by companies either directly involved in development of healthcare products and services or in the creation of research tools, reagents and equipment (RTR&E). The largest sub-category within the healthcare category of biotechnology is in the discovery and development of therapeutics. Fifty-two companies are solely devoted to therapeutics. Therapeutics may be examined more closely. First, most therapeutic biotechnology companies in the cluster use either small molecules or proteins/antibodies as therapeutic substances. Other technologies, such as cell or viral therapies, play an insignificant role in this cluster. Second, the route for the discovery or selection of those molecules is more diversified, but there is a clear focus on ‘clever’ drug design, utilizing informatics (bio- and chemo-), structure-based drug design and combinatorial chemistry. Third, the therapeutic areas, in which the cluster biotechnology companies specialize, are immunology and inflammation, cancer and infectious diseases. All other areas trail those three leading sectors significantly.

166

Key Investment Sectors and Locations

Table 3.8.3 Rank

Significant companies in the Cambridge cluster Sector

1 2 3 4 5

Information Technology Life Sciences Information Technology Information Technology Information Technology

6 7

Industrials Telecommunication

8 9 10 11 12 13 14 15 16

Information Technology Life Sciences Information Technology Information Technology Information Technology Information Technology Consumer Discretionary Information Technology Industrials

17 18 19 20 21 22 23 24 25 26

Information Technology Life Sciences Materials Life Sciences Industrials Telecommunication Information Technology Information Technology Information Technology Industrials

27 28 29 30 31 32

Materials Materials Telecommunication Materials Materials Telecommunication

33 34 35 36 37 38 39 40

Information Technology Consumer Discretionary Consumer Discretionary Energy Energy Industrials Materials Materials

Total Number of Companies 122 Principal Investment Sectors

Sub-sector

Number

%

Application Software Biotechnology Electronic Equipment & Instruments Internet Software & Services IT Management, Consulting & Services Industrial Machinery Wireless Telecommunication Services Systems Software Health Care Equipment Communications Hardware Computer Storage and Peripherals Computing Systems Hardware IT Systems Consumer Electronics Photonics Electrical Components and Equipment Semiconductors Pharmaceuticals Advanced Materials Health Care Supplies Aerospace and Defence Alternative Carriers Broadband Discrete Components Semiconductor Equip. & Materials Sub-assemblies & Components Commercial Printing, Services & Products Metals, Metallurgy & Alloys Speciality Chemicals General Fertilizers & Agricultural Chemicals Other Integrated Telecommunication Services Office Electronics Consumer Discretionary General Broadcasting and Cable TV Alternative Energy Alternative Energy Technologies General General Industrial Gases

160 153 106 53 37

17.8 17.0 11.8 5.9 4.1

37 35

4.1 3.9

34 32 29 29 23 19 19 16 14

3.8 3.6 3.2 3.2 2.6 2.1 2.1 1.8 1.6

10 9 9 8 7 7 6 6 6 4

1.1 1.0 1.0 0.9 0.8 0.8 0.7 0.7 0.7 0.4

4 4 4 3 3 3

0.4 0.4 0.4 0.3 0.3 0.3

2 1 1 1 1 1 1 1

0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1

898

Technology and Innovation – The Cambridge Phenomenon

167

The electronic equipment and instruments sub-sector The electronic equipment and instruments sub-sector is the third largest in the cluster, comprising 106 companies or 11.8 per cent of all cluster companies. In contrast to the biotechnology and application software subsectors, electronic equipment and instruments is not dominated by one or two large categories. Instead, the sector is more or less evenly divided into five categories: general, electronic security equipment, electronic test and measurement instruments, scientific and technical instruments and ‘other’. The ‘general’ and ‘other’ categories combined account for more of 40 per cent of the companies in this sub-sector.

Wireless telecommunication services sub-sector Although this sub-sector is only ranked seventh in terms of company numbers, some of these companies can be considered to be world leaders in wireless telecommunication technology. There are five categories, with the largest being wireless applications containing 23 companies and representing 65.7 per cent of the sub-sector. The ‘others’ category contains substantial diversity including 23 computer hardware companies, 16 in photonics, 10 in semiconductors and six in discrete components. At the heart of the Cambridge cluster is IT and, within that application software and to a lesser extent, instruments. Cambridge has been in the instrument business since the 1890s when Cambridge Instruments and Pye were founded. Software is a more recently established business but one where Cambridge has a substantial industrial base. Within the application software category, 71 companies are in business application software, 18 in graphics, reflecting early work in CAD, and 14 in communications software. The largest category within the 106 instrument companies is electronic test and measurement with 27 companies.

Life sciences sub-sector The life science cluster is concentrated in biotechnology, which makes up 153 of the total 202 companies. Thirty-two companies are in health-care equipment. This is the most vigorous of the next generation of sectors within the cluster, particularly when it comes to capital requirements.

Investment in the Cambridge cluster In the single month of March 2003, companies sought funding totalling £259 million. Cambridge biotech companies were seeking the lion’s share of the total (£106 million), although adding up the total for IT sub-sectors at £90 million makes it only slightly smaller than the capital sought by biotech

168

Key Investment Sectors and Locations

Table 3.8.4

Money sought in 2003

Sub-sector

Amount £ million

Per deal £ million

106 30 28 18 14

3.1 7.5 0.7 1.4 6.8

Biotech Semiconductor Applications software Wireless Peripherals

Table 3.8.5

Money raised in 2000–02

Sub-sector

Amount £ million

Per deal £ million

362 86 75 70 68

4 6 8 5 3

Biotech Wireless Alternative telco carriers Semiconductors Application software

companies. Table 3.8.4 summarizes the money sought in 2003 by sector and Table 3.8.5 summarizes money raised in the period 2000–02. Over a 3-year period (not just a single month in 2003), biotech also represents the single largest invested area – larger than the total (£300 million) invested into the IT and telecoms-related areas combined. A greater number of life sciences companies as a percentage of all life sciences companies are moving through the pipeline from seed to later stage development than their counterparts in IT. But, on an absolute basis, the total number of IT companies receiving A series funding is about the same as life sciences. Also, a greater percentage of life sciences companies is receiving subsequent rounds of funding, although that may be an artefact of life sciences funding where a greater number of rounds and a greater absolute amount of capital is typically employed across the lifetime of the company. At the sub-sector level, instead of a cluster clearly dominated solely by IT, three sub-sectors stand out: application software, biotechnology and electronic equipment and instruments.

Cambridge versus rest of Europe At the top level, the funding across the cluster over the last 3 years appears relatively stable, ranging from £245 million in 2002 to slightly over £300 million in 2001 and totalling £829 million over the 3 years. In 2002, Cambridge accounted for almost 25 per cent of private investment in innovation-based companies in the UK. Within the above numbers,

Mone inves ed in o ambrid e companies £000s

Technology and Innovation – The Cambridge Phenomenon

169

£350,000 £300,000 £250,000 £200,000 £150,000 £100,000 £50,000 £0 r 2000 onsumer discre ionar ndus rials elecommunica ion services

Figure 3.8.3 sectors

r 2001 ner nforma ion ec nolo

r 2002 ife sciences Ma erials

Total investment into Cambridge companies broken down by

considerable disparity exists when comparing the relative success of different sectors in securing capital. Life sciences clearly dominates the amount of funding successfully raised. Figure 3.8.3 shows the total investment into Cambridge broken down by sectors. Of all European provincial centres of high technology growth, Cambridge is without doubt the best served with venture capital and other financial services. It is also serviced by highly sophisticated private organizations such as Library House, which exist to facilitate activity for the investment community. Library House is an organization that effectively supports a wide range of investors and the investment processes across the United Kingdom. It has collected extensive information on Angel and VC investing and cluster development in the Cambridge region. This information is available on a confidential basis to Library House members. More information is included on Library House in a specific section of the report and further details can be found at www.libraryhouse.net. Recently, the UK public markets for technology in particular have been very depressed. Initial public offerings (IPOs) effectively stopped for 2 years. Cambridge companies, however, appear to be among the first to begin the process of recovery. There have been issues on the Alternative Investment Market (AIM) and full listings on the London Stock Exchange (an example is Cambridge Silicon Radio – LON: CSR – which received significant venture capital and institutional rounds before floating in March 2004). Cambridge, thanks to its well-rooted science base, and an increasing stock of seasoned entrepreneurs and executives, has been able to weather the technology investment storm of the past few years. Perhaps more than any other place in Europe, Cambridge has remained innovative, and has seen a steady stream of successful companies being funded, at every stage of development. Cambridge relies on people and money to make the cluster work. The best news is that more experienced business people are choosing to make Cambridge their home and that investors continue to view Cambridge as one of

170

Key Investment Sectors and Locations

the hottest places in Europe to find good deals. It is a place that cannot be ignored. For information on the macroeconomics of the East of England, contact Invest East of England +44 (0) 1223 450 40, www.investeastofengland.com. For details about technology investment opportunities across the UK, contact Mark Littlewood, Library House, [email protected], +44 (0) 1223 500 550, www.libraryhouse.net.

3.9 Renewable Energy: A UK Perspective Neil Budd, Watson Farley & Williams LLP

Climate change is a key item on the political agenda in the UK, and promoting renewable energy is one of the ways that the Government is seeking to reduce the national ‘carbon footprint’. In this chapter, we examine the regulatory framework in the UK for renewable energy developers and review the current market conditions in particular areas of renewable energy.

Legislative Background The starting point for renewable energy was the Renewables Directive.1 This required EU member states to meet targets for a percentage of their electricity to be generated from renewable sources by 2010. In the case of the UK, that target was 10 per cent.

Renewables Obligation and ROCs The Renewable Obligation Order2 requires licensed electricity suppliers3 to obtain a specified percentage of the electricity supplied to them from renewable energy sources. The Obligation increases year by year. In the year from 1 April 2007 to 31 March 2008 it is 7.9 per cent. Originally, the Obligation ended in 2010 but has been extended to 2027. The requisite percentage increases to 15.4 per cent by 2015 and continues at this level until 2027. The 1 2 3

Directive 2001/77/EC SI 2002 No 914 replaced by Renewables Obligation Order 2006 (SI 2006 No 1004) These are legal entities holding a supply licence under Section 6 of the Electricity Act 1989

172

Key Investment Sectors and Locations

extension was important in enabling renewable energy developers to obtain project finance. A typical financing for a renewable energy project is 10–15 years, and lenders require a secure legislative framework to be in place for the period of the loan. The target percentages have generally been regarded as ambitious and in the Energy White Paper published on 23 May 2007 ‘Meeting the Energy Challenge’, the Government accepted that, without changes to the Renewables Obligation Order, these targets are unlikely to be met. The proposed changes are discussed later in this chapter. The way the system works is that suppliers demonstrate their compliance with the Obligation by producing to the regulator (Ofgem) renewable energy certificates (ROCs). An ROC is issued by Ofgem to accredited renewable energy generators for each megawatt-hour (MWh) of electricity that they generate. Suppliers can either purchase the ROC from a renewable generator from whom they purchase the electricity or they can purchase the ROC separately. ROCs are separately tradable from the electricity to which they relate, and ROCs can be bought from ROC traders. If a supplier fails to provide to Ofgem the requisite number of ROCs to demonstrate compliance with the Renewables Obligation, it must pay a buy-out payment. The buyout payment is of an amount set periodically by Ofgem4 and has the effect of providing a cap on the ROC price. Buy-out payments go into a buy-out fund administered by Ofgem, and this fund is recycled back to ROC-holders in proportion to the number of ROCs they hold. This payment (known as a “smear-back payment’’) is factored into the ROC price that a supplier would negotiate with a renewable generator. Thus, renewable generators will receive, in addition to the price for the electricity that they generate, a price per MWh for each ROC sold, which will include an element for the smear-back payment. The MWh electricity price will also include other benefits available to renewable energy generators, namely levy exemption certificates (LECs) and triad avoidance benefits.

Levy exemption certificates LECs are issued for renewable electricity, which, by its nature, is exempt from the climate change levy. The levy is a tax on certain carbon-producing commodities including electricity. Ofgem will issue one LEC per one MWh of renewable energy generated. Unlike ROCs, LECs are not separately tradable from the electricity to which they relate, but they have a value and will be included in the price per MWh negotiated by a licensed electricity supplier with a renewable generator. The supplier will subsequently account to HM Revenue and Customs for the exempt electricity that they have supplied to their customers (in respect of which climate change levy is not payable), and this must be balanced by the number of LECs held.

4 The buy-out price from 1 April 2007 to 31 March 2008 stands at £34.30 per MWh (see Ofgem’s website: www.ofgem.gov.uk)

Renewable Energy: A UK Perspective

173

Triad avoidance benefits Most renewable energy generators do not connect to the high-voltage transmission network operated by the national grid company National Grid Electricity Transmission (NGET). Instead, they connect to the low-voltage networks operated by regional distribution network operators. Such generators are known as ‘embedded generators’. Licensed electricity suppliers can avoid certain charges imposed by NGET during three peak periods known as the ‘Triad’ if the embedded generator with whom they have contracted or sourced electricity generates during the Triad. These are known as Triad Avoidance Benefits, and suppliers are expected to allocate some of the benefit to the generator. A renewable generator that contracts with a licensed electricity supplier will include, as part of the price it agrees, an element for the Triad Avoidance Benefit.

The Experience of Renewable Energy in the UK It can be seen from the discussion above that a renewable energy generator can expect to receive a considerable premium in respect of renewable benefits over and above the price of the electricity itself. This is obviously intended to encourage the growth of renewable energy development in order that the Government can meet its target under the Renewables Directive discussed above. In this section of the chapter, we look at the experience of different types of renewable energy development in the UK over the last few years and assess their future prospects.

Onshore wind Onshore wind has undoubtedly been the most successful type of renewable energy in the UK. According to the British Wind Energy Association, 570 megawatts (MW) of onshore wind projects were commissioned in 2006, which was a 50 per cent increase over the figure in 2005 which in turn saw an increase of 100 per cent in capacity commissioned in 2004. The BWEA estimates that 700 MW will be commissioned in 2007.5 Indeed, February 2007 saw the UK’s total wind portfolio brought to 2 gigawatts (GW) (2000 MW),6 which is capable of generating sufficient electricity to meet the needs of 1.1 million UK households corresponding to a third of London homes or almost half the homes in Scotland.7 However, to set this in an international context, a total of 20,622 MW of wind energy 5 ‘Onshore Wind Continues to Climb the Upward Curve, but can the Level of Growth be Maintained to Deliver the 2010 Target’ BWEA publication ‘Real Power’ issue 8, Nov–Dec 2006 6 This includes offshore wind although, as will be seen below, the amount of megawattage of offshore wind currently in operation is insignificant. 7 Global Wind Energy Council Newsletter, 1 March 2007

174

Key Investment Sectors and Locations

was installed in Germany by the end of 2006 whilst in Spain the figure was 11,615 MW.8 So, the UK, whilst doing well, still has a long way to go to catch up with its neighbours. The economics of onshore wind are a clear driver to investment. The main barrier to investment in onshore wind has been difficulties and delays in obtaining planning permission. Consent to construct an electricitygenerating station (which includes windfarms) over 50 MW requires consent from the Secretary of State for the Department of Trade and Industry (DTI) under Section 36 of the Electricity Act 1989. It is recognized that Section 36 applications can be beset by delays (see below). Where development is proposed for an electricity-generating station under 50 MW, planning permission will be sought from a local planning authority (LPA) under Section 57 of the Town and Country Planning Act 1990. In determining a planning application for a renewable energy project, including a wind farm, LPAs are required to consider planning policy guidance issued by the Government in 2004, namely Planning Policy Statement 22 (PPS 22). PPS 22 replaced previous planning guidance which was considered to lack clarity. Many LPAs, whilst conceding the benefit of renewable energy to the country as a whole, did not want to allow wind farms, which many considered unsightly, in their ‘back yard’. Thus, figures from November 2003 showed the approval rating for onshore wind farm development in the preceding 3 years at 50 per cent, with gross inconsistencies in the decisions made between different parts of England, leading to uncertainty for investors and developers.9 PPS 22 stipulates that regional and local planning authorities should adhere to key national principles when dealing with the issue of planning for renewable energy and implement these into their respective development plans. Furthermore, PPS 22 sets targets (expressed in MW) for each region to install renewable energy in its region. In 2006, the Government commissioned the Barker Review as a wideranging review of the planning system. The Review acknowledged that major infrastructure projects (which includes energy infrastructure projects) in particular, were often subject to delays, and recognized that such delays caused uncertainty and were detrimental to developers taking business decisions. Whilst the Review noted that these delays were due to the often complex or controversial nature of planning cases, the delays together with the high costs associated with them indicated ‘that major reform should be urgently considered’.10 The Government welcomed the Barker Review and published a White Paper in May 2007, ‘Planning for a Sustainable Future’. The Government’s proposals include streamlining the consents process for major projects, including power plants and producing national policy statements for key infrastructure sectors including renewable energy. It is hoped that the Government’s proposal, when enacted, will speed up Section 36 8 Global Wind Energy Council Newsletter, 1 March 2007 9 BWEA Briefing Sheet – PPS22: Renewable Energy, November 2003 10 Kate Barker, Delivering Major Infrastructure, p 17, Barker Review of Land Use Planning, Final Report – Recommendations December 2006.

Renewable Energy: A UK Perspective

175

applications. As the BWEA have commented, two-thirds of all onshore wind capacity in the UK remains in the hands of the Scottish Executive and the DTI for determination under Section 36.11

Offshore wind The Government has been keen to promote the development of offshore wind projects in the UK, which are recognized as offering the potential for much larger-scale projects than onshore wind (the London Array project, for example, which is currently being developed by a joint venture of Shell, German utility E.On and Danish developer DONG Energy, is a 1000 MW project). It is also thought that offshore wind farms, particularly those far out to sea, are unlikely to encounter the same level of objections on planning grounds to onshore wind farms. In 2001, the Government organized the first round of tenders for offshore wind projects (known as Round 1). Eighteen projects were awarded for sites within the twelve nautical mile territorial limit around the UK. Each site had to have a minimum generating capacity of 20 MW. Successful developers were granted agreements for leases that would be followed by the grant of leases once the relevant consents had been obtained. The developers were given a 3-year period to obtain the consents. Round 2 followed in 2003 and was on a much more ambitious scale. Sites were grouped in three strategic areas both in territorial waters and in the Renewable Energy Zone created by the Government, which extends 200 miles into international waters. Fifteen projects with a combined capacity of 7.2 GW were awarded but the Round 2 agreements for leases allow developers 7 years to obtain the necessary consents, following which leases will be awarded. According to British Wind Energy Association statistics,12 in the case of Round 1 projects, four are currently operational with a combined output of 300 MW,13 seven have had their permit applications approved14 whilst four have submitted applications.15 In the case of Round 2 applications, none are yet operational although this of course is in line with the anticipated 7-year timescale of consents to be obtained. The consenting process for offshore wind farms is complex as it needs to recognize the often competing interests of other users of the marine environment such as shippers and fishermen. There are a number of statutory consents that need to be obtained although the principal consent remains: 11 ‘Onshore Wind Continues to Climb the Upward Curve, but can the Level of Growth be Maintained to Deliver the 2010 Target’, BWEA publication ‘Real Power’ issue 8, Nov–Dec 2006 12 www.bwea.com 13 North Hoyle (60 MW); Scroby Sands (60 MW), Kentish Flats (90 MW) Barrow (90 MW) 14 Gunfleet Sands, Lynn/Inner Dowsing, Cromer, Scarweather Sands, Rhys Flats, Burbo Bank and Solway Firth 15 Shell Flat, Teeside, Tunes Plateau and Ormonde. Tunes Plateau and Ormonde (which is a hybrid wind and gas project) were outside the original Round 1 process but conform to its terms

176

Key Investment Sectors and Locations

Section 36 of the Electricity Act 1989 which applies to all offshore wind- and water-driven developments (thus would also apply to wave farms) above one MW capacity. The consents process is managed by the DTI’s Marine Consents and Environment Unit, which has produced a helpful guidance note to developers looking to carry out an offshore wind farm.16 It would be fair to say that, thus far, the economics of offshore wind farms has not been favourable. There are currently very few turbine manufacturers producing turbines suitable for offshore windfarms, so there is a bottleneck in obtaining turbines. Furthermore, high steel prices have increased the costs of constructing the turbines and masts, and high copper prices have increased cabling costs, which is a particular issue for Round 2 wind farms because of their distance from the shore and therefore the length of cables required.

Other types of renewable energy The focus thus far given to wind energy reflects its importance to the UK renewable energy sector. If all the Round 2 wind farms come on stream, at 7.2 GW, that alone is likely to account for 7 per cent of the UK’s electricity supply. Nevertheless, other forms of renewable energy, though small-scale, are attracting the interest of investors. Biomass Chief amongst these is biomass, in the form of combustible solids, e.g., wood, the biogenic (plant or animal constituents) portion of municipal solid waste or combustible field crops. The biomatter is burnt to produce heat and energy. Solid biomass can also be gasified and biogas can easily be produced from several different types of waste, sewage and animal litter being two examples. Indeed, the burning of waste to produce heat and electricity assists in furthering the government’s twin goals of reducing disposal of waste at landfill sites17 and promoting renewable energy, although the Government’s preferred approach for reducing landfill is for waste to be recycled rather than combusted and turned into energy. The government has provided a number of grant schemes to encourage development of biomass projects, one example of which is the DEFRA scheme that was launched on 29 December 2006.18 The DEFRA scheme awards capital grants to fund the cost of equipment for installations fuelled by biomass. The primary purpose of the projects must be the supply of electricity for the industrial, commercial or community sectors. Projects may be fuelled by any biomass as defined in the Renewables Obligation Order but with a strong

16 MCEU Guidance Notes Offshore Wind Farm Consents Process 17 See the Waste Strategy for England 2007 published by the Department for the Environment Food and Rural Affairs (DEFRA) 18 www.defra.gov.uk

Renewable Energy: A UK Perspective

177

preference for forestry wood fuels. Such schemes are indicative of the government’s desire to see biomass establish a real foothold in the renewables sector. In March 2007, the government decided that it would provide an additional £3 million in funding for its Scottish Biomass Support Scheme. The Scheme provides grants to support combined heat and power installations and is open to a range of organizations from producer groups to businesses. The decision to provide additional funding is again broadly reflective of a recognition that biomass is a strategically important part of the renewables sector. It should be noted that funds available under the scheme must be spent by 2008. Biomass is also used in conjunction with fossil fuels, a process known as ‘co-firing’. When the Renewable Obligation Order was first introduced, a cap was imposed whereby only a certain proportion (currently 10%) of a supplier’s obligation could be met through co-firing. It was felt that this cap was important for a number of reasons, including the desire not to artificially extend the type of highly carbon-emitting coal-fired power stations and also due to the fact that giving too much encouragement to co-firing might cause too many ROCs to be issued and effectively scupper the whole scheme. In the case of energy crops used for co-firing, the cap was reviewed in April 2007 to encourage the use of energy crops and give a boost to farmers looking to grow crops for energy. In the recent Energy White Paper, ‘Meeting the Energy Challenge’, the Government proposes to abolish the cap on co-firing altogether although, as will be seen, the sting in the tail is that, for nonenergy crop co-firing, the number of ROCs earned will reduce to one ROC for every 4 MWh of energy generated. Solar Solar energy has recently been harnessed in Britain to generate electricity using photovoltaic solar cells. A photovoltaic (PV) module (which is made up of multiple PV cells) is a device that converts light energy into electrical energy. In early 2005, work was completed on the instalment of PV panels at the CIS tower in Manchester at the cost of £5.5 million. It started feeding electricity to the national grid in November 2005. This aside however, unlike countries such as Germany, where the use of solar power as a source for generating energy seems to have gained special momentum,19 the potential for solar energy remains undeveloped in the UK. This is partly because historically it is not an efficient or cost-effective alternative to traditional fuels for electricity generation on a large scale. Wave/Tidal Tidal/water energy can also be harnessed and used. Even a slow flowing stream of water, or moderate sea swell, can yield considerable amounts of energy. The Marine Renewables Deployment Fund is a £50 million fund established to assist the continued development of wave and tidal stream

19

Platts Renewable Energy Report 2 April 2007, pg. 19

178

Key Investment Sectors and Locations

technologies. The fund sets high criteria for eligibility, the idea being to help projects not from start up stage, but from a stage where they have significantly proven themselves to have a real chance of development. As it stands, the DTI are yet to award any project funding since January 2005.20 It is hoped that the quality of the projects being pitched to the DTI will improve so that some of these funds are made available thus energizing the sector.

The Future of Renewable Energy in the UK The Government’s report on the Energy Review: ‘The Energy Challenge’ was released on 11 July 2006. The intention was to document the government’s long-term challenges of tackling climate change by reducing carbon dioxide emissions and delivering secure, clean energy at affordable prices. The Energy Review was followed by a period of consultation, which has culminated in the recent Energy White Paper ‘Meeting the Energy Challenge’. The main proposal to come out of the White Paper is that ROCs will in future be banded. Instead of the current regime, under which each megawatt-hour of electricity produced from renewable energy sources is eligible for one ROC regardless of the type of renewable energy used, different types of renewable energy will in future attract different numbers of ROCs. The Government proposes to introduce four bands. Technologies in the ‘Established Band’ (which include sewage gas, landfill gas and co-firing of non-energy crop biomass) will receive one ROC for every 4 MWh generated. Technologies in the “Reference Band’’ (which include onshore wind, hydro, cofiring of energy crops, energy from waste with combined heat and power) will continue to receive one ROC per MWh. The ‘Post