Investors' Guide to the United Kingdom

Investors’ Guide to the United Kingdom GLOBAL MARKET BRIEFINGS Investors’ Guide to the United Kingdom Third Edition ...

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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

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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

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

Fund raising

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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

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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

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biotechnology and medical device companies were

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set up to commercialise technology developed at

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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

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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

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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

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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.

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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.

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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

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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

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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

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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

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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

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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

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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:

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“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

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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

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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.

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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.

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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.

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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.

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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.

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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/

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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

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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.

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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.

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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

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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.

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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

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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

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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.

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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

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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

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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.

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• 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

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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.

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• 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

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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

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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

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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

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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

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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.

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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

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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;

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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,

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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.

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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.

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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

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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

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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

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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 Demonstration Band’ (which includes offshore wind and regular biomass) will be eligible for 1.5 ROCs per MWh. The ‘Emerging Technologies Band’ (which includes wave, tidal, advanced conversion technologies, biomass burning energy crops, regular biomass with combined heat and power, solar and geothermal) will be eligible for two ROCs per MWh. Primary legislation will be required to implement the new ROC regime, and it is likely that it will not start before April 2009. The Government intends to introduce ‘grandfathering’ arrangements whereby existing plants will not have their ROCs reduced (although this will not apply to co-ﬁring), and existing projects that are in the Post Demonstration Band and Emerging Technologies Band will be eligible to receive the higher ROC levels once the new arrangements are in force. However, projects that have been in receipt of grants will not be eligible for higher ROC levels unless they repay the grant. For licensed electricity suppliers, the key signiﬁcance of banding is that their obligation will be to obtain a speciﬁed number of ROCs rather than (as at present) source a speciﬁed percentage of their electricity (in MWh) from renewable sources. 20

Platts Renewable Energy Report 2 April 2007

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179

A further change proposed by the White Paper is to increase the Obligation percentage imposed on licensed electricity suppliers to a maximum of 20% on a ‘guaranteed headroom’ basis. This means that each year the DTI will review the amount of ROCs in circulation and, if it appears likely that the total number of ROCs exceed the Renewable Obligation (calculated in ROCs), the percentage Obligation will be increased. The purpose of this is to maintain the stability of the system and ensure that ROCs retain their value, which is vital for the economics of renewable energy projects. Overall, the future for renewable energy looks bright. Relatively low operating costs and established infrastructure mean that onshore wind is likely to remain the dominant source for the near future, although problems remain. The reluctance of local planning authorities to grant planning permission is the biggest concern of the onshore wind sector.21 Offshore wind also has massive potential for development, and the additional ROCs allocated under the proposed new banding scheme (if implemented) should encourage new turbine developers to come onto the market. Biomass is very likely to develop although waste-to-energy is looking less attractive for the future. Despite the fact that solar will beneﬁt from double the number of ROCs as at present, there is little prospect for believing that solar energy will grow signiﬁcantly in the short to medium future, whilst tidal energy in the UK remains at the research stage, with large scale investment needed if progress is to be made.

21 ‘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

3.10 Offshore Oil and Gas: Exploration and Production Michael Wachtel and Philip Mace, Watson, Farley & Williams LLP

Introduction The UK sector of the North Sea has entered a new phase as a mature oil and gas province but plenty of opportunities for companies wishing to explore and develop on the UK Continental Shelf (UKCS) remain. Estimates suggest that there are still between 21 billion and 27 billion boe (barrels of oil equivalent) more to be recovered from the UK sector of the North Sea.1 In 2006, at least half a billion barrels were discovered and around 40 per cent of exploration wells found potentially commercial oil and gas accumulations2 . One of the government’s objectives in recent years has been to increase the competitiveness of the UKCS compared with other oil and gas regions. Some of the steps that have been taken include modernizing the licensing regime, allowing cost reduction through new approaches to exploration and development and the removal of obstacles to asset trading between licensees. The government is actively encouraging new entrants to the UKCS to enhance competition and innovation. This chapter contains a brief summary of the main legal issues that any new player in the oil and gas sector in the United Kingdom will need to consider before making an investment. 1 WorldOi.com, Interview to MP Malcolm Wicks ‘Minister predicts healthy UKCS period, despite tax hike’, April 2006. 2 Government News Network, ref 143533P, ‘Oil is well under the North Sea’ by the Department for Business, Enterprise and Regulatory Reform, 1 February 2007.

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Licensing regime In the United Kingdom the proprietary rights to all petroleum on land, under the territorial sea and the UKCS, are vested in the Crown. The right to explore for and exploit these resources is managed on behalf of the Crown by the UK Department for Business, Enterprise and Regulatory Reform (DBERR).A system of licensing has been established that grants rights to investors to conduct exploration and production under the terms of a licence established under a legislative framework (originally the Petroleum (Production) Act 1934, which is now consolidated in the Petroleum Act 1998 (1998 Act).

Types of licence The Petroleum Licensing (Exploration and Production) (Seaward and Landward Areas) Regulations 2004 (as amended) (2004 Regulations) provides for a variety of offshore licences, the most common of which are mentioned below: The Seaward Exploration Licence (EL) This is a non-exclusive three-year licence (extendable for a further three years if the Secretary3 consents). It only permits geological survey work and prohibits any drilling to depths in excess of 350 meters. The Seaward Production Licence (PL) This is the most common form of licence and the majority of United Kingdom’s offshore oil and gas industry is operated under PLs. A PL is an exclusive licence to search and bore for, and get, petroleum in a deﬁned area (a block) offshore, which may be granted to one or more licensee. It enables a licensee to undertake activities of exploration, appraisal and production of oil and gas in consecutive periods of 4 years (one for the initial term and another for the second term) and a period of 18 years (for the third term), provided that the conditions of the licence have been performed and the licensee has fulﬁlled its obligations to move into the subsequent term. Otherwise, the licence expires automatically at the end of a term. Usually the initial and second terms would be taken up with the exploration for and appraisal of any hydrocarbon discoveries. The longer period of the third term would typically be used for the production of oil and/or gas. The secretary has created variants of the PL to encourage new participants that want to invest in offshore upstream activities. These variants of the PL are as follows: 3

Secretary of State for Business, Enterprise and Regulatory Reform.

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• The ‘Promote Seaward Production Licence’, launched as part of the 21st licensing round, is designed to attract start-up companies not ﬁnancially equipped for full-scale exploration (including the drilling of wells) or that do not have the technical expertise to carry out work programmes. The intention is to attract companies with fresh ideas that could attract more experienced companies at the end of the ﬁrst two years of the initial term, when they will be required to submit to the DBERR proposals of a work programme for the last two years of the initial term (to include the drilling of at least one well or an equivalent agreed activity) by the end of the initial term. An annual licence fee reduced by 90 per cent applies for the ﬁrst two years. • The ‘Frontier Seaward Production Licence’ is designed to allow companies to operate in challenging and large areas, for an initial period of six years and with lower annual licence fees in the ﬁrst two years (for preliminary evaluation). Then the licence reverts to the traditional pattern of a fouryear work programme.

Key obligations of a licensee This section will focus on PLs as the most common form of offshore licence. The key obligations of any investors holding an interest in a PL are summarized below.

Requirements for a new licensee The main requirements for a new licensee are as follows: • A new licensee will be required to have a UK tax base (eg a place of business within the United Kingdom). This requirement can be satisﬁed by a new licensee having a subsidiary company incorporated in the United Kingdom or a UK registered branch of a non-UK incorporated company. • The DBERR requires evidence of the licensees’ ﬁnancial ability to meet their actual costs, commitments, liabilities and obligations (that may reasonably be expected to arise as a result of the operations under the licence), which could be annual accounts, a parent company guarantee or other evidence that the DBERR considers satisfactory. •

If the investor is to conduct the relevant operations it will also have to demonstrate technical and other capabilities and apply either as an ‘Exploration Operator’ (to be authorized to conduct all forms of exploration activity (surveys, exploration and appraisal drilling, etc)) or as a ‘Production Operator’ (for the development and production of a ﬁeld).

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Licence fees Included in the PL will be the annual licence fees applicable to that licence. These are usually listed in a schedule to the PL for each year of the PL (including for the second and third terms) and will include annual increases.

Work obligations The PL will also set out the work programme that is applicable to the PL, for example, the conduct of a deﬁned seismic survey or the drilling of a number of exploration wells. The work programme will have been agreed by the DBERR and the licensee(s) prior to the award of the licence. Carrying out the work programme will give the licensee the right, on surrendering a speciﬁed proportion of the licensed area, to continue the licence for subsequent terms.

Model clauses Each PL incorporates by reference a number of provisions applicable to the licence, which are known as the ‘model clauses’. For new licences the model clauses are found in the 2004 Regulations. However, for older licences the model clauses applicable to that licence may be derived from previous regulations. Under the 1998 Act, the secretary may modify or exclude the model clauses in any particular case. In recent licensing rounds, licences have been issued with some changes to the model clauses with the intention of speeding up and improving exploration activities and prompter surrender of unexploited ﬁelds.4 The model clauses cover a wide range of issues including remedies for breach of the licence. A new investor should consult with advisers to understand the speciﬁc requirements of the model clauses.

Securing an interest in an offshore licence Licensing round/out-of-round ELs are applied for on an ad hoc and non-competitive basis either because the licence itself is non-exclusive or because it is ancillary to another kind of activity.5 For PLs a prospective licensee can apply, on a competitive basis, for most licences in a UKCS licensing round held annually by invitation by the secretary and published in the Ofﬁcial Journal of the European Community every year. 4 5

‘United Kingdom Oil & Gas Law’, Daintith and Willoughby, 3rd Ed., 2003. Ibid.

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A prospective licensee interested in acquiring a licence in a particular area can ask the DBERR for an out-of-round licence award if it is able to put forward a suitable case. In any event, in compliance with the Hydrocarbons Licensing Directive 1995 (HLD), the DBERR will follow the normal invitation procedure to ensure competition. Blocks offered for a competitive bid in a licensing round or out-of-round are unlicensed blocks, which mainly cover exploration areas. However, due to the government’s recent initiative to encourage exploration and appraisal activities in the UKCS, acreage on which no discovery has been made and no signiﬁcant activity has been carried out for three years (fallow block), as well as acreage on which a discovery has been made and no signiﬁcant activity has been carried out for two years (fallow discoveries), may also be available.6

Acquiring an interest in an existing licence Acquiring an interest in an existing licence means that an investor has more choice on the type of investment to be made. Existing licences are at a various different stages of the upstream oil and gas process (ie exploration, appraisal, development and/or production). Interests in licences at these different stages have very different risk proﬁles and command a wide range of prices. Some of the most signiﬁcant transactions in the UK offshore sector in recent years have related to oil and gas ﬁelds that have been in production for many years. The issues to consider in this type of transaction are extensive and could be the subject of a chapter in its own right. However, some of the main issues are as follows: •

Multiple licensees Where there is more than one party to a licence then the rights and obligations of the licensees are held on a joint and several basis. Joint licensees will form a joint venture to regulate their affairs and the operations under the licence, under a joint operating agreement (JOA). The JOA speciﬁes the percentage interest of each licensee in the licence. A new investor needs to make sure that not only the undivided legal interest under the licence is transferred to it, free of encumbrances, but also the beneﬁcial interest in the JOA and any other underlying agreements.

•

Pre-emption JOAs often contain pre-emption provisions, which give a preferential right over a third party (the acquiring party) to acquire the disposing party’s percentage interest on the same terms and conditions as those proposed by the acquiring party.

6 The fallow initiative is a wholesale procedure whereby licensees will have to carry out signiﬁcant activities on those fallow blocks and/or discoveries, if they want to retain them. There are also different classes of fallow blocks and discoveries that are reviewed annually by the DBERR, etc. For further details, see http://www.og.dberr.gov.uk/UKpromote/fallow/fallow_assets.htm.

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Pre-emption rights were seen by the UK government as a major cause of delay and often operated as an obstacle to the assignments that could bring new funds and resources to the UKCS; under the New Pre-emption Arrangements (NPA)7 the pre-emption period (if the pre-emption right is exercised and not waived) will be of a standard 37 days from the date the disposing party notiﬁes the remaining parties of its intention to dispose of its interests. Signatory and non-signatory companies to what is referred to as the ‘Master Deed’ can beneﬁt from, inter alia, the NPA by ﬁlling in the form in the site http://www.masterdeed.com/join.cfm. • DBERR Consents (operator/non-operator) The DBERR’s prior consent will be required for the transfer of assignment of an interest under a licence. In giving consent the DBERR will be concerned with the ﬁnancial ability of the incoming investor (see sections on ‘Requirements for a new licensee’ and ‘Decommissioning’). Operatorship of a licensee is not transferred with the interest in the licence. For a company to take over operatorship of the licence, separate speciﬁc DBERR consent would be required based on proof of technical, environmental and ﬁnancial competence. For further details, please visit the DBERR’s website on www.og.dti.gov.uk.

Decommissioning The decommissioning of offshore oil and gas installations is a key and complex issue for the UK offshore oil and gas industry. The costs and risks involved in decommissioning offshore platforms and pipelines are signiﬁcant. New investors need to consider this issue carefully and seek suitable expert advice. As a starting point, the DBERR has published ‘Guidance Notes for Industry’, relating to ‘Decommissioning of Offshore Installations and Pipes under the Petroleum Act 1998’ and such notes are available from the DBERR or can be downloaded from the website www.og.dberr.gov.uk. Part IV of the 1998 Act contains the main regulations relevant to the decommissioning of offshore oil and gas installations and pipelines. Under Section 29 of the 1998 Act, the secretary can serve notice (a ‘Section 29 Notice’) on a range of persons, which either speciﬁes the date by which a decommissioning programme is to be submitted or, more usually, provides for it to be submitted on or before such date as the secretary may direct. The obligation to carry out an approved decommissioning programme is joint and several; therefore the DBERR can enforce the Section 29 Notice against any one of the parties that have received such a notice for the 7 The NPA is part of the Master Deed, created by agreement amongst Oil & Gas UK (formerly UKOOA) members, the DBERR and non-operators in the UKCS, which introduces, inter alia, a standardized and simpliﬁed pre-emption regime applicable in relation to disposals of interests and removes the existing pre-emption practices and procedures from operating agreements as of UKCS 20th Licensing Round.

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full cost of the decommissioning. The 1998 Act also provides that any company that has, in the past, held an interest in a licence (and companies associated with former licence holders) may also be held liable for decommissioning costs. Any party acquiring an interest under a licence covering operations for which offshore installations have been put in place will be subject to a Section 29 Notice and the DBERR will require, as a condition to giving its consent to the transfer, that the new party is capable of discharging its decommissioning obligations. Pursuant to Section 38(4) of the 1998 Act, the DBERR is entitled to require the new party to provide security in respect of those obligations. In practice, to date Section 29 Notices are issued only to current licence holders. The UK offshore industry appears to be taking a conservative approach to ensuring that there are sufﬁcient funds in place to cover decommissioning costs. So far, the government’s extensive powers under the 1998 Act have not been fully tested.

Environmental legislation Existing UK and international environmental legislation provides a comprehensive system of controls on UK offshore operations. Prospective licensees, particularly ones that intend to act as an operator of a licence, will need to become familiar with these requirements as they will affect the day-to-day conduct of all operations. For example, the Offshore Petroleum Production and Pipelines (Assessment of Environmental Effects) Regulations 1999 requires that an environmental impact assessment is undertaken and considered before consent for a proposed activity (such as drilling of any well, the extraction of petroleum at certain levels, the erection of any structure in connection with a development) is given by the DBERR. In cases when the proposed activity is not likely to have a signiﬁcant effect on the environment, the interested party may request the DBERR that the application for consent need not be accompanied by an environmental statement. Applicants in a licensing round are required to carry out environment assessments of their proposed work programmes. They must also submit copies of their company’s environmental policy and environmental management system.

Tax regime Over the last 40 years the UK tax regime applicable to offshore oil and gas activities has undergone signiﬁcant changes. The net result of this is that tax in this sector is a complex area and one on which investors should seek specialist advice before making an investment. For example, the main direct

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taxes applicable to offshore activities are petroleum revenue tax, corporation tax and supplementary charge. However, the application of these taxes to a particular ﬁeld will vary depending on when the ﬁeld was developed and where it is physically located.8

Conclusion The UK offshore oil and gas sector remains a dynamic industry with many opportunities for investors who are new to the region and/or the industry. Potential investors wishing to ﬁnd out more about potential opportunities in the United Kingdom are recommended to consult with the DBERR at an early stage. Early consultation with specialist commercial, legal and tax advisers is also advised.

Information Useful websites and our contact details are below should you need specialized advice on any matter related to oil & gas activities: Government: www.og.dberr.gov.uk (DBERR); www.og.dberr.gov.uk/ukpromote (UK Promote); UK Offshore players: www.ukooa.co.uk (Oil & Gas UK); www.pilottaskforce. co.uk (PILOT); www.masterdeed.com (Master Deed) Supply chain information: www.logic-oil.com (LOGIC) Seismic and well data: www.ukdeal.co.uk (DEAL); www.cdal.com (CDA); www.bgs.ac.uk (BGS) Our contact details Watson, Farley & Williams www.wfw.com Tel: +44-207-814-8000 Please direct any queries to Michael Wachtel, Head of Oil and Gas Group, Watson, Farley & Williams.

8

Ibid.

3.11 Liqueﬁed Natural Gas, Gas Storage and Access to Infrastructure Anna M. F. Soroko, Watson, Farley & Williams LLP

Background In addition to the renewed interest of investors in ‘upstream’ UK oil and gas exploration and production, there has been a surge of investment in ‘midstream’ elements of the energy chain, such as import of liqueﬁed natural gas (LNG) and gas storage, including projects that require access to spare capacity in the existing infrastructure. Since the United Kingdom has recently become a net gas importer, there has been considerable investment in projects to diversify sources of and enhance security of gas supply. In addition to recently completed gas import pipeline projects, the United Kingdom has seen interest focus on LNG import and gas storage projects. This is a result of a combination of a competitive gas market that could no longer rely on the monopoly gas supplier for security of supply, high gas prices and the United Kingdom becoming a net gas importer. As these same factors are impacting on other major energyconsuming countries, we are seeing new technology, in particular, for LNG, which has only recently been be viewed as ‘proven’ and can be relied on. An area that has seen much development is onboard regasiﬁcation of LNG, which allows LNG to be regasiﬁed into natural gas whilst still onboard a vessel. The natural gas can then be discharged, either into an onshore pipeline or via an offshore buoy, with transportation to shore, into a pipeline system. As LNG meets, for the most part, the British gas speciﬁcation, no extensive processing is required, thus increasing its delivery ﬂexibility. There is also considerable interest in combining this technology with opportunities

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for offshore gas storage. Such projects can be brought to completion quicker than conventional onshore regasiﬁcation facilities and gas storage projects that also often have planning and location concerns. These opportunities have only recently become commercially viable. The United Kingdom was previously self-sufﬁcient in oil and gas and did not need to consider energy source diversiﬁcation, resulting in a regulatory and legislative system that does not directly address at all or appropriately such projects. Many prospective developers and ﬁnanciers have found this regulatory uncertainty frustrating when considering investment in the United Kingdom. Over the past few years, the Department for Business, Enterprise and Regulatory Reform (DBERR) has been advising prospective investors on the regulatory regime surrounding new and innovative projects, but has recognized the shortcomings in existing legislation with its deterrent effect on the availability of ﬁnance. DBERR has recently undertaken a consultation process with interested parties with the aim of improving the regulatory framework for offshore natural gas storage and offshore LNG unloading. The results of this consultation, although now published, are unlikely to be translated into legislation and procedures for another few years. Nonetheless, it is clear from projects already undertaken that even under existing legislation, offshore natural gas storage and LNG import facilities are permissible and will be encouraged should they assist the United Kingdom in diversifying its energy portfolio, and support the competitive gas market. DBERR is a valuable resource for any persons considering these sorts of projects and will assist in providing guidance through the often confusing and complex laws and regulations. Nonetheless, an independent review of the regulatory framework will also be needed by any person considering such investments.

Gas storage Storage structures When the United Kingdom had an oversupply of gas from its own reserves, and particularly when the ﬁelds of the southern North Sea were able to increase production volumes at short notice, there was no urgent requirement for gas storage. There is currently only one offshore gas storage development in operation, the Rough Field, which gained its regulatory consents under the Petroleum Act as a gas producing ﬁeld. As more gas ﬁelds become depleted, the attraction of converting such ﬁelds to storage facilities is being considered, as is utilisation of other geological structures, such as salt caverns. With the precedent of Rough, it is clear that depleting gas ﬁelds can use the Petroleum Act licensing regime for storage, and the results of the consultation indicate a licence under the Petroleum Act will continue to be required for this typed project. Other storage structures cannot utilize this legislative path. Such projects are being considered both on- and

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offshore but onshore facilities are, and will continue to be, subject to The Town and Country Planning Act 1990 and to Local Authority jurisdiction.

Salt cavern storage Salt caverns are used in various places in the world for the storage of, particularly, hydrocarbon substances. Indeed, the US government uses huge salt dome caverns along the Texas Gulf Coast for their Strategic Petroleum Reserve programme. Salt dome caverns provide a safe structure that can be engineered speciﬁcally to accommodate the size and shape of storage required. Salt domes are found both on- and offshore but the regulatory path for developing these structures offshore is uncertain and currently inadequate. In order for such projects to proceed, the accepted view is that a licence is required under the Food and Environment Protection Act 1985 (FEPA), Part II, Deposits in the Sea, Section 5, which requires a licence for ‘the deposit of substances or articles . . . either in the sea or under the sea bed’. As natural gas would be injected into a sub-sea cavern, this provision is applicable, although the original purpose of the legislation was concerned with disposals of waste and scuttling of vessels offshore. Licences have already, however, been granted to prospective gas storage projects but it is recognized that this is not wholly satisfactory. Another requirement is a consent under the Coast Protection Act (CPA) 1945, Section 34, which requires consent of DBERR when carrying out operations that ‘construct, alter or improve any works on, under or over any part of the sea shore lying below the level of mean high water springs’, or ‘deposit any object or any material on any such part of the sea shore’ where such operation causes, or is likely to result in, an obstruction or danger to navigation. Various other offshore oil and gas and environmental legislations are also relevant and environmental impact assessments would need to be carried out. As will be discussed below, decommissioning liabilities will also need to be considered under the Petroleum Act 1998 (the Act). Another area in which the law is currently unclear surrounds the activity’s location and the applicability of the Crown Estates jurisdiction, also discussed below.

Gas reservoir storage The use of depleted gas reservoirs for storage provides a more certain legal route but may present problems with regard to suitability, particularly as many ﬁelds would be regarded as too large for such activities. (Many such ﬁelds are also being considered for Carbon Capture and Storage projects but the legal position and economics are problematic and they are speciﬁcally excluded from the recent DBERR review relating to offshore gas storage.) Depleted ﬁelds licensed for storage under the Act are also likely to require

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licences under FEPA and the CPA. The questions of ownership of gas, allocation, attribution and gas quality need to be considered in all storage projects. These would be the subject of private commercial agreements with persons having ownership interests in the gas and facilities. Any investor needs to consider both the applicable regulatory regime and commercial arrangements.

Way forward for storage The responses to the recent consultation indicate a Natural Gas Storage Licence being created, which would be required in addition to a Petroleum Licence for a conversion of a depleting hydrocarbon ﬁeld. Until this regime is in place, projects can continue to be developed but will do so under legislation that does not directly address the activities being carried out. Onshore storage remains covered by the Town and Country Planning Act 1990 and unaffected by any new offshore regime.

Relevance of the 12 nautical mile limit For any activities within the 12 nautical mile limit (NML), the Crown Estate has legal authority to grant rights for exclusive activities within a speciﬁed area by means of a lease. It cannot currently do so outside the 12 NML, but this does not mean that activities outside this limit are not permitted, merely that exclusive rights cannot be guaranteed. The DBERR consultation paper on offshore unloading and storage misstated this concept and it is accepted by DBERR that activities can occur outside the 12 NML, but will not have the protection of a Crown Lease. It is unlikely that once a project has been authorized that other authorizations, for example, under FEPA, would be granted to another project in the same area, as this would be likely to raise safety concerns. Thus, although exclusivity cannot be guaranteed via a lease, it is a likely consequence of other regulatory requirements. The United Nations Convention on the Law of the Sea (UNCLOS) 1982 is an international convention relating to the use of the sea bed and water column. At present, the United Kingdom has not asserted exclusive rights under UNCLOS in respect of areas of the continental shelf beyond the 12 NML territorial water limit. Should the United Kingdom choose to assert such rights, this will remove some of the uncertainties with regard to activities beyond the limit. It is likely to assert such rights at some time in the future. Those activities within the 12 NML will be subject to the jurisdiction of the Crown Estates and lease arrangements, as well as licences, can be obtained, for both short- and long-term activities. For example, with regard to any project for salt cavern storage offshore, The Crown Estate has the power to and will grant licenses to explore and thereafter grant a long-term lease, should the exploration activities result in a commercially viable project within the 12 NML.

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Onboard LNG regasiﬁcation opportunities Technology now exists to enable LNG to be regasiﬁed onboard ship discharging natural gas under pressure into onshore pipelines, offshore buoys, ﬂoating storage and regasiﬁcation vessels (FSRVs) or offshore storage facilities. Such vessels also have the ability to discharge LNG conventionally via cryogenic piping into onshore regasiﬁcation plants. The Gas Act 1986 sets out legislation with regard to the requirements for conventional onshore terminal projects. As onboard regasiﬁcation does not import LNG, but natural gas, the considerations are, in some ways, similar to those for the landing of gas produced from an offshore ﬁeld. The United Kingdom currently boasts the only onboard, in-port regasiﬁcation terminal in the world, the Excelerate Energy Terminal in Teesside, which discharges natural gas into a purposebuilt pipeline for delivery through an existing gas terminal into the National Transmission System. This project was constructed, and is now operational, within the current legislative regime. It obtained onshore planning consents and conﬁrmed, through its own legal research and discussions with DBERR, that all legal requirements were met. The same technology as Teesside GasPort™ can also be utilized for offshore unloading projects. LNG would be regasiﬁed onboard a vessel and discharged via an offshore buoy attached to a gas pipeline, to transport natural gas either straight to shore or to existing offshore infrastructure for onward transportation to shore. Discharge could also be via an offshore platform structure.

Legal issues Such projects raise some of the same concerns as for offshore storage, in that the use of the sea bed and sea column outside the 12 NML is not subject to a clear legislative regime. The requirement of licenses under FEPA and the CPA, as well as the Act, would need consideration. Each project will have special considerations depending upon its location and the infrastructure that it intends to utilize. Again, there are proposals to implement an Offshore Unloading License but such a scheme is several years away. The proposed regulatory regime envisages DBERR being a one-stop shop for the purposes of constructing offshore facilities and their ongoing operation but onshore facilities would still require a separate regulatory regime. Thus, although various permissions would be required, they could be coordinated through one ofﬁce, reducing the regulatory burden on investors and providing comfort to ﬁnanciers. It has also been suggested that such a regime and infrastructure could also be utilized for Compressed Natural Gas.

Contact for projects Any enquiries with regard to projects of the type described should be, in the ﬁrst instance, addressed to Ruth French, Leader Gas Supply Infrastructure Project at the Department for Business, Enterprise

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and Regulatory Reform, 1 Victoria Street, London SW1H 0ET (e-mail: [email protected]; tel: +44 (0) 207 215 6554).

Decommissioning liability There is both English domestic and international law governing the decommissioning of offshore infrastructure. The Act contains extensive provisions with regard to decommissioning and this legislation covers structures such as platforms as well as pipelines. If the only structures requiring decommissioning are pipelines, such as may be the case for offshore unloading of LNG, then only the Act needs to be considered. The provisions of the Act will be applicable to both offshore storage and offshore natural gas unloading facilities. Under the provisions of Part IV of the Act, any person who at any time has had an interest in the infrastructure could, theoretically, be liable for decommissioning costs. This is found in Section 34 of the Act and provides for a joint and several liability of the infrastructure owners, as between such owners and the government. Such owners may have contractual arrangements in place, which may vary their liability but any such arrangements would not affect the statutory liability embodied in the Act. DBERR has published full ‘Guidance Notes for Industry’, relating to ‘Decommissioning of Offshore Installations and Pipes under the Petroleum Act 1998’ and such notes are available from DBERR or can be downloaded from the website www.og.BERR.gov.uk. Such notes do, however, have to be read in conjunction with the legislation that grants extremely wide-reaching powers to the government, although none of these powers have, to date, been implemented or tested in the courts. There is concern within the industry as to the perpetual, contingent, residual liability with regard to decommissioning and it is possible that there may be changes to the Act to address this in the future, although the current consultation on decommissioning does not suggest this. The nature of the decommissioning liability is such as to be a potential deterrent to investment. In practice, it is the companies that are parties to any Joint OperatingAgreement relating to the infrastructure in question,who are likely to be served by DBERR with a notice under Section 29 of the Act. This requires such owners to set out and prepare a programme for the decommissioning of the infrastructure in which it has an ownership. Any person wishing to invest in oil and gas reserves or infrastructure should consider the potential risks of decommissioning liability. The international requirements under the Convention for the Protection of Marine Environment of the North East Atlantic (the OSPAR convention – http://www.ospar.org/ ), the London Dumping Convention of 1992 and the Act should be considered with regard to decommissioning; all have onerous requirements. There are tax concessions with regard to decommissioning costs through which DBERR assert that, in fact, through the tax regime the exchequer contributes an average of some 50 per cent of the decommissioning costs.

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The party would, however, need to investigate its own liability and tax position in the event of decommissioning. DBERR is currently in the process of consulting on changes to decommissioning liability but this is unlikely to change the current regime for some time, nor is it likely to relax any liability for decommissioning.

Access to infrastructure The dilemma on access Investors in the offshore oil and gas industry will require some assurances that their products can be transported to market through access to the necessary infrastructure, such as processing plants and pipelines. On the other hand, prospective investors in substantial infrastructure typically require assurances that they will have either exclusive access to or priority access to utilize their infrastructure, to enable them to secure ﬁnancing and recover their investment. Thus, in the United Kingdom’s market-driven energy industry, there is a certain amount of conﬂict between the investors in infrastructure and those wishing to have access to it. There is extensive EU and UK legislation addressing access to and use of energy infrastructure, much of it enacted fairly recently such that there is relatively little history or precedent of its application. Accordingly, each project would need careful consideration on its own merits to determine whether Third Party Access (TPA) was required/available and if so on what terms. As a broad generalization, the infrastructure discussed in this chapter would be classiﬁed as ‘gas facilities’ to which the European Gas Directives (EUGD) would apply. The general rule under EUGD is that there should be TPA to gas transportation infrastructure in order to encourage and facilitate competition. Exemptions and derogations from these provisions are available to certain projects provided they meet applicable criteria and would be granted by the UK authorities with the approval of the European Commission. The conventional LNG regasiﬁcation facilities currently in operation at the Isle of Grain and those under construction elsewhere in the United Kingdom all obtained such exemptions; however, if there is idle capacity, it must be made available to other parties (the ‘use it or lose it’ concept).

Preference for TPA The position with regard to TPA for other infrastructure projects discussed in this chapter is untested but existing statutes and regulations and the EU’s and United Kingdom’s energy market models, which encourage competition and open access to infrastructure, suggest that this will be granted wherever possible. In particular, Section 17(F) of the Act indicates that if an application to DBERR for access to any pipeline below the water mark was made, it would

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likely be granted, at least on a ‘reasonable endeavours’ basis. The question of access to a buoy is uncertain and likely to be the subject of a separate negotiation, as this is not covered by legislation that discusses ‘pipelines’. The Gas Act 1986 and the Pipelines Act 1962 both have similar provisions with regard to TPA and are relevant for any facilities onshore, or above the watermark. With regard to access to infrastructure, ‘to facilitate the utilization of infrastructure for the development of remaining UK Continental Shelf (UKCS) reserves’ the Infrastructure Code Of Practice (ICOP) provides a voluntary code that sets out a process by which parties are expected to negotiate commercial arrangements for the use of the infrastructure in question. Although voluntary, there is considerable pressure to utilize the processes set out in ICOP. ICOP is, however, not applicable to the types of project discussed in this chapter, although the overarching principle remains that DBERR would expect a commercial negotiation to occur with regard to reasonable access to any infrastructure capacity not being utilized by its owner.

Conclusion Because of the complexities of the legislation governing the matters discussed in this chapter, any party wishing to consider investment in this type of project is advised to discuss its project in detail with DBERR and obtain its own legal guidance on the applicable requirements.

3.12 London – As a Premier Investment Location Michael Charlton, Think London

Introduction Imagine Europe in a nutshell – its diversity of industries, consumers, workforce, skills, culture and language, and, not least, amounts of available funding. Add various business inﬂuences from overseas, a liberal business environment and regulatory system, and watch how converging industries, businesses, skills and practices trigger innovation and growth. This is London. London is the biggest magnet of foreign direct investment (FDI) into Europe. In the past year, the city has extended its lead as the number 1 city in Europe and the United Kingdom for FDI to the highest level since 2000: More than 7 per cent of all FDI companies coming into Europe set up business in London. No other European city attracts that many investors. Growing top business is easier in a city where business potential rests on solid assets. London is the international ﬁnancial capital of the world, the largest IT market and life-sciences market in Europe. The city is Europe’s best connected and ultimate creative city, retail universe and career hotbed. However, it is the future that will ultimately decide the race for inward investment companies in a globalized business world: the legacy of the Olympic Games 2012, London’s Wireless Revolution, and opportunities in the Thames Gateway are just a few developments holding enormous business potential for overseas companies. This chapter seeks to encourage FDI

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companies across a variety of sectors to unlock not only London’s current but also its future business potential.

London’s business proﬁle in brief • London’s strong business infrastructure nurtures a wide range of sectors. • London has the best international accessibility of any city worldwide. • London has a highly-skilled and international work force • London is Europe’s best connected city, providing world-class IT infrastructure. • London is good for your career. • London is a good place to live and work. • London’s value outweighs its cost. • London continuously regenerates and expands – and its appeal is growing.

FDI companies in London are highly successful and productive To date, London accounts for more than 20,0001 foreign-owned businesses. Independent research carried out by DTZ Consulting & Research (October 2006)2 demonstrates that FDI companies in London are highly successful, extraordinarily productive and believe that London plays an important role in their overall global strategy. On average, foreign-owned ﬁrms have grown by 165 per cent since ﬁrst investing in London and only 6 per cent of FDI companies have ever considered leaving the capital. For nearly two-thirds of respondents the diversity of London’s workforce creates value. Employees of foreign-owned companies are also more than twice as productive as other London workers, when measured across all sectors, and therefore London’s talent pool is a major draw. 1 London Annual Business Survey, London Development Agency. 2 The ﬁndings of ‘52 Billion: The Value of Foreign Direct Investment to London’ are based on independent research carried out by DTZ Consulting & Research in October 2006 for Think London. DTZ surveyed executives at 232 London-based FDI companies by telephone, and conducted additional face-to-face interviews with a selection of them. The companies were predominantly in the ﬁnancial, professional services and ICT industries, and most employed fewer than 50 people in London. Of the 232 executives surveyed, 90 per cent had worked outside the United Kingdom, 60 per cent were from outside the United Kingdom and 50 per cent had arrived in London within the past three years.

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The report also shows that a London base is a crucial component of companies’ expansion plans, with more than 90 per cent of respondents agreeing that London plays an important role in their businesses’ global strategy.

London’s business potential across sectors •

Financial services

London is the international ﬁnancial capital of the world. Every major bank and ﬁnancial institution in the world has a signiﬁcant presence in London and provides vital ﬁnancial services to the world’s governments and leading corporations.

“Our presence in London is an essential component of the ﬁrm’s continued success. This building is a symbol of our long-term commitment to London, to Europe, and to all our clients worldwide.’’ Richard S Fuld, Jr, chairman and CEO of Lehman Brothers (American ﬁnancial services ﬁrm)

•

Professional services

London invented and is now the leading location in Europe for professional services. It is one of the world’s two leading legal centres, one of the world’s leading international centres for management consulting and excels in providing accounting and related services. •

IT

London’s IT sector is the largest in Europe, worth US $27 billion. With the largest end-user market in Europe, London offers world-class opportunities for IT hardware, software and service providers. London also leads the way in mobile, broadband and wireless technologies.

“We selected London and Tokyo as the sites for our ﬁrst overseas ofﬁces because they are gateways to Europe and Asia, respectively.’’ Michael Donath, Vice President of Worldwide Sales, Corrent, (US Security Processing Company)

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Creative industries

London is the ultimate creative city. With its huge and sophisticated population, vibrant business environment and cultural diversity, London has an inexhaustible appetite for design innovation.

“Creative people with rich talents in the design, architecture, fashion, interior design and a range of other genres gather in London. It is our hope that they will use their skills to build upon Yamaha’s unique designs and overcome established preconceptions to propose advanced designs with their own innovative features.’’ Yoshihiro Katsumata, Manager Design Studio London, Yamaha Corporation (manufacturer of musical instruments and electronics)

•

Healthcare and life sciences

London is a world-class centre of healthcare provision and is Europe’s largest life-sciences market. The National Health Service (NHS) itself is a major procurement body. London’s strong healthcare provision facilities combine with unrivalled international access to attract more than 20,000 medical and surgical patients per year from overseas.

“We chose the London area as our new European base after a careful appraisal of the options available. There is a good supply of high quality staff and business support services, a favourable business environment and excellent communication links to the USA. Proximity to our investors in London is another advantage. More generally, we are impressed by the UK governments recognition of the importance of the pharmaceutical and biotechnology industries, and its commitment to dialogue with them.’’ Kevin Young, Exective Vice President, Commercial Operations, Gilead Sciences (biopharmaceutical company)

•

Environmental technologies

A high-density, high-consumption population with a distinct shortage of landﬁll, London is the perfect place to exploit new market developments. London offers a deep pool of environmental and engineering talent; pro-recycling legislation; world-leading research on waste reduction and reprocessing; and excellent private equity specialists.

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Food and drink processing

Food procurement is big business in London. It is the ideal place to sell to the food and drink giants – the UK-based supermarkets that shape everyday eating habits. London’s superb transport connections give fast access to UK and European markets, vital for companies producing perishable goods. •

Production industries

Manufacturing in London fuels over 300,000 jobs and US $17 billion of output. Increasingly interlinked with the city’s service sector activities, London thrives in all the key manufacturing sectors – food and drink, printing, telecommunications, design, advanced automotive, pharmaceuticals, precision engineering and high-technology activities such as ﬁbre optics. •

Retail

London’s retail sector is the largest in Europe and contributes over US $24 billion to London’s economy, about 13 per cent of its gross domestic product (GDP). London has over 30,000 shops, with over 3,000 being in central London.

Business opportunities in the future A business’s future ultimately lies in its ability to capture opportunities. A business location’s future lies in its ability to create opportunities for businesses. As one of the world’s most dynamic cities, London is regenerating, innovating and expanding on a large scale and will considerably change its face in the years to come.

The London 2012 opportunity The London 2012 games will be the catalyst for transforming one of the most deprived areas in London, the Lower Lee Valley, forming part of the Thames Gateway in East London. The planned 500-acre complex in Stratford will become Europe’s largest urban park, creating a world-class sporting legacy. Consisting of a Stadium, Aquatics Centre, Hockey Centre, Velopark, and Athlete’s Village, the park will be the driver for an estimated 12,000 new jobs. The next ﬁve years will see a number of large-scale infrastructure projects realized, with the process of procuring contractors, project managers and design specialists needed for the park already under way. Games-related opportunities will be extensive and diverse, ranging from producing furniture

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to landscaping development sites, from manufacturing sports equipment to providing essential services for the athletes, spectators and the East London community as a whole. Integration of these developments with wider regeneration initiatives will present business opportunities for contractors through the construction of new mixed-use commercial and residential property. The elite sports development programme, devised as part of the games, will also generate increased interest in sports, creating greater opportunities for companies within the sports and leisure sector. Working with our partner agency for East London, Gateway to London, Think London can help companies realize and access opportunities for growth both inside and outside the games.

The Thames Gateway opportunity The Thames Gateway initiative is Europe’s largest regeneration project. A key part of it is Silvertown Docks, a major mixed-use development planned on a strategically important site. The site covers 24 hectares (59 acres) – a substantial development opportunity providing an exceptional blend of highquality residential, workspace, retail, leisure and entertainment facilities. Silvertown Quays offers a rare opportunity to be part of an international vision providing lasting economic, social and physical regeneration of this key area of London and the Thames Gateway. The development will complete a vital missing link to other existing nearby schemes, such as London’s new Excel exhibition centre, the Royals Business Park and the London City Airport with its international connections, plus the new Docklands Light Railway (DLR) extension, which will provide fast links into Canary Wharf and the City of London. This international development will be undertaken in four key phases over the next 10–15 years in conjunction with other leading players and with strong ﬁnancial backing.

London’s wireless revolution London leads the way in the growth areas of mobile, broadband and wireless technologies and is at the forefront in developing Europe’s thirdgeneration wireless networks. In April this year, the City of London became the largest wireless Internet hotspot in Europe. Europe’s most advanced outdoor WiFi network was switched on across the entire City of London. More than 350,000 people who work in and visit the area now have wireless broadband access throughout the city. The network, built and operated by The Cloud, will have free access for the ﬁrst

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month, provided in association with Nokia, enabling anyone with a WiFienabled device to get online in the city for broadband Internet access on the move. The network currently comprises 127 nodes and will evolve to offer 95 per cent coverage across areas owned by the City of London Corporation. Reinforcing the City of London’s status as a world-leading ﬁnancial and business centre, the city-wide WiFi network has been designed and built onto existing street furniture including lamp posts and street signs. The network allows anyone with WiFi-enabled devices including laptops, PDAs, media players and smart phones such as the new generation of Nokia devices to take their broadband with them.

More customers, more incomes Looking ahead, London is forecast to witness a sharp increase in population over the next two decades with an extra 1,018,000 residents forecast between 2001and 2026.3 In 2005, more than 7.5 million people lived in London, an increase of 195,000 since 2001. Employment in London is also expected to grow, by 969,000 between 2003 and 2026 (see footnote 3). This combination of rising population and rising incomes should ensure continued strong growth in consumer spending on retail goods with spending on non-grocery goods forecast to rise by 4.8 per cent per annum by 2016.4 The ﬁnance and business services sector is projected to be among the strongest growing sectors over the next 15 years. Other service activities – especially in the creative industries, leisure and retail industries, and in hotels, catering and tourism – will also grow rapidly.5

Think London is instrumental in the success of FDI companies Gaining access to the right support and advice early in the process of developing a location strategy is vital. Think London has been proven to be instrumental to the success of FDI companies in the capital: DTZ Consulting & Research’s research into the value of FDI into London1 found that foreign businesses assisted by Think London expect to grow by 77 per cent in the next three years. This is about six times faster than expected by companies that did not beneﬁt from Think London’s help. Furthermore, 87 per cent of companies that received Think London’s assistance say that the help they were 3 GLA Economics May 2006 – Current Issues Note. 9: Borough employment projections to 2026. 4 GLA London Town Centre Need Assessment – Comparison Goods Floorspace Need in London – Experian Business strategies, Sept 2004. 5 The London Plan, A Summary; Greater London Authority, February 2004.

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given was ‘important’ or ‘crucial’. Since its creation, Think London has helped more than 1,000 companies from more than 43 countries set up operations in London.

Selected foreign direct investment and business growth in London, assisted by Think London (2005 to date) Amgen, European Development Centre The world’s largest biotechnology company, headquartered in California. Export Import Bank of India, European headquarters A ﬁnancial institution wholly owned by the Indian government. Mindray, European headquarters A leading Chinese medical device company from Shenzhen, China. Viadeo, UK ofﬁce A fast growing online business social network based in France Wipro Technologies, UK ofﬁce Leading IT services provider, based in Bangalore, India.

Think London’s services cover ﬁve key areas: 1.

Making the business case for London and facilitating set-up, helping companies understand how and where they should locate in London.

2.

Helping companies ﬁnd the right people with the right skills from the extensive labour resources available in London, and providing access to training and further education programmes.

3.

Helping companies ﬁnd the right property in the right location, making sure companies locate close to markets with the appropriate infrastructure and business support services.

4.

Helping businesses make connections and create a business network. Think London’s unique position as a public – private partnership in both central and local government also provides unrivalled access to government networks and policy makers. Think London also hosts an extensive range of networking events where inward investment companies can meet other businesses new to London.

5.

Helping companies ﬁnd out more about London, including housing, schools and local amenities. With Think London’s assistance, staff and their families can settle quickly into London life.

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Author and contributor information Michael Charlton is Chief Executive of Think London, the ofﬁcial FDI agency for London. He directs the team responsible for worldwide promotion and business development for London. Mr Charlton has a great deal of experience working across global markets and sectors and in developing business opportunities in Asia Paciﬁc, North America and Europe.

Think London Think London is the FDI agency for London. It is a not-for-proﬁt, private – public partnership delivering expertise and advice to international businesses, helping them to exploit the opportunities available. Think London has helped more than 1,000 businesses from more than 43 countries set up and grow in London. Its service is free, comprehensive and conﬁdential.

Part 4 The Corporate and Personal Legal Environment

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

Introduction Intellectual property rights (IPRs) play an important and often essential role across the whole range of business activities. The different types of IPRs are many and varied, but include the protection of intangible business assets such as know-how, reputation and goodwill, and the products of creative effort. Most IPRs have a commercial value and can be bought, sold and licensed. It makes good business sense to identify the IPR you have (particularly where your business is investing in innovation and research, or sells goods or services on the basis of its reputation) and to ensure that they are properly protected. It is also important, where possible, to identify as early as possible areas of potential conﬂict with IPRs owned by third parties so that potential infringements of their IPR can be avoided. Some IPRs attract protection automatically on their creation or commercialization, others require registration with an ofﬁcial body (usually the UK Intellectual Property Ofﬁce (UK IPO)) before they are recognized, and afforded protection, by the courts. This chapter gives a description of the main commercially signiﬁcant IPRs that may be protected and exploited in the United Kingdom.

Copyright and rights related to copyright Copyright is the collective name for the body of law that grants to makers of written, dramatic, musical and artistic works the ability to control how their

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creations are used. Both economic and moral rights are provided under the copyright law of the United Kingdom: •

Economic rights allow the creator to control the commercial exploitation of their works and to prevent them from being copied without permission.

•

Moral rights protect the works from being manipulated or distorted in a way that is detrimental to the interests or reputation of the author.

In the most basic terms, copyright is a right to prevent unauthorized copying. Rights related to copyright include the ability for the owner of a work to prevent others from doing things that, although not strictly copying, are essential to the commercial exploitation of a work, for example, the public performance of music, the adaptation of a play or the broadcasting or public showing of a ﬁlm or television programme.

Automatic protection Copyright protection covers original literary, dramatic, musical and artistic works, published editions, sound recordings, ﬁlms and broadcasts where the creator has expended a sufﬁcient level of “skill, judgement and labour’’ in creating the work. Protection is automatic as soon as the work is recorded, in any form or medium. There is no ofﬁcial registration system in the United Kingdom and therefore there are no fees to pay or formal action required in order to get copyright protection. However, it is a good practice to keep a detailed record of how and when the work was produced in case a creator is ever obliged to prove (eg in court) that they created the work and that it was not copied. Although not a legal requirement in the United Kingdom, owners can mark their work with the international copyright symbol © together with their name and the year of publication. The United Kingdom is a member of several international copyright conventions, and works created by UK nationals or residents are automatically protected by the copyright law of other signatory countries; nationals or residents of these countries are automatically afforded reciprocal protection in the United Kingdom.

Ownership and duration Copyright can be bought or sold, inherited or transferred or licensed wholly or in part. As a result, the economic rights to a copyright work can belong to someone other than the creator. Moral rights can be waived but cannot be transferred. The length of protection offered by copyright depends on the type of work and there are speciﬁc rules for each work but in general the length of protection is as follows:

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•

Literary, dramatic, musical or artistic works and ﬁlm – life of the author plus 70 years

•

Sound recordings and broadcasts – 50 years

•

Published editions – 25 years

Infringement Copyright infringement occurs when a work is copied or used without permission. Matters of infringement are ultimately decided in court. Infringement will not occur if the work is used with the permission of the owner, or in relation to certain very limited purposes, which include noncommercial research or private study, criticism or review or for teaching in schools.

Database right Copyright protection will apply to a database if there is originality in the selection or arrangement of the contents. If there has been substantial investment in the creation of a database then, in addition to copyright protection, a separate stand-alone database right may apply. Copyright and the database right can both apply to the same database. Database right gives automatic protection as soon as the database exists in recorded form and applies to both electronic and paper databases. It provides protection against the unauthorized appropriation and distribution to the public of the whole or a part of the contents of a database and lasts for 15 years.

Trademarks and passing off A trademark is a distinctive sign that identiﬁes certain goods and/or services as those produced or provided by a particular person or enterprise. The owner of a registered trademark has the exclusive right to use or identify goods and/or services using that trademark. If a sign is being used by a business as a trademark but is not registered, it may be capable of protection using the law of passing off. Trademarks can greatly assist the customers of a business by serving as a badge of origin for its goods and services. Registered trademarks also offer a business the ability to protect the investment it makes in its brand identity and in the reputation of its goods and services. Additionally, without trademark protection the competitors of a business may try to take unfair advantage by using confusingly similar distinctive signs to market their products and services.

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Types of trademark Trademarks may be words, letters, numerals, symbols, drawings, fragrances, colours used as a distinguishing feature, three-dimensional signs (eg shape and packaging of goods and sounds, so long as the trademark is capable of being represented graphically). Although the possibilities are many, and may seem almost limitless, a trademark must be distinctive and capable of distinguishing goods or services of one undertaking from that of another.

Process of registration To be registered a trademark must be distinctive, not similar to any earlier marks and not be deceptive, or contrary to law or morality. Both British trademarks and Community trademarks have effect in the United Kingdom. There are two main ways to acquire a trademark that will have effect in the United Kingdom: • Apply to the UK IPO for a British trademark. • Apply to the Ofﬁce for Harmonization in the Internal Market for a Community trademark. Ofﬁcial fees must be paid to obtain both types of registered trademark. A British trademark offers protection in the United Kingdom only. A Community trademark has effect in every member state of the European Community as well as the United Kingdom, but the application process is generally more expensive and slower than a British trademark. A trademark application must specify the types of goods and services in respect of which protection is sought (the more the types, the more expensive the application), and the application can be rejected by the relevant ofﬁce on a number of grounds, or challenged and blocked by third parties, prior to registration. Once granted, a registration lasts for 10 years, but can be renewed indeﬁnitely as long as the trademark is being used.

Beneﬁts of registration Registering a trademark confers on the owner the exclusive right to use the mark for the goods and services it covers in the United Kingdom. Once the trademark has been registered the ® symbol can be put next to it to warn others from using it. Care must be taken, however, as use of the ® symbol in respect of unregistered trademarks is a criminal offence. Other beneﬁts conferred to the owners by registered trademarks include the following:

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•

the ability to sell or licence the trademark;

•

the ability to commence legal action against anyone who uses it without permission;

•

the generation of value in an asset that may be used as collateral for ﬁnancing; and

•

UK Trading Standards, the police and the other law enforcement agencies can bring criminal charges against counterfeiters and pirates.

Passing off If an unregistered mark is used without the owner’s permission it may be possible to claim protection from the courts under the law of passing off. To be successful in a claim for passing off, a claimant must prove that: •

it is the owner of the unregistered trademark and has built up goodwill or reputation attaching to the goods and services it supplies to the public;

•

the defendant has made a misrepresentation to the public (intention is irrelevant), leading or likely to lead the public to believe that goods or services offered by the defendant are the goods and services of the claimant; and

•

it has suffered or is likely to suffer damage from the illegitimate use of the mark.

A legal action for claiming passing off can be expensive, as proving sufﬁcient reputation or goodwill in the unregistered trademark is often difﬁcult for the claimant and usually involves showing an extensive and lengthy prior use of the trademark in the United Kingdom (ﬁve years or more).

Patents If you have invented a product that is new or a new way of doing something a patent may be granted. A patent having effect in the United Kingdom can be acquired in two ways: • Application to the UK IPO for a British patent • Application to the European Patent Ofﬁce for a European Patent (which in fact is a single application process leading to the grant of a ‘bundle’ of separate national patents, including a UK patent) Whichever application process is used, once granted a UK patent has effect in the United Kingdom only and lasts for 20 years from the date of ﬁling of the application.

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A patent may not be the best or only way to protect an invention. It may be possible to protect aspects of the invention as registered or unregistered designs, registered trademarks or using the law of copyright.

Scope In basic terms a patent is designed to protect how things work, what they are made of or how they are made. To be granted a patent the invention must be new, involve an inventive step, not be obvious to someone with knowledge and experience in the subject and be capable of being applied on an industrial scale. A patent will not be granted for certain types of innovation, including: •

scientiﬁc or mathematical discoveries;

•

literary, dramatic, musical or artistic works;

•

most computer programs;

•

animal or plant varieties;

•

methods of medical treatment or diagnosis; and

•

inventions that are deemed to be against public policy or morality.

Process of application The process of applying for a patent can be complicated, and the assistance of a qualiﬁed patent attorney is recommended. It is also recommended that a search of published patents and existing public know-how (so-called prior art) be conducted before an application is made to conﬁrm that the invention is new and has not already been patented. The registration process requires full disclosure to the UK IPO of information explaining how the invention works, and this information is made available to the public whether the application is successful or not. Once a patent is granted, yearly renewal fees must be paid for the rights to continue.

Protection The owner of a patent can prevent anyone from using, distributing, selling or commercially making the invention without permission. If a patent is infringed it is up to the owner to take appropriate action.

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Designs In the United Kingdom a design may be legally protected in one or more of three ways. •

Registered designs: The look of a product (including its surface decoration, colour and ornamentation) may be protected by seeking a registered design, provided certain requirements are met, the main ones being that the design is new and has individual character (ie it is distinctive of existing designs). To obtain a registered design an application must be made to the UK IPO, and a fee is then payable. Registration lasts for a maximum of 25 years.

• Design right: The shape or conﬁguration of a product may be protected from illegal copying by use of the law of unregistered design right. Design right is free and, subject to certain qualiﬁcations, arises automatically where the shape of a new product is original. Design right lasts for the shorter of the 10-year period after the ﬁrst marketing of products that use the design or the 15-year period after creation of the design. Licenses of right (meaning that anyone is entitled to a licence to make and sell products copying the design) may be available towards the end of the period of protection. Design right does not protect two-dimensional designs (in respect of which registered designs or copyright may be relevant). • Copyright: If an original design is artistic and is not intended to be mass-produced, it will be protected against illegal copying by the law of copyright.

Plant variety rights, geographical indications There are a number of IPRs that, although less well known than those mentioned previously, can be valuable to those engaged in certain specialist areas of business. These include the following: •

plant variety rights (which offer protection to plant breeders); and

•

geographical indications (which offer protection to producers of foodstuffs with a strong connection to a particular area, eg stilton cheese).

Conﬁdential information and trade secrets Information that is not covered by one of the IPRs may nonetheless be protected by its owner if it is not public knowledge and the owner keeps it a secret. The law imposes or implies certain duties of conﬁdentiality in particular situations, but these can be strengthened or widened by contract. For example, a new and distinctive business proposition may not meet the

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requirements for patent protection, but before disclosing it to potential new business partners the owner may require them to sign a conﬁdentiality agreement that will prevent them from using the idea themselves or disclosing it to third parties.

Remedies for infringement A range of remedies is available to the owner of an IPR depending on the IPR in question, and include the following: • Account of proﬁts: If the defendant has made proﬁt out of infringing another’s IPR the IPR holder can elect to have this awarded instead of damages. •

Damages: Damages are usually calculated on a loss of proﬁts or on a royalty basis. Generally they are compensatory in nature and are to put the holder back in the position they would have been in if the infringement had not occurred.

•

Delivery up and destruction of articles infringing IPRs.

•

Criminal penalties: serious infringement of certain IPRs such as copyright, trademarks and patents may amount to a criminal offence (eg piracy on a commercial scale), leading to criminal sanctions including imprisonment and ﬁnes.

Injunctions may be granted by the court ordering a defendant not to carry on certain activities. Injunctions are discretionary remedies and may not always be awarded and interim injunctions (which are awarded before the ﬁnal decision of the court in an action for infringement) are only granted if it is a matter of urgency or in the interests of justice.

Employees and IPR In many cases, the IPR created by an employee in the course of their employment will, according to UK law, belong automatically to their employer. However, the type and nature of the IPR created and the scope of the employees’ duties can sometimes result in the employee being considered to be the ﬁrst owner of the IPR. For example, a junior employee who invents something that is not directly connected with the main business of the employer may claim that they are the ﬁrst owner of the invention, on the basis that it was not created in the course of their employment or as part of their normal duties. To avoid such problems it is strongly recommended that every UK employment contract contains clauses that expressly set out who will be the ﬁrst owner of the IPR created whilst the employee is employed by the employer.

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Where the creator of an IPR is not an employee of the business, but is a contractor engaged by the business, the usual rules (that the business is the ﬁrst owner of any IPR created at its request) do not apply in the absence of an express agreement between the parties to the contrary. In this situation the IPR will usually belong to the consultant who created it, with an express or implied licence being granted to the business to use the IPR. Although in some circumstances it may be inferred that a contractor is under an obligation to assign the IPR to the business, if this is the intention then a clear written agreement between all parties engaged in the work is highly recommended.

Useful websites www.wfw.com (Watson, Farley & Williams LLP) www.ipo.gov.uk (UK Intellectual Property Ofﬁce) www.ohim.eu.int (Ofﬁce for Harmonization in the Internal Market – EC Trademark Ofﬁce) www.epo.org (European Patent Ofﬁce) www.lawsociety.org.uk (Law Society of England and Wales) www.lawscot.org.uk (Law Society of Scotland) www.cipa.org.uk (Chartered Institute of Patent Agents) www.itma.org.uk (Institute of Trademark Attorneys)

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

Introduction One of the foundations of any sophisticated and successful ﬁnancial and investment marketplace is the existence of a legal and regulatory framework that provides investors and others with conﬁdence in the market as a place to do business. The most successful ﬁnancial business environments are those that are able to strike a balance between regulatory intervention and commercial freedom, enabling businesses to undertake their activities with the greatest ﬂexibility possible while providing a level of security for participants in the market. London has established itself as the world’s leading ﬁnancial centre. One of the bedrocks of its success is its balanced and ﬂexible regulatory system based upon a system of rules overseen by a central regulator, the Financial Services Authority (FSA). The system of ﬁnancial services regulation in the United Kingdom has evolved over time to match developments in the international marketplace, taking account of the changing business environment, the increasing globalisation of investment business, new technologies, new products and new market participants. The structure of the regulatory system in the United Kingdom, with a single central regulator and an overriding framework statute governing all ﬁnancial services businesses, incorporates the ﬂexibility to amend existing rules and issue new rules as circumstances require but with common standards across all businesses. This has created an environment that is considered to be fair, transparent and does not discourage

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entrepreneurial activity while at the same time providing a high level of security for investors and consumers. The principal legislation governing ﬁnancial services businesses in the United Kingdom, a term that encompasses a broad and diverse range of activities from banking and insurance to fund management, securities trading and even funeral contracts, is the Financial Services and Markets Act 2000 (FSMA). FSMA was enacted following an extensive consultation exercise in the United Kingdom and replaced and consolidated legislation previously governing ﬁnancial services, banking and insurance activities. It also enabled the movement away from self-regulation through various separate industry bodies by the establishment of the FSA.

The Financial Services Authority The FSA is the United Kingdom’s central regulatory body for the ﬁnancial services industry. It has its main ofﬁce in London, with another ofﬁce in Edinburgh. The board of the FSA, which is appointed by Her Majesty’s Treasury, sets overall policy, with day-to-day decisions and management being the responsibility of the executive. The FSA is directly accountable to treasury ministers, and through them to parliament. The FSA regulates most ﬁnancial services participants, exchanges and ﬁrms. It has wide-ranging powers of rule making, investigation and discipline that are derived from FSMA. It also acts as the ‘competent authority’ for listing of shares on the London Stock Exchange and maintains the Ofﬁcial List. In its role as competent authority, it is referred to as the United Kingdom Listing Authority (UKLA). FSMA imposes the following four statutory objectives upon the FSA: 1.

maintaining market conﬁdence in the ﬁnancial system;

2.

promoting public understanding of the ﬁnancial system;

3.

securing the appropriate degree of protection for consumers; and

4.

limiting the extent to which ﬁnancial businesses may be used for purposes connected with ﬁnancial crime.

These statutory objectives are supported by a set of ‘principles of good regulation’ that the FSA is required to have with regard to carrying out its functions. These include using its resources in the most efﬁcient and economic manner, recognising the international character of ﬁnancial services and markets and the desirability of maintaining the competitive position of the United Kingdom, recognising the need to minimize the adverse effects on competition that may arise from the FSA’s activities and the desirability of facilitating competition between the ﬁrms it regulates.

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The Financial Services and Markets Act FSMA is a framework statute. Its principal provisions form the basis of the United Kingdom’s regulatory system with secondary legislation, rules and regulations being made under and pursuant to those primary provisions. The two main provisions setting the overall parameters within which ﬁnancial services businesses are required to operate are the general prohibition of carrying on regulated activities in Section 19 FSMA and the restriction on the making of ﬁnancial promotions in Section 21 FSMA. These two sections effectively provide that, where regulatory protections are considered to be warranted, only those persons who have been licensed or authorised by the FSA are permitted to carry on or promote regulated business activities. These provisions are at the centre of the structure of FSMA and form the basis for the regulatory system established beneath it.

General prohibition As noted above, the FSA’s regulation of ﬁnancial services within the United Kingdom is based on a system of approval and licensing of market participants, whether they be commercial or investment banks, insurance companies, securities dealers, ﬁnancial advisers or others. The system provides for minimum standards and criteria for persons to qualify for approval and licensing where the legislators considered that the persons with whom such businesses may interface require regulatory protection. The activities requiring licensing are termed ‘regulated activities’ and FSMA provides a prohibition on the carrying on of any regulated activity in the United Kingdom other than by authorised or exempted persons. This prohibition is referred to as the ‘general prohibition’ and is the central building block around which FSMA and secondary legislation made thereunder is structured. A person who undertakes a regulated activity without authorisation or is not otherwise exempt will be subject to criminal and civil sanctions. Furthermore, any agreement that results from a breach of the general prohibition will be unenforceable. Although FSMA provides examples of regulated activities, this term is not exhaustively deﬁned in FSMA itself. Instead, it is deﬁned in secondary legislation – the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) – and includes the following activities: accepting deposits (ie banking business), dealing in investments, arranging deals in investments, managing investments, safeguarding and administering investments, establishing or operating collective investment schemes and advising on investments. Investments are deﬁned by the RAO and include deposits, contracts of insurance, shares, debt instruments, units in collective investment schemes and various derivative instruments.

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As stated above, only authorised or exempt persons may carry on a regulated activity. Such persons may include securities traders and advisers, ﬁrms of accountants or UK corporate ﬁnance ﬁrms that act as sponsors or brokers on a market listing. Exempt persons include recognised investment exchanges, such as the London Stock Exchange plc.

Financial promotion In addition to regulating the undertaking of certain activities described above, FSMA also regulates communications made to third parties in relation to the undertaking of those activities. In particular, FSMA prohibits a person from communicating, in the course of business, an invitation or inducement to engage in investment activity. This is more commonly known as ﬁnancial promotion. The ﬁnancial promotion regime is based on foundations similar to the general prohibition and does not apply if the person making the communication is an authorised person under FSMA or an authorised person approves the contents of the communication. Breach of the ﬁnancial promotion restriction may give rise to civil liability, and also constitutes a criminal ofﬁce. Resulting agreements may be unenforceable and recipients of the unlawful communication may be entitled to recover their investment and to claim compensation for any loss suffered. The detail of the ﬁnancial promotion regime is also set out in secondary legislation: the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO). The term ﬁnancial promotion is itself cast in extremely broad terms to encompass any communication in whatever medium, and includes face-to-face oral representations and representations made in telephone conversations (referred to as real-time communications), as well as communications made in letters, emails or information available on a website (referred to as non-real-time communications). Hence, communications to potential investors inviting them to purchase shares or other investment products will be caught, as will communications concerning insurance products, banking products and the provision of investment management and investment advisory services. Although the ﬁnancial promotion restriction is wide, the FPO contains a large number of exemptions from the restriction. Examples of exemptions include intra-group communications and communications made by a company to its members, creditors or employees. The application of certain other exemptions also depends on the type of communication being made and whether or not it is solicited by the recipient. Exemptions may also apply by virtue of who the recipients of such communications are. For example, where communications are made to investment professionals, or to certiﬁed high net worth individuals, companies or sophisticated investors certiﬁed as such, those communications will be exempt from the ﬁnancial promotion

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prohibition as such investors are not regarded as requiring higher levels of investor protection. The ﬁnancial promotion regime applies to all communications originating in the United Kingdom (irrespective of whether the person being targeted is outside the United Kingdom) and all communications originating outside the United Kingdom that are capable of having an effect in the United Kingdom. Communications that originate outside the United Kingdom and that are not capable of having an effect in the United Kingdom are exempt. The intention is to regulate the provision of business advice or the making of statements upon which a customer or client (other than more sophisticated investors) may seek to rely in making a ﬁnancial or investment decision. FSMA’s aim is to ensure that individuals and businesses establish the necessary credentials, legitimacy and expertise, through a system of approvals and licensing, before they engage with third parties and take a pecuniary reward as a result. This is supported by the requirement to treat customers fairly by recommending that ﬁrms consider the following points when preparing promotions: •

whether the material is clear, fair and not misleading;

•

whether it provides a balanced picture of the product or service;

•

whether the marketing matches what the product or service delivers; and

•

whether the promotions will be easily understood by their customers.

Secondary legislation and the FSA handbook Secondary legislation is issued, modiﬁed, replaced and supplemented as the marketplace develops and is tailored for particular kinds of business such as the carrying on of deposit-taking business by banks, dealing in securities and derivatives and the operation and promotion of investment funds and other collective investment schemes. Secondary legislation is further supplemented with rules and guidance issued by the FSA and contained in the FSA handbook, which applies to all regulated ﬁrms. The FSA Handbook includes overriding standards for all market participants as well as detailed Conduct of Business rules and the Code of Market Conduct. The FSA also produces sector-speciﬁc rules and guidance tailored for particular businesses such as insurance brokers, ﬁnancial advisers and friendly societies.

Conduct of business rules The FSA’s Conduct of Business rules (COB Rules) are the requirements applying to ﬁrms with investment business customers in the United Kingdom. The extent to which the rules apply depends upon the nature

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of the products and services provided and the type of client to which they are offered. The rules are set out in the COB sourcebook and have been in operation since 2001. They are designed to provide guidance on the regulatory requirements across the range of activities that may be carried on by regulated ﬁrms and cover, inter alia, ﬁnancial promotions, the provision of information and advice to clients, dealings in investments and managing investments. In contrast with the generally favourable reputation that the FSA has managed to generate in relation to its rules and governance, the COB Rules have been widely criticised by the ﬁnancial services industry for imposing unnecessary burdens on the businesses they regulate and are due to be overhauled. The proposed changes to the COB Rules are intended to free companies from the prescriptive nature of the current regulatory environment and enable them to design their business processes and promotional material to suit their particular circumstances and those of their customers.

Market abuse Although FSMA primarily regulates ﬁnancial services through a system of authorisation and licensing, it also sets out a framework for tackling wrongful behaviour on ﬁnancial markets (better known as market abuse), which complements the criminal offences of market manipulation and insider dealing. These rules are designed to enhance market integrity and conﬁdence for the beneﬁt of market participants enabling the United Kingdom to maintain its position as a leading global ﬁnancial centre. New market abuse provisions were introduced in the Market Abuse Directive, which was implemented in the United Kingdom on 1 July 2005 and harmonises the requirements relating to insider dealing and market manipulation across the European Union. Market abuse may arise in circumstances where market participants have been unreasonably disadvantaged (whether directly or indirectly) by others in the market who, inter alia, have: 1.

used to their own advantage information which is not generally available;

2.

created a false or misleading impression; or

3.

distorted the market.

Under FSMA, the FSA has power to impose ﬁnancial penalties for market abuse. The FSA has also published a Code of Market Conduct to supplement the provisions that deal with market abuse and provide guidance as to whether or not behaviour constitutes market abuse.

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Other provisions In addition to the above, FMSA also establishes the FSA’s powers of intervention, which include broad powers of investigation and powers to penalise persons contravening the FSA’s rules or the provisions of FSMA, including an ability to ﬁne contraveners or withdraw a ﬁrm’s authorisation. FSMA is a comprehensive statute and although this chapter provides a summary of the principal provisions upon which ﬁnancial services regulation in the United Kingdom is based, FSMA also makes provisions in relation to other relevant matters including provisions for: •

the ofﬁcial listing of securities derived from European Union legislation;

•

an investor compensation scheme;

•

the establishment and operation of an independent ﬁnancial ombudsman to whom investors and market participants can complain;

•

the establishment and operation of regulated and unregulated collective investment schemes;

•

changes of control over authorised persons; and

•

a prohibition of certain kinds of market behaviour including a broad prohibition on making misleading statements or undertaking misleading practices, which are in addition to the provisions relating to market abuse referred to above.

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

Introduction Employment law protection in the United Kingdom has changed over the decades to reﬂect social and political change and has also been affected by the United Kingdom’s membership of the European Union (EU). Any business considering operating in the United Kingdom needs to be aware of the employment law and immigration (see Chapter 4.7) requirements that govern the employment of individuals working in the United Kingdom. Employment law protection varies according to the mechanism used to invest in the United Kingdom and it should be noted that special protection is afforded to employees on the merger or acquisition of a business. This chapter seeks to assist those unfamiliar with the United Kingdom with the task of navigating the rights and obligations provided to individuals through the employment relationship.

Employment status In common with other European countries, UK employment law protection distinguishes between ‘employees’, ‘workers’ and the ‘self-employed’. Employment status is important because it determines the statutory employment rights to which a working person is entitled. Major rights are conferred upon employees who, traditionally, were seen as individuals with full-time jobs working under indeﬁnite contracts of employment. Examples of rights afforded can be found in the Employment Rights Act 1996, which provides employees with the right to claim unfair dismissal,

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the right to a redundancy payment in certain circumstances and the right to maternity leave and statutory maternity pay (SMP). However, as new working arrangements emerge, the United Kingdom has seen an increase in the number of individuals whose working arrangements fall outside the traditional pattern. There is no all-inclusive statutory deﬁnition of employee and, whilst case law has developed in this area, the actual ﬁnding of status depends upon the circumstances of each particular case. As a consequence, we have seen the growth of legislation that applies to ‘workers’ – this term is wider than ‘employee’ and embraces certain types of self-employment. Examples of legislation that apply to ‘workers’ include the Working Time Regulations 1998, the National Minimum Wage Act 1998 and the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000. An individual who is not a worker or an employee will not be entitled to any employment protection rights – but often this category is hard to deﬁne.

Employing people Employment particulars Contracts of employment A contract of employment comes into existence as soon as someone accepts an offer of employment in return for pay. It is legally binding between employer and employee. It can be written or oral, express or implied or a combination of these. In addition, some employment terms are imposed by statute – the most commonly cited is the ‘equality clause’ that is implied by the Equal Pay Act 1970 into every agreement. This provides men and women with a right to equal pay for equal work. Whilst there is no obligation on an employer to provide employees with a full written contract, this is recommended as it provides certainty and may help avoid disputes. However, even a written contract may not necessarily reﬂect all of the terms that apply in an employment relationship, as terms are often implied into a contract. These may be necessary to make the contract workable or may reﬂect custom and practice. In addition, all employment relationships have an implied term of mutual trust and conﬁdence. This is intended to prevent either party acting in a way that is likely to destroy or seriously damage the relationship of trust and conﬁdence that exists between employer and employee. A contract can be for an indeﬁnite duration or for a ﬁxed term. Protection is afforded to ﬁxed-term workers by virtue of the Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002. These regulations provide that a ﬁxed-term worker cannot be treated less favourably than an equivalent permanent worker, unless the treatment is objectively justiﬁed. Under the regulations, in certain circumstances ﬁxed-term contracts will automatically become permanent contracts.

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Written particulars of employment The Employment Rights Act 1996 obliges employers to provide employees with a written statement of employment particulars. The written statement is not necessarily a contract, but can provide evidence of the terms and conditions of employment. It must be provided to the employee within two months of employment starting and must contain basic information including the name of the employer and employee, the rate of remuneration and the intervals at which it is paid. An example of a written statement of employment particulars can be found at www.dti.gov.uk/employment/employmentlegislation/employment-guidance/page16332.html. An employee who has not been provided with the required particulars may make a complaint relating to this to the Employment Tribunal. The tribunal may award two to four weeks’ pay. For these purposes a week’s pay is currently capped at £310.

Policies and procedures Often, written contracts are supplemented by the use of policies and procedures that may, for example, describe the employer’s more general employment practices.

Minimum statutory provisions In the United Kingdom, employees (and, in some cases workers) are provided with minimum terms, which are aimed at providing decent minimum standards and to promote fairness at work. Many of the minimum standards were introduced in order to implement European Directives and consequently similar provisions apply throughout Europe. In the United Kingdom, the following minimum terms cannot be overridden:

National minimum wage The National Minimum Wage Act 1998 applies to almost all workers and sets minimum hourly rates of pay. The national minimum wage is reviewed annually. The rates vary for different groups of workers and at 1 October 2007 were set as follows: •

£5.52 an hour for workers aged 22 and over;

•

£4.60 an hour for 18- to 21-year-olds; and

•

£3.40 an hour for 16- to 17-year-olds.

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Working time The Working Time Regulations 1998 implement a European Directive that is aimed at protecting the health and safety of workers by ensuring that working time does not adversely affect a worker’s health. In summary, the regulations provide the following:

1. Working hours – the 48-hour week An employer cannot require an employee to work more than an average of 48 hours a week, although there are a number of exceptions to this rule for senior employees and certain other categories of employment. Unlike many other European countries, this limit does not apply where an employee agrees in writing with his or her employer to disapply it. It should be noted that the employer cannot compel the employee to opt out and also the employee can reverse this opt-out on giving appropriate notice. 2.

Rest breaks Workers have a right to uninterrupted rest periods of at least 11 hours daily in each 24 hours, and of 24 hours in each 7-day period. Additional rest breaks must be provided to workers whose pattern of work puts their health and safety at risk. The regulations also provide a right to a rest break of at least 20 minutes after 6 hours’ consecutive work. Special provisions apply to night workers.

3. Annual leave Workers have the right to a minimum of 4.8 weeks’ paid annual leave. This right applies from the ﬁrst day of employment and accrues at the rate of one-twelfth of the annual entitlement per month worked. A ‘week’ reﬂects the employee’s working week. So, where an employee works 3 days a week, they will be entitled to 14.4 days’ annual leave. At present, an employer may include the 8 days’ statutory holidays in the United Kingdom in calculating the 24 days’ annual leave. However, there are changes afoot. The Annual Leave (Amendment to Working Time Legislation) Regulations 2007 will increase statutory annual leave from 24 to 28 days on 1 April 2009. (This will be pro rated for part-time employees.)

In practice many employers offer employees the statutory minimum plus statutory holidays and will provide employees in senior roles with additional annual leave. It is common to ﬁnd that senior employees are provided with 25 or even 30 days’ annual leave (in addition to statutory holidays). In the

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United Kingdom, employers can only make a payment in lieu of holiday on termination of employment. Statutory sick pay Eligible employees are entitled to receive SSP for up to 28 weeks in one period, or more than one linked periods, of sickness. Periods with eight weeks or less between them are linked. A helpful SSP calculator can be found on the HM Revenue and Customs website at http://www.hmrc.gov.uk/calcs/ ssp.htm. The rate of SSP is reviewed annually and at April 2007 it was £70.05 per week. In certain circumstances an employer may be able to recover some or all of any SSP they have paid to their employees. As a matter of policy, employers generally pay employees full pay (inclusive of SSP) for a limited period – this is referred to as ‘contractual sick pay’. This period may increase with the seniority of the employee or in line with their length of employment. In addition, some employers provide employees with the beneﬁt of insured schemes, which may make payments on top of SSP or contractual sick pay (see Chapter 4.4). Statutory grievance and disciplinary procedures Where an employer wishes to take disciplinary action against an employee and/or where an employee wishes to raise a grievance against their employer certain statutory procedures must be complied with. In summary, these involve three steps: 1. A complaint being set out in writing. 2. The parties attending a meeting, following which the employer reaches a decision. 3. The employee being given a right to appeal against the decision, if they so wish. Failure to comply with the statutory procedures may render any subsequent dismissal automatically unfair and may result in uplift in compensation of between 10 per cent and 50 per cent. In addition, all employees must be provided with written details of the employer’s disciplinary and grievance procedures. Notice periods Generally, employees with more than one month’s employment are entitled to at least 1 week’s notice for each year of continuous employment up to a maximum of 12 weeks’ notice after 12 years’ employment.

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However, an employee’s contract of employment may provide for a longer notice period. Also, the contract may be terminated without advance notice where the employee has committed an act of gross misconduct. In the absence of any contrary contractual provisions, an employee who has been employed for one month or more must give their employer at least one week’s notice to terminate their employment.

Employers’ liability insurance Every employer in the United Kingdom must have employers’ liability insurance. It covers employers against damages and legal costs following injury or disease to its employees due to their employment.

Health and safety In the United Kingdom, employers have legal obligations to ensure a safe workplace. The health and safety obligations are extensive and if breached may give rise to criminal liabilities. In summary, an employer must provide the following: •

a safe place of work;

•

a safe system of work; and

•

adequate plant and equipment.

An employer must also recruit competent and safety-conscious staff. Further details can be obtained from the Health and Safety Executive’s website at http://www.hse.gov.uk/.

During employment Work/life balance Over the years legislation has been brought in to enable employees to achieve a better work/life balance. According to the Work Foundation, work/life balance is about ‘people having a measure of control over when, where and how they work’. It has been particularly targeted at parents to enable them to spend adequate time bringing up their children by allowing them to work around their commitments. However, it should be noted that in the United Kingdom work/life balance is now rising up the agenda for all employees. Relevant provisions include:

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Maternity leave In relation to babies due on or after 1 April 2007, the relevant legislation provides the following: • All pregnant employees are entitled to 26 weeks’ Ordinary Maternity Leave (OML) and 26 weeks’ Additional Maternity Leave (AML). The main difference between OML and AML is that during OML an employee is entitled to a greater number of the beneﬁts normally due to her under their employment contract. • An employee must give 8 weeks’ notice if she intends to return to work early. • Employees can work for up to 10 days during the leave period (keepingin-touch days). There is no limit on when the keeping-in-touch days can be taken, other than they must not be taken in the two weeks immediately following childbirth. The amount the employee is paid is by mutual agreement, but cannot be less than the amount of SMP (see below) to which the employee is entitled.

Maternity pay Employees on maternity leave are entitled to receive the following payments: •

SMP – Employees with at least 26 weeks’ continuous employment ending on the 15th week before the expected week of childbirth will receive up to 39 weeks’ SMP at the rate set by statute. The ﬁrst six weeks of SMP are earnings related and a woman is entitled to 90 per cent of her average weekly earnings with no upper limit. The remaining weeks are paid at a lower rate, which as of 1 April 2007 is £112.75 (or 90 per cent of earnings if this is less).

•

Maternity allowance – Employees with less than 26 weeks’ continuous employment ending on the 15th week before the expected week of childbirth are entitled to £112.75 per week from 9 April 2007 (or 90 per cent of earnings if this is less) for up to 39 weeks. (This is claimed from the Department for Work and Pensions.)

Similar provisions to those set out above apply on the adoption of a child.

Paternity leave Employees whose partners are expected to give birth will be entitled to time off at or around the time of birth. An employee is eligible to take paternity leave if they:

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1.

are either the father of the child or are married to or are the partner of the child’s mother, but are not the child’s biological father; and

2.

have, or expect to have (if they are the child’s father), responsibility for the upbringing of the child; or (if they are the mother’s husband or partner but not the child’s biological father), the main responsibility (apart from that of the mother) for the upbringing of the child.

Eligible employees are entitled to take either one or two consecutive weeks’ leave as paid paternity leave. As of April 2007, statutory paternity pay is the lesser of 90 per cent of an employee’s weekly earnings or the prescribed amount, currently £112.75. Changes are due in this area. The government has announced plans to introduce a separate right to Additional Paternity Leave and Pay (APL& P), which it is intended will be introduced before the end of the current parliament. The right will provide all employees who qualify for paternity leave with the opportunity to take up to 26 weeks’ paid leave to care for their child during the ﬁrst year. Provisions similar to those set out above apply on the adoption of a child.

Parental leave Parents who have at least one year’s continuous employment may take up to 13 weeks’ unpaid parental leave for each child up to that child’s ﬁfth birthday (or ﬁfth year of adoption). Parents of disabled children are entitled to up to 18 weeks’ leave until the child’s 18th birthday. Where leave is taken in less than a four-week block the employee is entitled to return to the same job; if the leave is longer and it is not reasonably practicable for them to return to the same job then they may return to a similar job with at least the same status.

Time off to care for dependants In the United Kingdom, all employees have the right to take a reasonable amount of time off, without pay, to care for dependants. The right to time off is intended to enable employees to deal with an emergency in the short term and/or, where necessary, to make longer-term care arrangements. This may apply to the employee’s spouse, child or parent, and, in addition, a dependant who lives in the same household, or a person who reasonably relies on the employee.

Right to request ﬂexible working Employees who have at least 26 weeks’ continuous employment and who either:

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have responsibility for the care of a child or

•

care for an adult

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may be able to make a request for ﬂexible working, which will allow them to work modiﬁed hours of employment.

Part-time working Protection is also afforded to those who work on a part-time basis. The Parttime Workers (Prevention of Less Favourable Treatment) Regulations 2000 introduced provisions that prevent part-time workers from being treated less favourably than equivalent full-time employees, unless this is justiﬁable. Also part-time employees should have access to the same rights and beneﬁts as a full-time employee, albeit on a pro rata basis.

Equality provisions The United Kingdom outlaws discrimination on the grounds of sex, race, disability, sexual orientation, religion or belief, and age. Generally, the law recognizes the following types of discrimination: •

Direct discrimination – This is where someone is treated differently because of their sex, race, etc. It is not necessary to show an unlawful motive – it is the reason for the treatment that matters.

•

Indirect discrimination – This is more complicated. It takes place when one person applies to another a ‘provision, criterion or practice’ that the ﬁrst person applies (or would apply) equally to a person of a different sex, race, etc but that puts (or would put) a person of the same sex, race, etc as the other at a particular disadvantage, and that the ﬁrst cannot show to be a proportionate means of achieving a legitimate aim.

•

Harassment – This is where one person subjects the other to unwanted conduct on the grounds of their sex, race, etc that has the purpose or effect of violating the other’s dignity, or creating an intimidating, hostile, degrading, humiliating or offensive environment for them.

• Victimization – This is where a person is treated less favourably because they have started proceedings, given evidence or complained about the behaviour of someone who has been harassing them or discriminating against them. Special provisions apply to disability discrimination and age discrimination. Under the disability discrimination legislation, an employee with a particular condition may receive additional protection where this amounts to a ‘disability’ under the legislation. The most recent form of anti-discrimination

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legislation is age discrimination. This has set a UK default retirement age of 65 years and also gives employees the right to request to continue working beyond this age. It is important to note that compensation for acts of discrimination is uncapped.

Other important things to note Whistle blowing Protection is given to employees who disclose (blow the whistle on) wrongdoings at work. Employees are protected if they blow the whistle and, if they are dismissed or receive detrimental treatment as a result of their action, they can present a claim in the employment tribunal. Compensation for whistle blowing is uncapped. Whistleblowers are protected where they disclose in good faith something that relates to: •

the commission of a criminal activity;

•

a failure to comply with a legal obligation;

•

a miscarriage of justice;

•

a health and safety issue; and/or

•

damage to the environment.

Data protection Stringent data protection or ‘privacy’ laws apply in the United Kingdom. Data transfer to companies outside the EU is only permitted when the receiving country has data protection laws that are considered ‘adequate’ by the European Commission. UK data protection laws may give individual employees access to information held on them by their employer, provided that certain conditions are satisﬁed.

Reporting and consultation requirements The Information and Consultation of Employees Regulations (ICE) give employees rights to be informed and consulted about the business they work for, including information on the employer’s activities and any possible threats to employment. ICE is being introduced in stages and from 6 April 2007 applied to undertakings with at least 100 employees and from 6 April 2008 applies to undertakings with at least 50 employees. The aim of ICE is to encourage people to develop their own arrangements tailored to their particular circumstances through voluntary agreements.

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Termination of employment Dismissal In the United Kingdom, employees have the statutory right not to be unfairly dismissed. Generally, after one year’s service an employee can only be dismissed for a ‘fair’ reason. The reason will only be fair if it comes under one of six prescribed reasons, namely: •

capability;

•

conduct;

•

avoidance of a legal enactment;

•

redundancy;

•

retirement; or

•

some other substantial reason that justiﬁes the dismissal.

Even though a fair reason may be established, the employer is also expected to follow a fair procedure when dismissing an employee. The minimum procedural steps are those established by the statutory dismissal procedures (see above). Depending on the circumstances, additional steps may also need to be taken. For example, where the reason for the proposed dismissal is ill-health that counts as ‘capability’, the employer may also be expected to have: consulted with the employee regarding their sickness absence; obtained medical reports regarding the diagnosis and prognosis and given consideration to any alternative positions within the company. Where the dismissal is found to be unfair, an employee can recover up to £69, 900 by way of compensation. There are, however, a number of grounds upon which an Employment Tribunal can ignore the cap on compensation and award unlimited compensation, including whistle blowing and discrimination, as mentioned above. If the reason for dismissal is redundancy, an employee is generally entitled to a statutory redundancy payment, up to a current maximum of £9, 300. Employers should note that there are special rules concerning redundancy. An employer who proposes to make 20 or more employees redundant must consult with a trade union or employee representative beforehand. Failure to do so may result in compensation of up to 90 days’ pay for each affected employee.

Breach of contract In addition to statutory rights on dismissal, if the employer does not comply with a term of the employment contract this may be a breach of contract. An employee can bring a claim for damages or ‘wrongful dismissal’ if they

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do not receive their notice entitlement under their contract of employment. A fundamental breach of contract will also usually entitle an employee to resign and claim unfair ‘constructive dismissal’. Similar principles will apply where an employee breaches their employment contract. When awarding compensation for breach of contract the UK courts will seek to place the innocent party in the position they would have been in had the contract been properly performed.

Mergers and acquisitions Where part of an entity is transferred to another, by way of a business transfer, the employees in the transferring part are given signiﬁcant legal safeguards under the Transfer of Undertakings (Protection of Employment) Regulations 2006. These safeguards only apply when there is a transfer of assets and not where the employing entity is the same, as might be the case where the transfer is of the shares in the company. These special provisions also apply in certain outsourcing situations. The special protections include: •

appointment of employee representatives, who must be informed (and possibly also consulted) in advance of the transfer;

•

inheritance of past (undischarged) liabilities of the employer by the buyer;

•

changes to an employee’s terms and conditions of employment being unlawful; and

•

dismissals in connection with the transfer being unlawful unless they are for special reasons.

Conclusion It might seem at ﬁrst sight that employers in the United Kingdom are subject to a large amount of legislative requirements. However, it should be borne in mind that many of the provisions, particularly in the area of equal opportunities, are introduced as a result of European Directives and thus apply to all member states. In the case of the Working Time Directive, the United Kingdom has managed to water down the impact of the legislation by opting out of certain provisions. It is also the case that, in the United Kingdom, employees do not gain protection from unfair dismissal until they have been employed for one year, which in most cases is sufﬁcient time for an employer to assess whether or not they will be an asset to the business. In the ﬁeld of redundancy and company acquisitions, the information and consultation requirements are less onerous than in some EU states where agreement must be reached with employee representative bodies before any action can be taken.

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In summary, UK employment law strikes the right balance between ensuring that employees receive adequate protection in their working arrangements and allowing employers the freedom to run their businesses so that they can compete successfully in the global market.

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

Introduction In the United Kingdom it is usual for an employer to provide its employees with a mix of beneﬁts including one or more of pension arrangements, insured beneﬁts and/or stock/share options, in addition to basic salary. This chapter summarizes these types of beneﬁts.

Pensions Occupational pension plans versus personal plans Pension plans can be either occupational or personal. Broadly, occupational plans are annuities provided by employers for their staff in order to provide an income in retirement. Occupational pension plans vary in size from large arrangements that have many thousands of members and assets worth many millions of pounds down to individual arrangements set up for single executives. Occupational pension plans operate on a triangular basis. They are established by the employer and administered by a board of trustees who act in

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the interests of the third party – the beneﬁciaries. The employer and the trustees will agree the terms of the constitutional documents. In addition to these documents, the plan has to be run in accordance with UK legislation and HM Revenue & Customs (HMRC) rules. Personal pensions are different in that the primary legal relationship is between the employee and the personal pension plan provider, such as a life insurance company, a bank or another authorized institution.

Deﬁned beneﬁt versus deﬁned contribution What differentiates between types of occupational plan is how they are funded. Some are funded on a deﬁned beneﬁt basis and others on a deﬁned contribution basis. There is a signiﬁcant difference between the two. (a)

Deﬁned beneﬁt – Here the pension that is provided for the employee is calculated according to a variety of factors that might include length of service, amount of salary at the retirement date and the ‘accrual rate’ (often speciﬁed as a fraction, eg one-sixtieth for each year of service). To the extent that there is a difference between the amount of contributions made by the employer and the employee, the employer will be responsible for making up this shortfall.

(b)

Deﬁned contribution – These plans take contributions from the employee and from the employer and invest them in such a way as to optimize returns with a view to purchasing an annuity for the employee at their normal retirement date. The investment risk falls on the employee, not the employer and this is the funding method chosen by most companies starting out new occupational pension plans.

(c) Combined – On rare occasions a mix of the two or a ‘hybrid’ plan is chosen. This may be a deﬁned contribution plan with a deﬁned beneﬁt underpin (or vice versa) or a plan that permits a change from one to the other at a given age or service period. The uncertainty of cost and complexity of running such plans makes them rare choices. Problems with deﬁned beneﬁt plans Many companies have closed their deﬁned beneﬁt pension plans to new entrants to try and cap the underfunding problems that such plans have caused.

Personal pension plans The main other type of plan used by employees to provide for their retirement is known as a personal pension plan. A personal pension plan is the only type of HMRC-approved pension arrangement that can currently be initiated by an employee who is not eligible to join an occupational pension plan.

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A personal pension plan is a very simple form of pension contract. It is a deﬁned contribution contract issued by a provider to an individual employee. The provider takes contributions from the employee, and invests them, with the contributions receiving certain tax privileges. Employees can take their beneﬁts from age 50 (which will go up to age 55 in 2010) and the value of the fund that an employee accrues over their period of membership (including investment income) will be used to purchase a pension. Employers can also make contributions to the arrangement provided that HMRC limits are not exceeded.

Group personal pension plans Many employers offer a group personal pension plan. This is, essentially, a branding exercise and the ‘group personal pension’ is merely a collection of personal pension policies arranged by the employer through its ﬁnancial adviser. This does not change the fact that, for legal purposes, this is an arrangement between the employee and the provider.

Stakeholder pension plans Since October 2001 all UK employers who employ ﬁve or more employees and who do not offer employees membership of an occupational pension plan or make contributions of at least 3 per cent of basic salary to a personal pension plan have had to comply with the stakeholder access requirements. These are not as onerous as they may sound. They merely require an employer to nominate a stakeholder pension plan, after consulting with the relevant employees and any organizations representing them, and then to provide employees with certain information about the stakeholder pension plan. Employers do not have a legal obligation to make employer contributions, but if an employer does not comply with the access requirements the penalty is a ﬁne of up to £50,000. The vast majority of stakeholder pension plans are merely personal pension plans that meet minimum requirements prescribed by statute. The particular feature of stakeholder plans is that the maximum charge that can be levied on a stakeholder pension plan cannot exceed 1 per cent of the funds under management.

Insurances Introduction In addition to pension beneﬁts, it is also common for employers to provide employees with insured beneﬁts, such as life insurance, private

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medical insurance and permanent health insurance (PHI). These beneﬁts are summarized below.

Life insurance This beneﬁt pays out a lump sum in the event of the death of the insured employee. Typical arrangements will provide for a lump sum payment based upon a multiple of the insured employee’s annual salary, sometimes up to a maximum salary level. Where an employer provides this beneﬁt through a group life insurance plan (see below), the level of cover that can be provided is capped at four times an employee’s annual salary. Where life insurance is provided as an employee beneﬁt, this will usually be done by the employer establishing a group life assurance plan for which the employer pays the plan premium. Individual employees can then be entered into the plan. The provision of life insurance by an employer (where the group policy meets certain HMRC requirements) does not constitute a taxable beneﬁt in the hands of an employee who is entered into the policy.

Private medical insurance This beneﬁt provides cover to meet the costs of treatment of short-term curable illness or injury of an employee, and consequently ensures that the employee has access to such treatment with as little delay as possible. Certain conditions may, depending on the scope of the policy, be excluded from the cover provided (eg any conditions pre-existing on commencement of the policy will often be excluded). Like life insurance plans, group private medical insurance may be arranged by an employer, and individual employees may then be entered into the plan. This will usually decrease the ‘per capita’ cost of cover, as the employer is able to obtain lower premiums for the group policy than would be available to an individual. However, the value of the premiums paid by the employer in respect of an employee is a taxable beneﬁt for the employee, and the employee will therefore be required to pay income tax on this amount (at the employee’s prevailing marginal rate) to HMRC.

Permanent health insurance Where an employer provides PHI beneﬁt to an employee, in the event that the employee becomes unable to work due to illness or accident, the insurer will pay a percentage (usually between 50 and 75 per cent) of the employee’s salary for the duration of the employee’s incapacity. PHI policies will usually provide either that an employee must be unable to perform his or her own

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occupation or that the employee must be unable to perform work of any kind, in order to receive beneﬁts, although other forms of policy are available. Payments will begin after a deferment period during which time the employee must be incapacitated (within the meaning prescribed in the policy). Deferment periods of six months are common, although the period may be longer or shorter. Shorter deferment periods will increase the premium payable on the policy. Often the employee will be eligible to receive company sick pay from the employer for some or all of the deferment period, following which the employee may become eligible to receive beneﬁts under the policy. Where an employer provides PHI as a beneﬁt to employees, it will normally do this by establishing a group plan, into which individual employees may be entered. Where an employer sets up a plan in this way, the provision of PHI cover to an employee is not a taxable beneﬁt in the hands of the employee. However, should an employee become eligible to receive beneﬁts under the PHI policy, those beneﬁts will be taxable as income (this is in contrast to where an individual arranges PHI independently, where any beneﬁts received will not be subject to tax).

Employee Share Plans Introduction There are various types of share and share option plans that an employer can establish as a tax-efﬁcient way of rewarding and incentivizing its employees. The choice of plan or plans will depend on the needs and objectives of the employer. An employer will need to decide whether it wishes to put in place an option plan (in which case Company Share Option Plans (CSOP), Savings-related Share Option Plans (Save As You Earn (SAYE)) and Enterprise Management Incentive (EMI) Plans may be of interest), a share plan (in which case Share Incentive Plans (SIP) or Long-term Incentive Plans (L-TIP) may be of interest) or a cash-based plan that replicates an option or share plan (in which case a ‘Phantom’ Plan may be of interest). An employer does not need to adopt an approved plan or grant approved options. It can adopt an unapproved plan or merely grant unapproved options outside of, or in addition to, any formal plan. Further details in relation to share option plans can be found on the HMRC website at www.hmrc.gov.uk/shareschemes (Please note that all HMRC web addresses are correct as at September 2007, but are subject to any subsequent alterations made to the HMRC website).

‘Approved’ and ‘unapproved’ plans Share and option plans are often categorized as ‘approved’ or ‘unapproved’, which indicates whether or not they are approved by HMRC. Broadly,

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provided an unapproved option cannot be exercised any later than 10 years from the date of grant, an employee who is granted an unapproved option will normally not be charged income tax on the grant of the option itself or when the option becomes exercisable. Income tax will, however, be charged following an exercise of an option on the excess (if any) of the market value, at the time of acquisition, of the shares acquired over the amount paid by the employee to acquire the shares. Capital Gains Tax (CGT) may also be payable on any increase in value between the date of exercise and the date of disposal, although substantial reliefs are usually available to minimize any charge. There may also be PAYE and National Insurance implications for the employer on grant or, more likely, exercise of the option. Further details in relation to unapproved options can be found at www.hmrc.gov.uk/shareschemes/emp_nics.htm. By contrast, options granted under the terms of an option plan approved by HMRC may, subject to conditions, be exercised without giving rise to a charge to income tax. The employee is still likely to be liable to CGT when he or she ultimately sells the shares, but certain approved plans do offer CGT beneﬁts.

Company Share Option Plans Summary In a CSOP an employee is granted an option allowing him or her to buy a ﬁxed number of shares from the employer at a price ﬁxed at the date of grant during a set period of time. The price of the shares must generally not be less than the market value of the shares at the time of grant. To qualify for favourable tax treatment, options must be exercised by the employee not less than 3 years and not more than 10 years after the time of grant and the exercise must not be within 3 years of a previous tax-advantaged exercise. Under a CSOP the employer is, broadly, free to set its own rules as to the circumstances in which the options may be granted or exercised, provided that the performance-related conditions are objective and not subject to the exercise of a discretion by any one person.

Participation and limits The employer can decide on a discretionary basis which of its employees or full-time directors can take part in its CSOP. There is, however, a limit of £30,000 on the maximum value of shares over which approved options granted under a CSOP may be held by an individual at any one time. Further information on CSOPs can be found at www.hmrc.gov.uk/shareschemes/ csop.htm.

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Savings-related Share Option Plans Summary SAYE plans are capable of approval as approved plans. Employees are given a share option to buy a certain number of shares at a ﬁxed price at a particular time. The shares can only be purchased using amounts saved under a special SAYE savings contract. Employees are required to make savings contributions out of net income over a number of years. At the end of the ﬁxed period the SAYE contract pays back the contribution and a bonus, out of which the shares can be purchased. If employees do not exercise their options, they will still receive the proceeds of their SAYE contract, including the bonus.

Participation and limits SAYE plans are all-employee plans under which all qualifying employees and directors must be eligible to participate on similar terms. The employer may specify a qualiﬁcation period of up to ﬁve years’ employment. Participants may choose to exercise their options at the end of ﬁxed three-, ﬁve- or sevenyear terms and monthly savings must be between £5 and £250. Further information on SAYE plans can be found at www.hmrc.gov.uk/shareschemes/ employer-guidance.pdf

EMI Plans Summary EMI plans are aimed at smaller trading companies. EMI plans can be established by independent trading companies that have gross assets not exceeding £30 million. Certain trades (such as property development) are excluded. Although EMI plans offer attractive tax beneﬁts, there is no approval mechanism, although an employer can get prior conﬁrmation that it is eligible to grant EMI options.

Participation and limits There are no restrictions on the number of employees who may participate in an EMI plan. Options over shares worth up to £100,000 at the time of grant can be issued to each employee. However, there is an overall limit of £3 million on the value of unexercised options at any time. There are no rules about when the options may be exercised (although options must be exercised within 10 years of grant to obtain tax and National Insurance relief) or about the price at which options may be granted. Tax relief is limited

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if the options are granted with an exercise price of less than the market value at the time of grant. A qualifying employer under an EMI plan must not be under the control of any other company and must be carrying on a qualifying trade wholly or mainly within the United Kingdom. Individuals, whether they are new recruits or existing employees, must work for the employer for at least 25 hours a week or, if less than 25 hours, for at least 75 per cent of their working time to qualify for EMI. The purpose of the grant of the option must also be to recruit or retain an employee and not for the purpose of tax avoidance. Further guidance on EMI plans can be found at www.hmrc.gov.uk/shareschemes/ emi-new-guidance.htm.

Share Incentive Plans Summary All shares acquired under a SIP must initially be held in a UK resident trust, whose trustees hold shares in the employer on behalf of the employees who join the plan. In order to obtain the full tax beneﬁts, employees must normally leave their shares in the plan’s trust for at least ﬁve years. An employer makes cash payments to trustees who then buy shares in the employer, which are then appropriated to each employee in the plan. There are four ways by which an employee can obtain shares: 1.

Free shares: An employer can award up to £3,000 worth of free shares per annum (with a choice of performance-related awards).

2.

Partnership shares: An employee can buy shares out of pre-tax remuneration. The maximum percentage of salary that can be used to buy the shares is 10 per cent, with an overall limit of £1,500 per annum.

3.

Matching shares: An employer can match the partnership shares bought by the employee by awarding up to two free shares for every partnership share issued.

4.

Dividend shares: An employee can use up to £1,500 of any dividends from the plan shares each year to reinvest in further plan shares.

Participation and limits Employers offering free shares have to offer a minimum amount of free shares to all eligible UK tax resident employees on ‘similar terms’ based on objective criteria such as level of remuneration or length of service. Between that minimum amount and the plan maximum they can offer free shares on different bases to different employees (although there must be no deliberate weighting of rewards in favour of directors or more highly paid employees).

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Further details in relation to SIPs can be found at http://www.hmrc.gov.uk/ shareschemes/sip_employers.htm.

Long-term Incentive Plans Summary This is a ﬂexible, unapproved plan whereby employees receive a deferred right to shares or to exercise an option to acquire shares at nil cost. Rights are generally made conditional upon the employer attaining pre-set performance targets. The plan is intended to afford incentives for future performance over a period of (usually) three years. Many plans also provide that at the end of the period over which the performance is measured, the employees’ rights to sell the shares are deferred for a further period of another one, two or three years (ie up to six years in total). The plans are often aimed at company executives to encourage them to become long-term shareholders in the employer. When shares are ultimately transferred to (or sold on behalf of) the employee under an L-TIP, they receive the full value of those shares, not merely, as in the case of a traditional share option, the growth in the value over the option period. This is because, should the targets be met, shares are usually transferred to the recipient at no cost.

Participation and limits Any employee may participate in the plan at the discretion of the directors/shareholders. Since L-TIPs are not capable of approval, there are no limits on the amounts up to which individuals may participate in the plan.

Tax treatment for the employee The tax treatment for the employee will be as described above in relation to unapproved plans, the employee generally being liable to income tax when shares are received. There may be PAYE and National Insurance considerations for the employer, which generally do not apply to approved plans.

Phantom Share Options (Phantoms) Summary Phantoms are a type of deferred cash bonus arrangement. As they are merely a method of calculating a cash bonus they are not subject to HMRC approval.

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The amount paid as a bonus is calculated by reference to the increase in the market value of a ﬁxed number of shares over the ‘option period’. The employee is granted a right to call upon the employer to pay him or her a cash sum calculated as the amount of the difference between the ‘exercise price’ (usually the market value at the time of grant) and the market value of those shares at the time of exercise. Participation and limits Any employee or director is able to participate in the plan at the discretion of the directors/shareholders. As phantoms are not capable of approval there are no restrictions on the number of shares or on individual participation. Tax treatment for the employee The cash bonus paid forms part of the employee’s emoluments and is subject to income tax and National Insurance Contributions.

ABI guidelines Listed companies are subject to various additional guidelines and codes of best practice relating to the adoption and amendment of employee share and share option plans. In particular, listed companies are expected to conform to the Guidelines for Share Incentive Plans issued by the Association of British Insurers (ABI). The guidelines are designed to provide a framework to enable companies to operate the full range of employee share plans within prudent limits, which avoid undue dilution of the interests of existing shareholders. We would suggest that we include a statement in the chapter to the effect that the links are correct as at September 2007, but are subject to any subsequent changes made by HMRC.

4.5 UK Taxation for Foreign Nationals Tim Cook, Wilder Coe

Introduction This chapter deals with the UK taxation implications for a foreign national coming to the United Kingdom to live and work. The UK tax year is very individual; it starts on 6th April and ends on 5th April. There are three personal taxes to which an individual may become liable; Income Tax, Capital Gains Tax (CGT) and Inheritance Tax (IHT); additionally, National Insurance is likely to be due on any salary. In order to determine the UK taxation treatment of an individual it is necessary to consider three basic principals: residence, ordinary residence and domicile; these are discussed in detail below.

Residence The term Residence is not deﬁned in UK tax law despite being the starting point for determining any liability to UK tax. Over the years the UK Revenue have built up a system based on statute and decisions of the courts (case law). The result of this is that we have now established practice, which deals with this. Residence is where you are physically present, at any one time. There are two basic tests for residence from a tax point of view: 1.

being present in the United Kingdom for more than 183 days in a tax year (6 April to 5 April); or

2.

for those not considered resident under the above rule, there is a second test, which is being present in the United Kingdom for more than

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90 days per year on average over a period of four tax years. Those to whom this applies are considered tax resident from the beginning of the ﬁfth tax year. UK Revenue have stated that normally they only look at whole days in the United Kingdom, ignoring days of arrival and departure. However, it would be dangerous to rely on this statement, as the statutory position is that both days of arrival and departure should be counted (Wilkie v IRC 32 TC 495). There is a more recent case that also backs this up (Gaines-Cooper v Revenue 2007 STC 23).

Dual residence It is possible to be tax resident in more than one country at a time, looking at the individual residence rules for each country, in which case it is necessary to look to see if there is a double tax treaty between the United Kingdom and the relevant country. This can be a very complex matter and is not dealt with in the chapter; further speciﬁc advice should be sought on this.

Ordinary residence Again, there is no statutory deﬁnition of ordinary residence; the UK Revenue looks at a combination of statute and case law. Taking one year with another, ordinary residence is where you, the individual, are usually resident. Normally the UK Inland Revenue looks at residence in the previous four years, in which case the individual will be regarded as ordinarily resident from the ﬁfth year. However, when you come to the United Kingdom, an individual planning to stay in the United Kingdom for more than three years will be considered ordinarily resident from the outset.

Domicile This term is also not deﬁned in UK tax law. It takes its meaning from general law. It looks for what is considered the ‘mother’ country from which the individual hails. There are three types of domicile: origin, dependence and choice.

Domicile of origin This is the domicile that is acquired at birth, being that of the individual’s father, unless their parents were unmarried or divorced during your minority, in which case it is the domicile of the mother or the parent with whom they lived.

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Domicile of dependence During an individual’s minority, a domicile of dependence can displace a domicile of origin if the parents adopt a new country as their ‘mother’ country and settle there; or, as mentioned, if the parents separate or divorce.

Domicile of choice It is possible to shed your domicile of origin in favour of a domicile of choice, by taking various steps. It is not a straightforward matter to shed domicile of origin, particularly if you are trying to shed a UK domicile of origin. This is really a whole subject on its own and is beyond the scope of this chapter. However, speciﬁc advice on this issue should be sought.

Deemed domicile If not actually domiciled in the United Kingdom, see above, an individual may be deemed to be domiciled for IHT purposes only if they have been tax resident in the United Kingdom at anytime in 17 out of the last 20 tax years. Again, speciﬁc advice should be sought on this aspect.

Inland revenue formalities Upon entering the United Kingdom it is necessary for the individual to establish if they have a liability to tax and to notify their existence to the UK Inland Revenue. There are some forms that should be completed: •

Form P86: on entering or returning to the United Kingdom;

•

Form DOM1: if the individual is contending that they are not domiciled in the United Kingdom and have income or gains arising abroad;

•

Form P46: for an employee who has just commenced work in the United Kingdom.

It is suggested that professional assistance be obtained when completing these forms; once residence, ordinary residence and domicile position have been established any liability to tax can be calculated.

Income tax Individuals who are resident, ordinarily resident and domiciled in the United Kingdom are liable to income tax on their worldwide income on an arising

UK Taxation for Foreign Nationals

Table 4.5.1

249

Income Tax rates after the ﬁrst £5, 225

Income First £2,230 Next £32,370 Dividend income above this Any other income above this

Tax Rate (per cent) 10 22 32.5 40

basis. However, for those individuals who are considered resident and ordinarily resident but not domiciled in the United Kingdom, they are only taxed on UK source income on an arising basis, income from abroad is taxed on a remittance basis. Careful planning can enable funds to be held offshore and remitted to the United Kingdom without liability to UK tax. It is best to take advice on this before becoming resident in the United Kingdom. Non-UK residents are still liable to income tax on UK source income usually on an arising basis, for example, on rental income from a UK property or a salary from a UK company. Individuals taxable in the United Kingdom will be entitled to a personal allowance of currently £5,225 (2007/08), the tax rates that apply after that are shown in Table 4.5.1.

Capital gains tax The charge to CGT relies on individuals being resident or ordinarily resident in the United Kingdom, in which case they are liable to CGT on their UK gains on an arising basis. If an individual is also domiciled in the United Kingdom they will be liable to CGT on their worldwide gains on an arising basis. However, individuals who are considered resident or ordinarily resident but not domiciled in the United Kingdom are only taxed on UK source gains on an arising basis. Gains from abroad are taxed on a remittance basis. Unfortunately, it is not possible to remit a capital loss to the United Kingdom, only a capital gain, with no set-off available against offshore gains, which you may feel is inequitable, but this is unfortunately the law. It is suggested that before coming to the United Kingdom advice is taken on mitigation strategies. There are various exemptions available, the most common ones are listed in the following sections.

Annual exemption Each tax year an individual is entitled to an exempt amount of capital gains, which are not taxable; the current amount is £9, 200 (2007/08), and any unused exempt amount cannot not be carried forward to any future year.

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Table 4.5.2 Reduction of capital gain dependent on years held of business assets Complete Years Held

Gain Exempt (per cent)

One More than two years

50 75

Spouse exemption Transfers between spouses of the same domicile are exempt, otherwise there is only a £55, 000 exemption.

Business asset taper relief This reduces the amount of the capital gain chargeable to tax, dependent on the length of ownership in complete years of qualifying assets as shown in Table 4.5.2. Qualifying business assets Taper relief was introduced on 6 April 1998. The deﬁnition of business assets and the percentage exempt has been changed a number of times since its introduction. The current deﬁnition of a business asset is: •

all unincorporated trading businesses whether as a partnership or as a sole trader;

•

all unquoted trading companies, which are not subsidiaries of quoted companies;

•

unquoted non-trading companies where you own less than 10 per cent;

•

quoted trading companies for whom you work full-time;

•

assets used in a business owned by the individual, a partnership of which you are a partner or an unquoted trading company.

Non-business asset taper relief Assets that do not qualify as business assets qualify for non-business asset taper relief. This is also dependent on the number of complete years the asset has been held. If the asset concerned has been held since pre 16 March 1998 an extra year is added to the ownership period from 6 April 1998. The relief is calculated by reference to Table 4.5.3.

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Table 4.5.3 Non-business asset taper relief dependent on years held Complete Years Held One Two Three Four Five Six Seven Eight Nine Ten

Gain Exempt (per cent) 0 0 5 10 15 20 25 30 35 40

Tax rate Any chargeable gains in excess of the annual exemption are added to income and taxed as if they are the top slice of income.

Inheritance tax The charge to IHT is dependent on where the asset is situated and the domicile of the individual or trust concerned; residence or ordinary residence is not relevant. A charge arises on all gifts of UK-sited assets whether or not the individual is domiciled in the United Kingdom, subject to various exemptions discussed below. Additionally, those individuals and trusts that are either actually domiciled or deemed domiciled in the United Kingdom are liable in respect of gifts of their worldwide assets. Lifetime gifts to individuals and some trusts are not immediately chargeable to tax, but are considered ‘potentially exempt’ subject to the transferor surviving for seven years from the date of the gift. If death occurs within the seven-year period following the gift then any tax due (payable by the donee) is reduced using a sliding scale shown in Table 4.5.4. Any gift made is accumulated with earlier gifts made in the previous seven-year period in order to calculate the tax due. There are a number of speciﬁc exemptions available to offset against any gift before charging it to tax. The most common ones are given below: • Annual exemption. Total gifts of up to £3, 000 annually are exempt. Any unused exemption may be carried forward one year only. •

Small gifts to individuals. Gifts totalling £250 to an individual per year are exempt.

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Table 4.5.4 tance tax

Sliding scale of tax reductions of inheri-

Death in Year (Following Gift) 1–3 4 5 6 7 8

Percentage Reduction in Tax due on gift 0 20 40 60 80 100

•

Spouse exemption. Gifts to a spouse who is domiciled in the United Kingdom are unlimited. However, gifts to spouses who are not domiciled in the United Kingdom are limited to £55, 000.

•

Regular gifts of income. Taking one year with another, regular gifts made out of excess income are exempt.

•

Business assets. Gifts of business assets such as an unincorporated business or shares in a ‘family’ company are exempt in full. Personally owned assets used in a business may qualify for 50 per cent relief.

• Agricultural property. There is a similar relief to business property relief. •

Gifts in consideration of marriage. Gifts may be made to the bride or groom, the amount that is exempt depends on the relationship to the couple as shown in Table 4.5.5.

Tax rate Lifetime chargeable transfers in excess of any available exemptions and the ‘nil rate’ (£300,000 2007/08) band are chargeable at 20 per cent. The rate upon death is 40 per cent. Advice should be sought before making any gifts so that all the taxation consequences may be considered, including CGT and stamp duty land tax (a tax on transactions and documents). Table 4.5.5 Tax exemptions depending on relationship to married couple Relationship to Couple Parent Grandparent Remoter ancestor and otherwise

Exempt amount £5,000 £2,500 £1,000

UK Taxation for Foreign Nationals

Table 4.5.6

253

National Insurance contributions 2007/08 Employee (per cent) Employer (per cent)

£100.01 to £670 per week Over £670 per week

11 1

12.8 12.8

National insurance This is a social security tax payable on earnings. Contributions are payable by both employees (primary) and employers (secondary). An individual who is an European Economic Area (EEA) national and who continues to pay social security taxes in another EEA country in respect of their earnings will not be liable to National Insurance in the United Kingdom. However, if the individual ceases to pay contributions in another EEA country he or she will immediately become liable to pay National Insurance in the United Kingdom. Non-EEA nationals will normally have a 12-month period before they have to pay National Insurance contributions in the United Kingdom. Non-UK employers are not liable to pay secondary National Insurance contributions where they do not have a permanent establishment in the United Kingdom. However, if employees of the non-UK employer are seconded to the United Kingdom to work for a UK company although they are still paid by the non-UK employer, then the UK company may be liable to pay the secondary contributions. Contributions for 2007/08 for employed earnings are shown in Table 4.5.6. Contributions are also payable by self-employed earners.

UK tax returns UK tax returns are normally issued annually on 6 April for ﬁling at the latest by the following 31 January, that is, for the year ended 5 April 2007, the return would have been issued on 6 April 2007 for ﬁling by 31 January 2008. The forms are on a self-assessment basis subject to audit by the Revenue at any time within 12 months of the ﬁling deadline, that is, for the 2007 tax return by 31 January 2009.

Payment of UK tax Payment of any tax liability calculated to be due is normally made on 31 January following the year of assessment, the same date as the tax return ﬁling deadline (see above). However, in certain circumstances where insufﬁcient tax is payable at source during the tax year the UK Revenue requires that payments on account are made equal to the previous year’s liability in two equal instalments on 31 January in the tax year and 31 July following

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the tax year. For example, for 2006/07 payments on account would have been due on 31 January 2007 and 31 July 2007 with any balance being due on 31 January 2008 together with the ﬁrst instalment for the following year. Late payment of tax currently carries interest at 7.5 per cent per annum and a surcharge of 5 per cent if the ﬁnal tax due for a year is not paid by 28 February following the ﬁling deadline, in this example 28 February 2008, with a further 5 per cent surcharge becoming due if the tax remains outstanding by 28 August.

Remuneration packages HM Revenue & Customs (HMRC) have developed a very wide deﬁnition of earnings over the years to include most forms of remuneration and beneﬁt in kind, which are subject to income tax and national insurance contributions when payment is made. Many beneﬁts such as company cars now carry a charge to national insurance as if they were salary for earnings purposes (see above). It is still possible, however, to remunerate employees with share options and share incentives tax effectively using: •

approved share options – subject to a maximum value of £30, 000;

•

approved savings-related share option schemes – subject to a maximum of £250 per month;

•

enterprise management incentives – subject to a maximum value of £100, 000 available to smaller companies only.

Non-tax effective schemes such as unapproved share options and ‘phantom’ shares schemes are both subject to tax and national insurance. It is common for employees seconded to the United Kingdom to be provided with rent-free accommodation. This is subject to both tax and national insurance. The cost in terms of tax and national insurance can be expensive where the value of the property involved is in excess of £75,000. In this situation the beneﬁt in kind is calculated by taking the value of the property when ﬁrst provided to the employee and treating the excess over £75,000 as an interest-free loan to the employee. The beneﬁt is calculated as this amount at the ofﬁcial rate of interest, which currently is 5 per cent (2006/07). Any costs paid by the employer and 20 per cent of the value of any furniture supplied in the house are also considered a taxable beneﬁt. This beneﬁt is then added to the employee’s salary and taxed at their highest rate. For a higher-rate taxpayer they will pay tax of 2 per cent of the value of their house in excess of £75,000; so for a £500,000 property the tax due would amount to £8,500 with £2,720 national insurance due by the employer, plus any tax and national insurance contributions due on the running costs of the house paid by the employer.

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Dual contracts It is still possible to have dual contracts for employments where the duties are performed both in the United Kingdom and abroad. One contract should be for the UK duties, which would be taxable in the United Kingdom and the other contract would be for duties performed abroad. If the employee is domiciled outside the United Kingdom and the contract for the non-UK duties is with a non-UK company with the salary being paid abroad and not remitted to the United Kingdom no UK tax will arise. This is an area that the Inland Revenue is now looking at more closely, so care needs to be taken and up-to-date advice obtained.

Taxation in country of origin Individuals should always remember that although you have become resident in the United Kingdom and liable to tax here, their country of origin (eg United States) may still tax them on the same income. It is therefore essential to ensure that any planning takes account of this. It is pointless avoiding tax in the United Kingdom when the same income is taxable in their home country. The most important thing to bear in mind in situations where taxation arises in two countries is to ensure that credit for the tax paid in the United Kingdom can be obtained against the same income taxable in the home country; it is therefore necessary for individual’s UK accountant to liaise with his or her home country accountant. Employers are required to deduct tax and national insurance from salary and certain beneﬁts in kind as they arise under what is known as Pay As You Earn (PAYE). These deductions are then paid to the Inland Revenue on a monthly basis by the 19th of the month following payment.

Trips to the home country Employees working in the United Kingdom who are not domiciled in the United Kingdom may for the ﬁrst ﬁve years after arrival be entitled to have trips to their home country paid for by their employer tax-free. Additionally, if the employee is in the United Kingdom for 60 days or more it may also be possible for their spouse and any children under the age of 18 to travel to and from the United Kingdom tax-free, limited to two trips per person in a tax year. There are a number of speciﬁc rules that need to be adhered to, to gain this relief.

4.6 Money Laundering Regulations Mark Saunders, Wilder Coe

Introduction In accordance with the requirements of the Second European Community Money Laundering Directive of 2001 the United Kingdom government introduced the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2003 that came into force largely with effect from 1 March 2003. As this edition goes to press the implementation of the EU Third Money Laundering Directive is taking place with consultation on the Draft Money Laundering Regulations 2007. The purpose of the Money Laundering Regulations is to implement a regime whereby those businesses and individuals operating within the ‘regulated sector’ will report any knowledge or suspicions of money laundering they might have to the Serious Organized Crime Agency (SOCA).

Money laundering Money Laundering legislation in the past has primarily concerned itself with identifying funds that are the result of terrorist activities or illegal drug trafﬁcking. However, the scope of the legislation has been widened and it now encompasses the possession, dealing with or concealing the proceeds of any crime. This obviously still includes terrorist funds, funds that may be used for terrorist purposes or the proceeds of terrorism or illegal drug trafﬁcking. Money laundering involves the hiding, converting, transferring or taking out of the country of any criminal proceeds. It covers anyone who agrees to help, is involved in helping or suspects that they are involved in helping

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another person to acquire, keep or use criminal property. It also includes anyone who self-acquires, uses or possesses any criminal property. Criminal property in this case includes anything, whether it is money or property, by which a person or company gains, either directly or indirectly, as a result of criminal activity. It is worth clarifying that this deﬁnition of criminal property also covers the proceeds of tax evasion, bribery or corruption.

Businesses that have to comply with money laundering regulations The regulations deﬁne relevant businesses – being those businesses that have to comply with money laundering regulations – as including: •

banking generally;

•

any business that accepts deposits;

•

the effecting or carrying out of long-term insurance;

•

dealing in investments either as principal or as an agent;

•

arranging deals and investments;

•

managing, safeguarding or administering investments;

•

advising on investments;

•

the operation of a Bureau de Change

•

transmitting money by any means or cashing cheques that are made payable to customers;

•

estate agency;

•

casino operation;

•

insolvency practitioners;

•

those who offer tax advice;

•

those who offer accountancy services;

•

those who offer auditing services;

•

those who offer legal services

•

those who offer services in relation to the formation, operation or management of a company or trust;

•

those dealing in goods of any description where a transaction will involve the acceptance of a cash payment of 15,000 euros or more, including those acting as an auctioneer.

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It can be seen from the above list that this largely involves those individuals and businesses that are involved in ﬁnancial transactions. It signiﬁcantly includes banks, accountants, solicitors and estate agents at least one of whom is likely to be involved in assisting any proposed new business within the United Kingdom.

Requirements for businesses in the regulated sectors Businesses and individuals within these regulated sectors need to do the following: 1. Appoint a representative who will be the money laundering reporting ofﬁcer. 2. Train all employees in relevant positions in recognizing and reporting money laundering. Those employees will be responsible for reporting to the money laundering reporting ofﬁcer. 3. The money laundering reporting ofﬁcer has a responsibility to report any knowledge or suspicion that a money laundering offence has been committed to the SOCA. This report has to be made no matter how small the amounts involved or how serious the offence appears to be. 4.

In a situation where a report has been made, the persons making the report must do nothing to help the suspected money launderer for a period of seven days unless told to do so by the SOCA. This may result in any work on a particular transaction being suspended during this period. If nothing is heard from the SOCA at the conclusion of that period of seven days then the reporting business can continue to deal with the respective transaction. If the reporting business is in itself not involved in the transaction but has become aware of its suspicious nature and has reported it, then it does not need to await any consent from the SOCA to continue working.

5.

Maintain Identiﬁcation Procedures in respect of every business and individual with whom they do business (see below).

‘Tipping off’ and failure to make a report The law makes it an offence to ‘tip off’ a suspected money launderer that a report has been made or is contemplated to the SOCA. It is also an offence to fail to make a suspicious transaction report. Further, it is an offence for any person who receives information in the course of their business within the regulated sector to fail to inform SOCA or their businesses money laundering reporting ofﬁcer of that knowledge or suspicion that another person is engaged in money laundering. The penalties

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for failure to report or tipping off can lead to prison sentences of up to ﬁve years and monetary ﬁnes.

Identiﬁcation procedures Every business within the regulated sector will be required to maintain identiﬁcation procedures with regard to every person and business with which they do business. This means that as soon as is reasonably practicable after contact is ﬁrst made with a business or individual that this business or individual must produce satisfactory evidence of their identity and their residential or business address. This would usually require the provision of at least two documents. For an individual the documents would include the following: •

In order to conﬁrm identity – a current signed passport, a UK photo card driving license or a home ofﬁce residency permit.

•

In order to conﬁrm the address – a recent utility bill, local authority tax bill or bank or building society or mortgage statement. In some cases a visit to the person’s home may establish proof of address.

With regard to a corporation, a copy of the deed of incorporation would conﬁrm identity and, if the entity is within the United Kingdom this can be checked with details held at Companies House. In other nationalities, if there are similar public registers then this information can be checked independently. In order to obtain proof of address of a company then similar evidence to that above including utility bills or rent statements would sufﬁce, or once again a visit to the company’s premises. In the case of unincorporated organizations such as trusts or partnerships a copy of the trust or partnership deed would be obtained and identiﬁcation procedures similar to those relating to individuals carried out in respect of each trustee or partner. Businesses within the regulated sector are required to maintain evidence of the identity checks they have made.

Practical considerations for those considering doing business within the United Kingdom For anyone considering doing business within the United Kingdom it is almost inevitable that they will have contact and carry out business with one or more organizations within the regulated sectors. The most basic business functions such as opening a bank account or appointing an accountant or lawyer will require compliance with identiﬁcation procedures. Under such circumstances, therefore, each such business should be prepared to provide the identiﬁcation evidence indicated above. Having such

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evidence readily available and having anticipated a need to provide will greatly facilitate commencing business within the United Kingdom. Secondly, in order not to arouse suspicion that any transaction taking place could conceivably be construed as money laundering, it would be wise to be as frank and open as possible in relation to any business carried out. Details of the source of all funds being used should be freely shared and at no point in time should any doubt be allowed to enter into the details of any transaction. Most business and trading activities will be of a relatively routine and repetitive nature and should never cause a problem. It is likely to be the unusual or large transactions that might arouse doubt or suspicion. A ready compliance with all United Kingdom taxation requirements would also be recommended, particularly those relating to employment tax – Pay As You Earn (PAYE) – which should be administered by all employers, and value added tax (VAT).

Trading in the regulated sectors If you are considering commencing a business within the United Kingdom that falls within one of the regulated sectors then you will clearly need to comply with the requirements of the money laundering regulations. Many of the regulated sectors have their own professional bodies or trade associations who will be able to advise on the speciﬁc requirements of the business sector in which the operations are planned to take place. In the case of any doubt, advice should be sought at the earliest possible opportunity. In such cases professional advisers such as accountants or solicitors, who should all be well versed in the obligations of the money laundering regulations as they relate to their own activities, should be able to advise on how to proceed.

Conclusion Regulations similar to those being applied in the United Kingdom have been enacted throughout the European Community and throughout much of the rest of the world. The legislation continues to be developed and it is important to keep abreast of these changes. The international ﬁght against terrorism and drug trafﬁcking, which has provided the impetus for this kind of legislation, has caused it to be expanded to include all areas of crime, in particular the areas of tax evasion and the ‘cash’ economy. However, compliance with these regulations should hold no fears for those involved in honest business activity and although the cost of compliance in terms of time and money may initially seem great, the eradication of crime from business should result in a level playing ﬁeld for all and greater integrity within the business environment worldwide.

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

The UK government is keen to promote economic opportunities by encouraging overseas investment and the immigration of skilled individuals. There are various immigration options available to individuals wishing to enter the United Kingdom to seek employment or to explore business and investment opportunities. Set out below is an outline of the main business immigration options and key requirements under each category.

Visiting the United Kingdom on business It is possible to enter the United Kingdom as a business visitor although there are restrictions on the type of activities that can be undertaken. Permitted activities include: •

attending meetings, trade fairs, conferences and seminars;

•

making purchases and negotiating contracts with UK businesses;

•

acting as an adviser or consultant to a UK ﬁrm;

•

giving certain types of training;

•

undertaking fact-ﬁnding missions; and

•

receiving training.

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Advisers, consultants, trainers or ‘trouble shooters’ entering as business visitors have to be employed abroad, either directly or under contract, by the same company (or group of companies) to which the UK company belongs. In addition, they must not get involved in actual project management or provide direct consultancy services to clients of the UK company. A business visitor must only intend to transact business directly linked to his or her employment abroad; normally live and work abroad and have no intention of transferring his or her base to the United Kingdom (even on a temporary basis), and receive a salary from abroad (although reasonable expenses may be paid for travel and subsistence during the visit).

Obtaining a visa before travelling to the United Kingdom Not all individuals travelling to the United Kingdom require a visa. The Foreign and Commonwealth ofﬁce website at www.ukvisas.gov.uk has a list of all countries from which nationals will require a visa before travelling to the United Kingdom.

Entry clearance If you are already legally in the United Kingdom but are changing your immigration status from one category to another, you can sometimes ‘switch’ your immigration status without leaving the United Kingdom. This requires you to make an application to the Home Ofﬁce before your current leave to remain ends. You will need to check whether you are eligible to ‘switch’ in-country. If you are outside of the United Kingdom when you are issued with an Immigration Employment Document (IED) valid for a period longer than six months, you may need to apply for prior entry clearance before you travel. An IED is your approval to work under, for example, one of the following categories: • Work Permit Scheme; •

Highly Skilled Migrant Programme (HSMP); or

• Training and Work Experience Scheme. The need to apply for prior entry clearance will depend on your nationality and the route through which you are seeking to come to the United Kingdom. If you do need to obtain entry clearance, you must make your application to a British Diplomatic Post in your country of nationality or legal residence before travelling to the United Kingdom.

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263

Application of a Schengen visa for travel to the United Kingdom A Schengen visa allows an individual to travel freely amongst its 15 European member countries. As of 2007, the Schengen Treaty countries are: • Austria; •

Belgium;

•

Denmark;

•

Finland;

•

France;

•

Germany;

•

Greece;

•

Iceland;

•

Italy;

•

Luxembourg;

•

Norway;

•

Portugal;

•

Spain;

•

Sweden; and

• The Netherlands. Schengen visas are issued for varying amounts of time but an individual will be allowed a maximum stay of 90 days within any six-month period. The scheme is intended for individuals who wish to move around Schengen member states for the purposes of business and tourism. A Schengen visa does not permit someone to work in the Schengen-participating country and in order to do this a work permit for the relevant country would generally need to be obtained. The United Kingdom is not part of the Schengen Treaty and therefore having a Schengen visa will not permit someone to enter the United Kingdom who would otherwise need a visa and/or other immigration permission.

Rights of EU/EEA nationals Nationals of certain countries have the right to live and work in the United Kingdom. This is known as a right of residence. Nationals with a right of residence include:

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•

nationals of the European Union (EU);

•

nationals of Iceland, Liechtenstein and Norway; and

•

Swiss nationals.

Iceland, Liechtenstein and Norway are not EU countries but are part of the European Economic Area (EEA) Agreement, which gives nationals of these countries the same rights to enter, live in and work in the United Kingdom as EU citizens. Swiss nationals are included in the deﬁnition of ‘EEA nationals’. Although not essential, people from the EEA can apply for a UK residence permit. Nationals of the EU member states who have joined since 2004 (except Cyprus and Malta) and who wish to work for more than one month for an employer in the United Kingdom need to register under the Worker Registration Scheme (WRS). Once they have been working legally in the United Kingdom for 12 months without a break, they will have acquired full rights of free movement and will no longer need to register under the WRS; they can then apply for a residence permit conﬁrming their right to live and work in the United Kingdom. Nationals of Bulgaria and Romania, despite being EU citizens, will still need to obtain authorization to work before starting any employment. If you have a right of residence, your family may generally join you in the United Kingdom. If, however, your family members are non-EEA nationals they should get an EEA family permit, which is a form of entry clearance (like a visa) prior to travelling to the United Kingdom. The spouse/partner of an EEA national is permitted to work in the United Kingdom without requiring separate/additional permission to their own permission to do so.

Applying for a work permit If you are not an EEA national or the family member of an EEA national, you will generally require a work permit to undertake employment in the United Kingdom. A work permit will also be required even if you are going to undertake work-based training for a professional or specialist qualiﬁcation, or a period of work experience. It is the employer who applies for the work permit; the work permit will be granted to the employer for the employment of a particular employee. Further, if you already have a work permit for the United Kingdom, you are not permitted to change jobs (other than certain technical changes to your current job) without your new employer getting a new work permit. The business and commercial work permit scheme is divided into two tiers. Tier 1 Applications involve a simpliﬁed procedure and include: •

intracompany transfers where an employee of a global company is transferring to a skilled post in a UK-based branch of the same company;

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265

•

board level posts where the job is a senior board post or a post at an equivalent level;

•

inward investment where a new post is essential to an inward investment project that is bringing jobs and money to the United Kingdom;

•

shortage occupations designated by the Home Ofﬁce, which vary depending upon labour market trends; and

•

sponsored researchers.

Tier 2 Other applications fall within Tier 2 and, in addition to requiring numerous supporting documents to show that the applicant has the skills, qualiﬁcations and experience purported, the employer is also required to show that it cannot ﬁll the post with a ‘resident worker’. A resident worker is a national of the EEA or a person who has settled status in the United Kingdom. For both Tier 1 and Tier 2 applications, there are certain additional requirements that must be satisﬁed in every case: •

there must be a UK-based employer;

•

the worker must become an employee of the UK employer;

•

there must be a genuine vacancy for an employee in the United Kingdom;

•

the employer must be responsible for the post;

•

the job must be a skilled position; and

•

the worker should not have, or have had, a signiﬁcant shareholding (typically more than 10 per cent) or beneﬁcial interest in the UK company for which they intend to work or in a connected business.

The Highly Skilled Migrant Programme Individuals who meet the points qualiﬁcations can obtain leave under the HSMP. HSMP is an attractive option for applicants as it is a permission to work that is granted to them personally and is not attached to any particular employer. An applicant needs to score 75 points or more to qualify as a highly skilled migrant. Points are scored in three main areas: •

educational qualiﬁcations;

•

previous earnings; and

•

UK experience.

In relation to educational qualiﬁcations, an applicant will score points according to the highest level educational qualiﬁcations that they hold; this can be a PhD, a Masters or a Bachelors degree. Alternatively, vocational

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and professional qualiﬁcations will also add to the points score subject to satisfactory evidence. There is a special provision for MBA graduates from the list of eligible programmes under HSMP. Provided the MBA graduate also meets the English language test (see below) they will automatically be awarded the 75 points. Points for previous earnings are based on gross earnings before tax over a total period of up to 12 months in the 15-month period prior to the application being made. This can include total earnings from several jobs. The points scored depend upon the amount earned in accordance with bandings for various countries. Points can also be earned for previous experience of living in the United Kingdom through either your earnings under the scheme having been in the United Kingdom or having completed qualifying studies in the United Kingdom. In recognition of the difﬁculties experienced by younger applicants in meeting the earnings categories there are points available on a graded scale for those under 32 years of age at the time of applying. The ﬁnal criteria is the required evidence that the applicant has a good knowledge of the English language. This applies even if you are from an English-speaking country and it may require you to pass an IELTS exam, which is the International English Language Testing System. This can be avoided if you hold a Bachelor’s degree that was taught in English together with a letter from the awarding academic institution conﬁrming this.

Coming to the United Kingdom as a sole representative of an overseas ﬁrm A sole representative application is only suitable where an overseas company which does not have a presence in the United Kingdom, wishes to send one of its existing employees to set up a wholly owned subsidiary, or register a branch. The company must be in genuine operation; where it has been established for less than one year it is unlikely to be deemed an eligible sponsor for these purposes. In order for an application to be considered, the individual must: •

be authorized to take operational decisions on behalf of the overseas ﬁrm without reference to the parent company;

•

have been recruited to the parent company from outside of the United Kingdom;

•

be directly employed by the company; and

•

have been employed by the parent company for some time and hold a senior post.

The employee must not, however, be a major shareholder in the overseas company and should not intend to carry out any other work whilst

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in the United Kingdom. The individual must be able to support themselves (and any dependants) in the United Kingdom without recourse to public funds. A sole representative application is normally made by the individual employee at a British Diplomatic Post in their country of nationality or legal residence. Applicants are expected to spend a minimum of nine months a year in the United Kingdom; those who spend less time than this in the United Kingdom are not considered to be making genuine efforts to establish a commercial presence here. Once an application has been successful, the sponsor company must continue to conduct the majority of its business overseas. It will not be permitted to gradually move its operation to the United Kingdom by exploitation of this category.

Entry to establish a business in the United Kingdom An individual may apply for entry to the United Kingdom in order to run a business full-time. The applicant will need to provide the Home Ofﬁce with a detailed business plan, which should detail the object of the business, the investment and employment involved and ﬁnancial projections. Projected opening balance sheets should be produced, along with projected trading and proﬁt/loss accounts and overhead expenses. Applicants will need to provide evidence to show that they: •

Have at least £200,000 under their control, which is available for them to use in the United Kingdom and which is held in their name (it is not held by trust or other investment arrangements), with the aim of investing it in a business in the United Kingdom.

•

Have enough extra funds to support themselves and any dependants, and live without needing any help from public funds or taking employment (other than working for the business) until the business earns them an income.

•

Intend to be actively involved full-time in trading or providing services on their own account or in partnership, or in promoting and managing the company as a director.

•

Intend to keep a level of ﬁnancial investment proportional to their interest in the business.

•

Undertake to maintain the level of their investment proportional to their interest in the business.

•

Intend to have either a controlling or an equal interest in the business, with no partnership or directorship amounting to disguised employment.

•

Can afford their share of any liabilities.

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•

Can address a genuine need for their investment and services in the United Kingdom.

•

Expect to receive a share of the proﬁts from the business, which will be enough to support themselves and any dependants, and live without needing any help from public funds or taking employment (other than the business).

•

Do not intend to take or look for any other employment in the United Kingdom other than their work for the business.

There are additional evidential requirements where you are taking over or joining as a partner or director in an existing business or if you are setting up a new business in the United Kingdom. An individual should be aware that entry clearance is granted for the speciﬁc business described in the application and new permission would be required where the individual later wishes to pursue a different business.

Special rules for individuals willing to invest in the United Kingdom An investor application is suitable for people who have substantial capital assets available to invest in the United Kingdom and who wish to make the United Kingdom their main home but who do not wish to take up employment here. In order to be granted leave to enter the United Kingdom under this category an applicant needs to show that: •

they are going to make the United Kingdom their main home;

•

they have at least £1 million to bring to the United Kingdom (this can either be their own money over which they have full control (ie not held under some trust or similar restriction) or it can be borrowed money if they have a personal net worth of at least £2 million and have money (which may include loans from a Financial Services Authority regulated institution) under their control of at least £1 million). Where the loan method is chosen, the calculation of net worth may include not only ﬁnancial assets but also property. However, these assets must be held in the name of the investor, not in the names of a controlled trust, settlements or companies);

•

they have a plan for their proposed investments (the plan must show that they are going to invest at least £750,000 of their capital in UK government bonds or in share capital or loan capital in active and trading UK registered companies other than property companies); and

•

they can live in the United Kingdom without recourse to public funds or having to work as an employee although they can be self-employed or a non-executive director/consultant.

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The investor does not have to make the United Kingdom their only home but it should be their ‘main’ home and they would be expected to spend more time in the United Kingdom than away in order to continue to qualify for limited leave to remain as an investor.

Indeﬁnite leave to remain (settlement) Generally speaking, you will become eligible to apply for indeﬁnite leave to remain in the United Kingdom after you have spent a requisite period here; for most people this is ﬁve continuous years. Adult applicants are required to demonstrate knowledge of language and of ‘Life in the UK’ in addition to meeting the usual requirements for settlement. Certain applicants will need to pass a ‘Life in the UK’ test or will otherwise be required to pass an approved ESOL (English for Speakers of Other Languages) qualiﬁcation. Once settlement is granted, there will no longer be any immigrationrelated restrictions on the work or business you may do in the United Kingdom, and no time limits on your stay here, provided that you do not spend longer than two years outside of the United Kingdom, you maintain ties here and consider the United Kingdom to be your home.

British nationality You can normally apply for naturalization as a British citizen one year after being granted indeﬁnite leave to remain and as long as you meet the residence requirements. There are two ways to naturalize as a British citizen: •

naturalization based on ﬁve years’ residence in the United Kingdom;

•

naturalization based on marriage/civil partnership and residence in the United Kingdom.

There are various requirements that will need to be satisﬁed, such as age, capacity, residence requirements, good character, language skills and intention. You will also need to pass an ESOL course or ‘Life in the UK’ test. If the application is approved, you will be required to attend a Citizenship Ceremony after which a certiﬁcate of naturalization is issued as a British citizen. Once naturalized, you are eligible to apply for a British passport.

Part 5 Industry Sectors of Opportunity

5.1 Art and Antiques James Goodwin

Introduction ‘Nearly all steps upward in civilization have been during periods of internationalism,’ wrote the celebrated art historian Kenneth (later Lord) Clarke. Never has this been truer than today, thanks to the free movement of international capital, with the possible exception of the 19th century, which importantly saw the birth of today’s art market. The link between art and money is intimate and long-standing with auctions known in Ancient Rome. The ﬁrst documented art markets developed in Italy and Flanders (modern Belgium) during the 15th century. As Western investors experience slim returns on cash, record stock markets and high-priced property, on a global scale art might be considered a safe haven for a diversiﬁed portfolio or another source of speculation. Whatever the motivation, information and advice is available, often via the Internet, to indulge in this unique and potentially lucrative pleasure.

Art and antique journals, guides and price indexes Linking the ﬁnance and art worlds is a new breed of specialist advisers who have experience in either or both. They have access to leading experts, valuation, investment research, marketing and other operating procedures. However, for those wishing to go it alone, there is no shortage of information on art and the art market. Britain is blessed with a large number of auctioneers, dealers, galleries, art libraries, museums and trade organizations. Information on the UK and international art markets is available from the weekly Antiques Trade Gazette, and the monthly journals The Art Newspaper, Antique Collecting, Art + Auction, Art Review, Art Monthly and Art News, as well as some of the daily newspapers, periodicals and guides.

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Industry Sectors of Opportunity

One of the best-known price guides published since 1985 is Miller’s antique guides, which covers 60 subjects and 10,000 items from 20 auctioneers. Prices include buyer’s premium and value added tax (VAT). The other buyer’s guides cover the individual collecting areas in more detail and are available in pocket size. Based on similar data, art indexes are the closest thing to an objective, statistical analysis of the art market and an invaluable tool, now mostly available online. Still, it should be noted that most exclude transaction costs and dealer prices, which are generally double hammer prices and represent the remaining 70 per cent of the market. One of the oldest is John Andrews’s ACC index, which is based on the average prices for 35 types of 1,200 typically good-quality pieces of British furniture from seven periods dating from 1650 to 1860. These are illustrated in a book and discussed in a monthly magazine. Since 1968 the index has been published annually in January, and is compared to the FTSE 250, house prices in the South East excluding London and UK inﬂation. According to the broader ACC index, English furniture would appear to follow a 10- to 12-year cycle, as Figure 5.1.1 illustrates. Also dating from 1968 but measuring the ﬁne art auction market is the LTB Gordonsart Art Sales Index, which is published every August in three languages and updated continuously on the Internet. Last year the index included 2.7 million pieces of data on 210,000 artists, covered by 2,400 auctions. Bought-in (unsold) items are excluded and the ﬁgures are net of auction premium and tax. Offering the broadest range of art prices are Robin Duthy’s Art Market Research indexes. The 500 indexes, which are Internet based and include most ﬁne and decorative art categories sold at auction, have been compiled annually since 1976 with the help of Christie’s. Data on stock markets, UK nglish urniture 4500 4000 Oa

3500

alnu

3000

arl ma o an

2500

a e ma o an

2000

e enc

1500

arl vic orian

1000

oun r

500 0 1993

Figure 5.1.1

1995

1997

1999

2001

2003

Fine art sales, 1976–2004.

Source: Art Market Research 2004

2005

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property markets and other forms of investment are also available. Each graph can be calculated in ﬁve different currencies, adjusted for inﬂation, segmented into ﬁve parts, ie top 10 per cent, and measured by compound interest. Its clients include the US and UK revenue services, banks, insurers, galleries and newspapers. Located abroad but written in the English language are a number of ﬁne art websites used by the art auction market, journalists and academics. From Italy, Gabrius, founded in 1997, provides 470,000 colour images and prices at auction subdivided into old master paintings, 19th-century, modern and contemporary art. It also publishes a conﬁdence and liquidity index adjusted for inﬂation. Gabrius’s intention is to bridge the gap between ﬁne art and ﬁnance via a quarterly magazine and through distribution on the Bloomberg media network. Gabrius have been one of the pioneers in measuring emerging art markets. From France, www.artprice.com, created in 1997, provides 4 million data entries including bought-in works sold at 2,900 auction houses in 40 countries. Its website provides analysis of artworks, artists and their works, market segments and market overviews. In 2005, they added a database for the decorative arts and in 2006 they launched an art valuation service. Similarly, www.artnet.com, founded in the United States in 1989, links works sold by each artist in order of ascending value. Their website and magazine provide general market information including dealer locations and events. It is favoured by a large number of members from the Society of London Art Dealers (SLAD) and Sotheby’s in London. Also from the United States, ArtFact, founded in 1989, contains 5.5 million public auction sale results and is one of the few archives that include decorative art as well as ﬁne art. It is referred to by a number of leading auction houses and museums.

Buying and selling art Auctioneers, Internet, dealers, fairs and artists There are several routes to buying and selling art: auctioneers, online auctioneers, dealers and artists. The primary market is where original works are sold for the ﬁrst time – artists’ studios, art fairs, galleries, etc. The secondary market is for the exchange of existing works, where participants are likely to have good information helped by many journals, magazines, the Internet, etc. Olav Velthuis (2003) believes that dealers in the primary market take a longer-term view of contemporary artists and establish a ﬁrm market for their work. Others, such as Orley Ashenfelter and Kathryn Graddy (2002), believe the auction system is a key determinant of the cost of creating and distributing works of art, and of understanding what is good and bad. A key consideration is that auction prices often rise above ‘true value’ when two or more people are determined to bid for them.

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Though auction houses are increasingly regarded by some retailers, there remains an interdependence between both parties, with at least a third of sales made to dealers. Consequently, major sales and promotions are often coordinated between all parties. The main selling months in the art calendar are May/June/July and October/November/December and to a lesser extent January/February/March/April. In the United Kingdom the auction market is represented by the big three of Sotheby’s, Christie’s, Bonhams, and a large number of provincial auctioneers. Both Sotheby’s and Christie’s were founded in the 18th century, and are the world’s oldest and most prestigious art auction houses. They have salerooms throughout the globe and hold over 700 auctions each every year. Bonhams, from its base in Knightsbridge, London, has 600 international sales annually in most continents, especially the US West Coast and Australia. The United Kingdom’s largest regional auctioneer is Drewett Neate, with 12 salerooms offering 150 sales in southern England. The Society of Fine Art Auctioneers and Valuers (SOFAA) is the United Kingdom’s only professional body that exclusively covers the valuation and sale by auction of ﬁne art and antiques. Probity and ethics along with the improvement of knowledge are the central aims of the Society’s 48 UK members. It is also advisable to buy from auctioneers or valuers who carry the Royal Institute of Chartered Surveyors (RICS) mark since they will be governed by their codes of conduct, such as holding clients’ money in a designated bank account separate from their own business. Today the presence of high-end works in provincial salerooms is also becoming more commonplace. This is partly thanks to online catalogues that project works worldwide at ‘competitive’ premiums, thereby avoiding higher charges in London and New York. An increasing number of provincial auctioneers regularly auction over £1 million per sale and often sell internationally prestigious works. At Christie’s, the maximum commission for selling an item in the United Kingdom up to £2,500 is 15 per cent and 10 per cent thereafter. Similarly, Bonhams charges vendors 15 per cent for the ﬁrst £2,000, while Tennants charges 15 per cent up to £500, 12.5 per cent from £500 to £1000 and 10 per cent thereafter. Buyer’s fees at Christie’s and Bonhams are 20 per cent up to a £70,000 hammer price and from 12 per cent thereafter. The threshold for the same charges at Sotheby’s is £100,000. At Drewett Neate charges are 17.5 per cent on the ﬁrst £25,000 and 12.5 per cent thereafter. At Tennants it is 15 per cent for the ﬁrst £30,000. The advent of online auctions since August 1999 has made sought-after items even more accessible and is transforming the traditional art market. It is estimated that it is ﬁve times more expensive to sell a £750,000 painting at a traditional auction house than online. Until recently, the Internet had generally been considered less suitable for the sale and auction of larger and more costly art because of the lack of specialist assistance to verify quality and authenticity. Improved technology has changed this. In July 2006, Christie’s launched its live auction website in New York and London, selling

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£1.5 million online in 42 sales with over 6,700 bids accepted. Twenty-ﬁve per cent of the Internet bidders were new to Christie’s. Items sold include prints, jewellery, silver, clocks, sporting guns, arms and armour, old master pictures, sculpture and furniture. Many dealers consult the online auctioneer eBay for price information to buy ceramics, silver and jewellery. eBay registers 135.5 million users, 56.1 million of which are active. It costs between 15p and £2 to list on eBay and between 1.75 per cent and 5.25 per cent of the price attained. For qualiﬁed listings, buyers are protected for purchases of up to $1,000 that includes the launch prices of most items. Buying tends to be concentrated at the end of an auction and in the United States prices of stamps sold by eBay tended to be 10 to 15 per cent lower when compared to another auctioneer. Buying and selling through a dealer can represent a more straightforward transaction than at auction since purchases can mostly be made on sight. In fact, dealers’ collective turnover is still greater than the UK sales from the two main auction houses. The most reputable dealers are typically those belonging to the SLAD, the British Antique Dealers’ Association (BADA) and the Association of Art and Antique Dealers (LAPADA). As well as organizing fairs and exhibitions, these trade organizations offer a wide range of services including restoration, valuation and consumer information, such as lists of packers and shippers. In the United Kingdom, antique shops and collectors’ fairs are still the preferred trading place for collectors thanks to increased dealer specialization. In the United Kingdom, in any given week you could expect to ﬁnd no fewer than 25 British general fairs listed in the Antiques Trade Gazette. For SLAD members the most popular fairs are the 20/21 British Art Fair, Grosvenor House and TEFAF, New York International Fine Art Fair, Art Islington, Palm Beach Art & Antiques, with Art Basel the most highly rated. For SLAD members, according to the most recent survey, trading conditions are much improved since 2002 with 70 per cent of output sold to private buyers. The majority of SLAD dealers trade in post-war contemporary art, Impressionists and 19th-century European pictures. Most sales are made in the United Kingdom, but are down since 2002, while increasing in the European Union (EU). According to a recent LAPADA survey, the majority of their dealers specialize in 19th-century art; 59 per cent of turnover is from their shops or galleries, 68 per cent trade on the Internet, all sold to a growing 40–50 age range. More collectors are also buying directly from artists. In the contemporary market, art fairs provide the opportunity to see the work of hundreds of different artists under one roof and are good for judging what’s on the market. For the more adventurous, the MA degree shows, often in June, are worth considering, following the successful promotion of Young British artists like Hirst and the Chapman Brothers by collectors such as Charles Saatchi. According to a recent article in The Independent, 3,700 graduates leave art school every year, adding to the 60,000 or more practising artists. The best UK colleges are the Royal College of Art, Goldsmith’s College, Central Saint Martin’s College, Slade School, Camberwell College, Chelsea College of

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Art, Glasgow School of Art and the Ruskin School of Drawing. As a result of these activities, sales in the contemporary art market exceeded £500 million in 2005. Revealingly, according to a recent survey in The Art Newspaper students at these colleges elected the following artists as the most inﬂuential: Marcel Duchamp, Pablo Picasso, Francis Bacon, Henri Matisse and Lucian Freud.

Conclusion Investing in art has been likened to investing in a small start-up company where both risk and returns can be very high. Possibly reﬂecting the upward trend in private equity transactions, during the last ﬁve years ﬁne art has outperformed the United States’s S&P500 share index, according to the Mei and Moses index of 6,000 repeat sales since 1875. Moreover, according to their latest results, art is now above its all-time high levels of 1990, albeit representing a small fraction of the market. It is worth noting, according to their data, that on average in the last 125 years only two artists have emerged whose work has increased in value over time. Nevertheless, their striking conclusion that ‘the more you pay for art above a certain level the lower the return’ would indicate greater opportunities in ‘undervalued’ markets selling art of increasingly recognizable style and pedigree. In future, art investment seems likely to mirror emerging economies, which today account for the bulk of world production as they did until the late 19th century. To a lesser extent it will also beneﬁt art from developed

erging art entral

ar ets real ter s

4500 4000 3500

ussian pain in s

3000

inese ceramics

2500 2000

a in American pain in s

1500

Ar 100 inde

1000 500

06 20

03 20

00

97

94

91

Tax-exempt works of art.

Source: Zurich Financial Services 2004

20

19

19

19

85

82

88 19

19

79

Figure 5.1.2

19

19

19

76

0

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economies that have invested there. Art buying appears to have a home bias like equity investment. Figure 5.1.2 illustrates ﬂuctuations in the emerging art markets over the period 1976 to 2006. The challenge for the uninitiated collector is choosing from the bewildering range of art now available, as more familiar art, once used as a benchmark, becomes scarcer. But, as ﬁnancial history has taught us to avoid concentration in one or two asset classes due to greater risk and dismal long-term returns, so it may be with the art market, which is increasingly directed to the developing world, ‘undervalued’ art markets and art sectors. More than ever, the best advice is to buy something because you like it and hope your enthusiasm is shared with buyers of the future.

Note James Goodwin’s chapter was ﬁrst published in 2007, ‘Handbook of Personal Wealth Management’, Edition 3, Kogan Page, London, and is reproduced here with the publisher’s consent.

5.2 The Automotive Industry Mark Norcliffe

The Automotive Industry – A Global Business in a Changing World The closing years of the 20th century – once dubbed ‘the age of the motor car’, saw a severe bout of rationalization and consolidation within the automotive industry. Driven by the demands of economies of scale, lean manufacturing, and downward price pressure, many famous names amalgamated, were taken over by erstwhile competitors, or simply faded away. For the survivors, the ﬁrst 6 years of the new millennium have provided tough trading conditions. Overcapacity, price wars, and increasingly demanding customers and regulators have severely eroded the proﬁt margins of even the largest global players. In the United States, General Motors and Ford are struggling against declining market share and historical employment costs. Most recently, Daimler has separated the merged Chrysler business, (which had lost a signiﬁcant part of its US market share) from Mercedes Benz and sold it off to private equity investors. In Japan, both Nissan (successfully) and Mitsubishi (unsuccessfully) turned to foreign partners to revive their automotive businesses. European manufacturers have also experienced mixed fortunes. Fiat is slowly emerging from a period of decline caused principally by a loss of domestic market share and a series of uninspiring models. Daimler has ﬁnally abandoned attempts to merge successfully with Chrysler and has sold the American company to private equity investors. Even VW has struggled to deliver the right product mix. Today, there are a dozen global car manufacturers – each building more that one million units per annum – who produce and sell vehicles around the world. Below them is a tier of regional manufacturers, who principally

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serve their domestic market from a single manufacturing plant. It is this grouping that is under the greatest ﬁnancial pressure. Then, there are the niche manufacturers, building specialist vehicles (eg sports cars) in volumes ranging from hundreds to tens of thousands. There have also been signiﬁcant geographical shifts in the global vehicle market. North America, Western Europe and Japan continue to account for around 80 per cent amend to more than 70 per cent of total car sales, but growth in these markets is stagnant. In contrast, booming demand has catapulted China into fourth place in the world table of automotive producing countries. India has broken through the one million vehicles mark. Iran and Central Europe are both showing strong growth. The combination of expanding domestic markets and low-cost manufacturing opportunities has made these developing countries an attractive investment target for major vehicle manufacturers. A process of consolidation has also taken place in the automotive component industry, particularly at the Tier 1 level (ie those companies that supply product direct to the vehicle manufacturer). By a process of acquisition, major Tier 1 players have positioned themselves to supply whole vehicle systems to the car makers, in whatever region of the world their customer chooses to assemble vehicles. These leading component suppliers are also taking an increasingly prominent role in the design and development of new products. However, within the component sector, consolidation has not always been a successful strategy. In the search for sustained proﬁtability, some conglomerates have now begun to divest parts of their automotive business. For states and/or regions seeking to attract inward automotive investment, these structural changes within the industry present signiﬁcant challenges. Firstly, the number of companies willing, and able, to contemplate major overseas investments has reduced progressively. At the same time, proﬁt margins within the sector are severely squeezed. Companies have fewer funds to invest and require a faster return on those investments that they do make. Additionally, newly emerging economies, with strong local markets, competitive costs and a thirst for foreign investment, are offering motor industry investors rapid growth potential. To win in this competitive environment, it is necessary to offer investors additional advantages – a full range of support services, a stable and ﬂexible business environment, brand excellence, and work-force skills to underpin the long-term validity of their projects.

A Brief History of Automotive Investment in the UK Inward investment from automotive companies is not a new feature of Britain’s industrial history. Ford Motor Company started building cars in the UK as long ago as 1911, and General Motors, naming the Vauxhall brand after their ﬁrst site in South London, were not far behind. Component

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suppliers from Europe and the United States arrived to support both the foreign vehicle manufacturers and the fragmented domestic manufacturers. The pace quickened in the 1980s, with the arrival of the Japanese. Nissan, Toyota and Honda all chose the United Kingdom as their manufacturing base within the European Community. In each case – Nissan in Sunderland, Toyota in Burnaston, and Honda in Swindon – they elected to construct new, modern plants in areas with a strong tradition of engineering skills, but high levels of unemployment. Key Japanese component manufacturers came to support their major customers. Some established brand new facilities, some combined with existing UK companies, and some – like Calsonic, who took over Llanelli Radiators and opened a greenﬁeld site in Washington – did both. Throughout this period of expansion, the UK government and industry pursued an ‘open door’ policy to inward investment, in marked contrast to some EU countries, where there were dark mutterings about ‘a Japanese aircraft carrier, moored off the European coast’. Their reward was a rejuvenation of the British motor industry. Productivity and quality standards seared. In 1982, the UK produced only 888,000 vehicles – by 2005 that ﬁgure had almost doubled to 1.6 million of automobiles and over 200,000 commercial vehicles of which over 73 per cent of automobiles and 62 per cent of commercial vehicles were sold abroad. In the 1990s, further inward investors arrived from Europe and the United States. Ford took control of Jaguar, PSA bought the Rootes/Chrysler plant at Ryton and BMW gained control of Rover Group. All invested substantial sums in modernizing facilities, introducing new models and raising production levels. Even when BMW subsequently parted company with Rover, selling the passenger car business back to the UK management and the Land Rover brand to Ford, they maintained a substantial footprint in the UK, by continuing to manufacture the best-selling Mini. In the luxury car sector, they concluded a complicated deal with VW, which resulted in the two German manufacturers taking ownership of the Rolls Royce and Bentley brands, respectively. Alongside their manufacturing investments, the global automakers identiﬁed another area where the UK offered attractive investment opportunities – product design and development. Vehicle manufacturers learnt – sometimes by bitter experience – that, although they are in a global business, they must offer products that have local market appeal. Again, Ford was one of the ﬁrst on the scene. Their R&D Centre at Dunton, Essex, opened in the 1960s and grew to become the company’s world centre for design and development work on small and medium-sized passenger models. Another key investor in this sector was Nissan, who, in 1991, created a new European R&D centre at Cranﬁeld, Bedfordshire. Staff at Cranﬁeld have been responsible for re-engineering the Primera, Micra and Terrano models for the European market. They were also responsible for the new crossover vehicle – codenamed P32L – ‘the Qashqai, which proved an instant success when it entered production at the Sunderland plant’. Nissan also opened a design studio in the heart of London, to tap into the capital’s vibrant and multi-cultural inﬂuences.

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The UK Motor Industry Today The combination of native engineering and production skills with the capital and best practice injected by foreign investors – all supported by the ‘open door’ policy of successive governments – has created a strong, modern industry that contributes substantially to the UK’s overall economic performance. Seven major international car makers continue to regard the UK as a good place to build and sell cars, and they are complemented by more than 40 niche manufacturers to create the most diverse automotive mix in Europe. Additionally, 19 of the world’s top 20 component suppliers have British operations. The UK also boasts Europe’s most productive car plant (Nissan at Sunderland, where capacity will be raised to 400,000 cars per annum) and commercial vehicle plant (Leyland). British assembly plants have an international reputation for ﬂexibility and innovation, enabling their owners to produce highly customized vehicles with speciﬁcations, styles and ﬁttings matched to individual customer needs. BMW’s Mini production line in Oxford runs for an incredible 134 hours per week, whilst Toyota’s Burnaston plant, which recently completed its 2,000,000th vehicle has seen production levels rise 25 per cent in 2 years. Today, total automotive turnover is estimated at US $72 billion, with the sector providing direct employment for around a quarter of a million workers. Between 2001 and 2003, the UK car market reached record totals for 3 successive years and is now the fourth largest in Europe. Globally, the UK accounts for around 4 per cent of total passenger car production. Annual turnover in the R&D sector is calculated at US $2.4 billion, of which 50 per cent comes from foreign investors. British companies account for around 20 per cent of the global market in independent design and development engineering services.

The Changing Pattern of Automotive Investment in Europe In March 2004, the Korean car maker, Hyundai, announced that their new European car plant will be built in Slovakia. This decision reﬂects the growing trend in the motor industry to locate new investments in Central and Eastern Europe, where they can take advantage of low labour rates in countries that are the latest entrants into the single market of the EU. But the arrival of Hyundai, perhaps, also marks the last major automotive production plant investment to be made in Europe. All the major global players now have manufacturing facilities within the EU, and, whilst there may be future rationalization and transfer of models between plants, it is questionable whether there will be another large-scale greenﬁeld investment. Consequently, key changes are taking place in the battle to attract inward investment. First, the emphasis is on switching from winning new projects to

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retaining the loyalty of existing investors. Second, component suppliers are becoming more important in the investment equation, and, third, research and development projects take on a new signiﬁcance. In the 1980s and 1990s, the UK was a pioneer of attracting automotive inward investment into Europe. Although other competitors have subsequently emerged – some of who can offer signiﬁcant cost beneﬁts – the early reputation that the UK established as an easy and welcoming place to do business is a key factor in preserving investor loyalty. Industry and government work together to ensure that this reputation is maintained, and their success is demonstrated by the additional investments from BMW, Nissan and Toyota, totalling in excess of £350 million. The recent announcement by Honda that it will freeze new investment in its Swindon plant because the UK has remained outside the Eurozone and it wishes to avoid further currency risk adds a cautionary note, but does not detract from the general advantages of the UK as a location for automotive manufacturing. The return of MG Rover production to Longbridge, albeit on a much reduced scale, is a welcome fulﬁlment of the promise made by its new Chinese owner, Nanjing Auto. The component sector is increasingly at the cutting-edge of new technology developments in the automotive industry, and component suppliers are taking more and more responsibility for the conception, design and development of vehicle systems. They therefore require a production base that is not only economically competitive but can also offer them a reservoir of research skills sufﬁciently large and sophisticated to meet their new development role. Again, British industry and government are working together to ensure that the UK’s engineering heritage is preserved and expanded. Among the largest component manufacturers in China, Beijing-based ASIMCO Technologies has established a UK operation at Nuneation. The UK is home to a considerable number of independent companies and academic institutions who perform R&D work for global vehicle manufacturers. As has already been noted, some of those manufacturers have also chosen to set up their own research centres in the UK. Design and development considerations are now both a crucial part of initial investment decisions and also a powerful factor in determining which plant in a manufacturer’s global network will win the work to upgrade existing models and build new ones. Against this background, the government is paying increased attention to industry’s call for enhanced incentives for R&D work. New investors – especially from the emerging industrial powerhouses of Asia – are often seeking to establish specialist research and marketing facilities, rather than manufacturing plants, within Europe. The UK – with its great fund of R&D expertise and sophisticated retailing systems – is an attractive location for such partners. Two ambitious Chinese vehicle manufacturers – Shanghai Automobile Industry Corporation (SAIC) and Nanjing Automobile Co (NAC) – have been able to develop their own cars on the basis of technology, equipment and staff acquired from MG Rover. In turn, both have invested in the UK, with NAC planning to re-start sportscar production at Longbridge, and SAIC setting up an R&D centre in partnership

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with Ricardo. This example has been followed by Tata Engineering, with the Indian conglomerate announcing that its European research facilities will be based at Warwick.

What Can the UK Offer? Positive economic indicators Automotive investors have been attracted by, and have beneﬁted from, the same macroeconomic factors that have sustained growth across many industrial sectors. These include •

a stable, low-inﬂation economy, which has generally out-performed the other major European players;

•

a strong domestic market, driven by consumer demand;

•

good labour relations and ﬂexible working practices, which allow UK plants to achieve high levels of productivity;

•

a tradition of manufacturing excellence, supported by modern, practical training programme.

An open business environment The welcoming approach to inward investors, categorized by successive governments’ ‘open door’ policy, is carried over into industry and regional contacts. The Society of Motor Manufacturers and Traders (SMMT) – the trade association that represents all sectors of the automotive industry in the UK – has a multinational membership, embracing all the leading international and domestic companies who are active in the UK. Those regions that host motor industry investments have created automotive ‘clusters’ and other mechanisms for linking together companies within the supply chain. At the same time, the government’s specialist Automotive Unit has designated Business Relationship Managers to maintain a business dialogue with major overseas investors. The networks offered to investors by all these organizations extend into Brussels and the heart of EU policy-making.

A skilled and professional workforce The UK has a strong tradition of engineering and production skills, which have long attracted inward investors. The decline in industries such as shipbuilding and railways has given automotive investors the opportunity to establish greenﬁeld operations close to existing pools of engineering talent.

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Industrial relations have improved out of all recognition in the last 30 years, and the total of stoppage time is low. It is estimated that productivity per employee has risen by an impressive 45 % in 3 years. A number of British universities offer specialist automotive engineering courses at both undergraduate and postgraduate level, ensuring that there is a continuing supply of qualiﬁed engineers and technicians entering the job market. Because many of these academic institutions also conduct research on behalf of major vehicle and component manufacturers, their students have an early opportunity to gain ﬁrsthand experience of vehicle development programmes. Government and industry are committed to maintaining, and growing, this pool of automotive talent. A special Automotive Academy (see below) has been established, with the principal objective of enhancing job skills and training at all levels of the industry.

A network of research and development centres A multi-skilled research and development network – embracing world-class testing facilities, independent design engineering companies and academic institutions – has grown up within the UK to support development projects for major international customers. Prominent in this network are the 50 universities and colleges that have been designated ‘automotive centres of excellence’. These run specialist courses and research programmes specially tailored to the needs of UK-based automotive manufacturers, as well as providing a steady stream of well-qualiﬁed graduates to ﬁll positions within the industry. The International Automotive Research Centre, established at the University of Warwick in 2003, is one example of this collaborative approach to research and development work. Partners in the project include the university’s Warwick Manufacturing Group, component supplier Corus Automotive, Ford Motor Company and Advantage West Midlands. Initial funding of £70 million came from the regional development agency and the industrial partners. More recently in 2005, the government took part in the establishment of two Knowledge Transfer Networks (KTNs) – the Low Carbon and Fuel Cells Centre of Excellence (Cenex) and the innovITS Centre of Excellence for intelligent transport systems – to help build UK competitive advantage in these key technology ﬁelds.

A unique partnership between industry and government Both government and industry understand the importance of maintaining world-class, competitive standards, if the UK automotive industry is to remain attractive to inward investors. They have, therefore, worked together to develop a range of programmes to ensure that – throughout the industry – standards are constantly improved.

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In 1996, SMMT Industry Forum was established to support companies in achieving manufacturing process improvement. Master engineers were engaged from leading global players to provide practical training and tuition in the workplace. By a process of cascade-learning, more than 450 companies have beneﬁted from the programmes of Industry Forum, and the example has been taken up by other industry sectors. In the ﬁeld of R&D, another joint programme, Foresight Vehicle, was instigated to stimulate the development of technologies for future motor vehicles. This programme encourages collaborative research by industry and academia under ﬁve thematic headings – engine power-train, alternative fuel vehicles, electronics and telematics, advanced structures and materials, and design and manufacturing process. Although working on future automotive developments, the Foresight vehicle programme, under industry management, has a clear focus on achieving practical and marketable solutions. The Automotive Academy, established in 2003, is the most recent example of government/industry cooperation. The objectives of the academy are to ensure that, at all levels, the UK’s automotive workforce is continually trained to high and consistent standards, and to encourage talented young people to make their career within the industry. Academy-approved courses cover the full range of industry skills, from shop-ﬂoor improvements in quality, processes and delivery performance to strategic business planning in the boardroom. Courses specially designed for newcomers to the industry encourage younger students into engineering and automotive disciplines and offer practical ‘hands-on’ experience to recent graduates.

Research and development incentives The government offers a package of ﬁscal incentives to companies conducting R&D work in the UK. Since 1 April 2002, both large and small companies have been able to claim tax relief on both capital, consumable and salary expenditure on research and development projects. Detailed information is available at www.inlandrevenue.gov.uk/randd/index and www.dti.gov.uk/support/draft-guidelines.

Key Areas of Expertise There is a discernible trend for vehicle manufacturers to use the UK as a production base for luxury or niche models, which offer greater proﬁtability per vehicle. Supported by increased investment from their German parent companies, both Bentley and Rolls Royce have substantially increased the production levels for their hand-crafted, luxury products. Production of the iconic new Mini, now running at 190,000 a year, has far exceeded even the most optimistic expectations now running in excess of 200,000 units a year, has more than doubled BMW’s original production projections. Aston Martin

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and Land Rover – both now members of Ford’s Premier Auto Group – can boast broader model ranges and increased sales at premium prices. These success stories all stem from an effective blending of foreign investment, local engineering skills and craftsmanship, and a unique ‘British’ brand image. The UK has also acquired a global reputation for excellence in some of the motor industry’s most dynamic, competitive and technically innovative sectors. These include engine design and build, vehicle styling, and motorsport.

Engine design and production Companies that have been behind some of the world’s most famous engines – names like Cosworth, Lotus and Ricardo – continue to offer their design and engineering skills to international customers. As electronic systems take an increasingly prominent role in engine development, new names, like QinetiQ, are coming to prominence. Recognizing the advantages offered by the combination, UK expertise in systems integration and engine management systems – vital components of hybrid and dual fuel powertrains – is recognized worldwide; many volume manufacturers have selected the UK as a key location for engine manufacture. BMW, Ford, General Motors, Honda, Nissan and Toyota all build substantial numbers of power units within the UK. Ford sources 25 per cent of its global engine requirement from the UK, including 50 per cent of its diesels, and its Bridgend plant is scheduled to produce a million units a year by 2010. Since 2003, the American automaker has invested over £550 million in UK-based engine production. All of BMW’s four-cylinder engines are now built in the UK following the decision to transfer engine production from Brazil. Production is predicted to pass the three million mark shortly with a value of approximately £3 billion, much of it for export. In the case of BMW, engine production has actually been transferred to the UK from the ‘low-cost’ economy of Brazil.

Vehicle styling, research and design British-born and trained stylists are behind some of the most eye-catching, and best-selling, models appearing in world markets. Peter Horbury became Ford’s Chief of North American Design, after earlier spells with Volvo and Premier Auto Group. The Callum brothers – Moray and Ian – lead the design teams at Mazda and Jaguar, respectively, and Martin Smith has been top designer at both Audi and GM Opel. Nissan has relocated its design studio from Germany to London, and this sector has won increasing business from car maker in China and India, including Shanghai Automotive Industry Corporation (SAIC) and Tata.

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British academic institutions and design houses, such as the Royal College for Arts, have a reputation for schooling top-class designers, which attracts international talent and investment from around the globe. The UK independent design engineering sector generates sales of around £650 million, of which some two-third returned from overseas.

Motorsport In the demanding realm of motorsport, the UK is clearly a world leader, with an estimated 70 per cent of the global market. More than half the cars on the Formula 1 grid are built and tuned in the UK. Leading teams in Indy Car racing and NASCAR also turn to British expertise to prepare their cars for competition. In addition, volume manufacturers such as Subaru and Hyundai, who wish to burnish their brand image with world rally success, have invested heavily in UK-based operations to develop their products to the optimum performance level. The motorsport sector has annual sales of £4.6 billion and employs 38,000 people. In 2005, Honda opened a new £30 million wind tunnel for Formula 1 development. This concentration of motorsport activity again testiﬁes to the high level of engineering skills and rapid development capability available within the UK.

Construction Equipment The UK is also a major hub for the manufacture and distribution of construction equipment. Alongside the iconic JCB, international names such as Caterpillar, Komatsu and Terex, 75 % of of who’s output is exported. Their lead is being followed by emerging Chinese manufacturers who have already established a sales and marketing presence in the UK.

Investing in the Future The 21st century sees a motor industry that is more global, more complex and more competitive than at any time in its long history. Manufacturers’ prosperity and survival depends on designing and building the best vehicles speedily and economically. They need to operate in an economic and business environment that offers them the best prospects of success. The UK has won an international reputation for offering automotive companies a world-class development and production base. Government and industry are committed to working together to maintain that status as the motor industry continues to evolve.

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Key Websites www.autoindustry.co.uk www.uktradeinvest.gov.uk www.smmt.co.uk www.industryforum.co.uk www.foresightvehicle.org.uk www.automotiveacademy.co.uk

5.3 Biotechnology Jeanette Walker, ERBI

Introduction Although scientists worldwide celebrated the 50th anniversary of the deciphering of the structure of DNA, Cambridge had special cause to celebrate, for Crick and Watson made this ground-breaking discovery at the Cavendish Laboratory in Cambridge. Moreover, Sir John Sulston, winner of the Nobel Prize in 2001, is also a Cambridge scientist. In fact, Cambridge is home to more Nobel Laureates in medicine and chemistry than any other part of the world (see the list at the end of this chapter). The east of England is home to over 200 biotech companies, including a quarter of Europe’s top 50 publicly quoted biotech companies and over half of the UK’s public biotechs. Cambridge is arguably the most successful biopharma cluster in Europe, and Norwich (just over 50 miles from Cambridge) is home to the largest concentration of scientists in plant, food, and microbial research in Europe. Companies are attracted to this part of the UK because they are able to access all the resources they need to research, develop, test and market products and services, whether in red or green biotech. Cambridge is a highly networked bio-cluster. Newcomers and start-up companies are able to integrate quickly and easily into the local scientiﬁc and business communities. Dozens of internationally mobile companies have established operations in the east of England, including Amgen and Genzyme, two of the world’s most successful biotech companies. Despite the tough economic climate, the science community in the east of England is growing. The number of startups from universities is rising, new science parks are under construction, mature biotech companies are pursuing complex mergers and acquisitions, and more and more business and scientiﬁc professionals are moving to the area.

292

Industry Sectors of Opportunity

Advantages of locating in the east of England include • access to a large research base of over 20 research institutes; • the opportunity to collaborate with seven universities including the topranked University of Cambridge; • the support of a broad network of technical service providers; • proximity to the global research centres of the multinationals, GSK and Merck, Sharpe, and Dohme • proximity to Addenbrooke’s and Papworth Hospitals, research hospitals of international acclaim, plus the more recently opened Norwich and Norfolk University Hospital; • networking in a cluster of 200 biotechnology companies; • easy access to other signiﬁcant UK biotech clusters in London, Oxford, Manchester, and Scotland; • fast, low-cost access to continental Europe; • a large labour pool in all disciplines, including research, clinical development, business development, marketing\technical sales and consulting; • a wide choice of affordable laboratories and ofﬁces on world-class science, research and business parks; • a mature network of professional advisers (lawyers, bankers, accountants, recruiters), all of whom understand the unique needs of biotechnology companies; • the support of ERBI, Europe’s most successful regional biotech industry group; • unrivalled international partnering opportunities; • superb quality of life for employees.

Research institutes in biosciences There are over 20 research institutes in the east of England including the world-class Laboratory of Molecular Biology in Cambridge, dubbed ‘The Nobel Factory’. The Wellcome Trust’s Genome Campus at Hinxton is the largest campus of its type in Europe, housing the Sanger Centre, the European Bioinformatics Institute and the Rosalind Franklin Centre for Genomics Research. The Norwich Research Park is home to the John Innes Centre, the Sainsbury Laboratory, the Institute of Food Research, the University of East Anglia, and the Norfolk and Norwich University Hospital (see Table 5.3.1).

Biotechnology

293

Table 5.3.1 Main biotechnology research institutes in the Cambridge/east of England cluster. Institute

Website

Babraham Institute European Bioinformatics Institute The Rosalind Franklin Centre for Genomics Research (previously the Human Genome Mapping Project Research Centre) John Innes Centre Laboratory of Molecular Biology MRC Biostatistics Unit MRC Cancer Cell Unit MRC Centre for Protein Engineering MRC Cognition and Brain Sciences Unit MRC Dunn Human Nutrition Unit MRC Resource Centre for Human Nutrition Research National Institute of Agricultural Botany Rothampstead Research Sanger Institute Silsoe Research Institute

http://www.babraham.ac.uk/ http://www.ebi.ac.uk/ http://www.hgmp.mrc.ac.uk/

http://www.jic.bbsrc.ac.uk/ http://www2.mrc-lmb.cam.ac.uk/ http://www.mrc-bsu.cam.ac.uk http://www.hutchison-mrc.cam.ac.uk/ccu_organo.html http://www.mrc-cpe.cam.ac.uk/ http://www.mrc-cbu.cam.ac.uk/ http://www.mrc-dunn.cam.ac.uk/ http://www.mrc-dunn.cam.ac.uk/ http://www.niab.com/ http://www.rothamsted.bbsrc.ac.uk/iacr/tiacrhome.html http://www.sanger.ac.uk/ http://www.sri.bbsrc.ac.uk/

Local universities There are seven universities in the east of England with life science departments. The University of Cambridge is arguably the top-ranked university in the UK for science and technology, as 14 of its science and related Table 5.3.2

East of England universities with life science departments.

University Anglia Polytechnic University Cranﬁeld University University of Cambridge University of East Anglia University of Essex University of Hertfordshire University of Luton

Website http://www.anglia.ac.uk/ http://www.cranﬁeld.ac.uk/ http://www.cam.ac.uk/ http://www.uea.ac.uk/ http://www.essex.ac.uk/ http://www.herts.ac.uk/ http://www.luton.ac.uk/

294

Industry Sectors of Opportunity

departments achieved the highest rating in the government’s recent audit. Cambridge has an active technology transfer and corporate liaison ofﬁce with an ‘open for business’ policy. Cranﬁeld University, a postgraduate university, has an outstanding track record in providing research to industry, particularly in the ﬁeld of bio-sensors (see Table 5.3.2).

Research hospitals Three of the region’s hospitals work in close collaboration with universities. Addenbrooke’s Hospital in Cambridge is a leading international centre for biomedical research, medical education and clinical trials. The hospital shares its site with the Wolfson Brain Imaging Centre, the MRC Laboratory of Molecular Biology, the Cambridge Institute for Medical Research (CIMR), the MRC Dunn Human Nutrition Unit and the MRC Centre for Protein Engineering. Other institutions include the Regional Blood Transfusion Centre, the Addenbrooke’s Centre for Clinical Investigation, Addenbrooke’s Clinical Research Centre (ACRC) incorporating the Wellcome Trust Clinical Research Facility and Clinical Investigation Ward, the Centre for Genetic Epidemiology, the Institute of Public Health, which accommodates the MRC Bio-statistics Unit and the University Department of Public Health and Primary Care. The Hutchison/MRC Research Centre houses the new MRC Cancer Cell Unit and staff of the Cancer Research Campaign’s Department of Oncology. Papworth Hospital is a global leader specializing in cardiothoracic research. Research programmes include coronary heart disease, heart failure, sudden cardiac death and arrhythmia, pulmonary vascular disease, inﬂammatory lung disease and respiratory failure. Activities include the assessment of new technologies and methods of service delivery, often in multi-centre trials that involve multidisciplinary collaborations. The Norfolk and Norwich University Hospital is a teaching and research hospital, in partnership with the nearby University of East Anglia (UEA). The medical school built on the UEA campus – the ﬁrst in the UK for 31 years – will train up to 110 medical undergraduates each year. When the school is fully operational, some 500 medical students will be training in Norwich.

Biotech companies There are over 200 biotech companies in the east of England region. Eighty per cent of the commercial activity in biotechnology is focused on drug discovery, enabling technologies and technical services. These include a mix of •

overseas companies that have established subsidiaries in the east of England, either through acquisition or from a zero base (Amgen,

Biotechnology

295

Genzyme, PPD, Gilead, Ambion, Lion Biosciences, Cell-zome, Medivir, Accelrys, Genaissance Pharmaceuticals, GATC, Li-Cor, Advanced Technologies, Biogemma, Mundipharma International, Organon Labs, Prometic, Scynexis, Dakocytomation and Biovitrum); •

successful locally established companies (Cambridge Antibody Technology, Alizyme, Vernalis, KuDOS, Arakis, Astex, Domantis, Cytomyx, Acambis, Ionix, Solexa, Biofocus, Lorantis, Abcam, HFL, Inpharmatica, Isogenica, Paradigm, MMI, NCE Discovery, Pharmagene, Xenova, Biosynergy, de Novo, Xention);

•

spin-outs from universities, research institutes and other companies (Akubio, Pharmorphix, Sareum, Smart Holograms, Novacta, Novexin, Lumora, Purely Proteins).

As Figure 5.3.1 indicates, there is increasing focus on clinical development work as companies progress products into the clinic. Figure 5.3.2 shows that

roduc s

ase

ase

ase 5

0

Figure 5.3.1 market

10 15 Number of companies

20

25

Number of companies with products in the clinic and on the ambrid e re ion

roduc s

All

erman

ase 3 ase 2 ase 1 0

Figure 5.3.2 UCB.

10 20 30 Number of roduc s

40

Comparison of Germany and Cambridge, 2004,

Source: Ernst & Young – Through Rough Ways to the Stars and ERBI

∗

excludes

296

Industry Sectors of Opportunity

companies in the Cambridge area have more products in the clinic than the whole of Germany.

Science and research parks With over 14 science parks located in the east of England (see Figure 5.3.3 and Table 5.3.3), biotech companies have a wide choice of laboratories and ofﬁces.

Proximity to other signiﬁcant UK biotech clusters There are excellent connections to other signiﬁcant biotech hubs in the UK from a base in the east of England, whether travelling by road, rail or air. The region is served by four main roads: M11, M1, A1 and A14 giving easy access both north to south and east to west. Typical drive times to Oxford are 1.5–2 hours and 3.5 hours to Manchester, subject to trafﬁc. All major towns in the region have direct rail services to London. Cambridge is only 45 minutes by train to the centre of London. There are three international airports in the region. Daily scheduled ﬂights to Scotland (Glasgow and Edinburgh) are available from Stansted and Luton airports, with average ﬂight times of less than an hour.

Fast, low-cost access to continental Europe Stansted and Luton airports also offer daily, scheduled ﬂights to all main European cities, including Frankfurt, Paris, Milan, Stockholm, Rome, Amsterdam, Brussels and Madrid. Access to Stansted is just off the M11 motorway, with short-term parking available directly in front of the terminal building. Luton is adjacent to the M1 motorway. Companies interested in reducing costs choose to ﬂy with low-cost airlines such as Ryanair and EasyJet, with average return tickets to European cities of approximately £50.

Mature business infrastructure First-class advice is on offer from experienced professional ﬁrms of lawyers, bankers, recruiters, accountants and management consultancies. Many of the companies employ dually qualiﬁed staff. Biotech companies can be conﬁdent that they are receiving advice from professionals who fully understand the unique needs of biotech companies. The ‘Big 4’ (PricewaterhouseCoopers, Ernst & Young, Deloitte and KPMG) all have life science ofﬁces in the region.

Biotechnology Approxi ate

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Location of science parks in the east of England

ar

297

298

Industry Sectors of Opportunity

Table 5.3.3

Science parks in the east of England region.

Park Cambridge Science Park

Babraham Research Campus

Granta Park

Fyﬁeld Park Cambourne Research Quarter Norwich Bio-incubator

History The Cambridge Science Park is the most successful development of its type in Europe. Established in 1970 by Trinity College (University of Cambridge), the Park currently houses 24 life sciences companies The Babraham Incubator is arguably the most successful bio-incubator in the UK, currently providing laboratories and ofﬁces for 24 biotech companies on ﬂexible terms. Larger laboratories have recently been constructed at the campus to provide grow-on space for existing and new tenants. Companies also have access to Babraham Technix – a range of technical and administrative services ranging from meeting rooms, library, accounting and photographic services to production of monoclonal antibodies, microchemistry and imaging Granta Park is a purpose-built biotech research park located close to the Genome Campus and the Babraham Institute. The park has attracted some of the region’s top pharma and biotech companies, including Alizyme, UCB, Cambridge Antibody Technology, Vernalis (British Biotech), PPD, Gilead and Pharmion. Great Chesterford Park is located close to Granta Park, and the Genome Campus, Great Chesterford Park, is undergoing a major expansion to include biology and chemistry laboratories and a state-of-the-art amenity centre in a parkland environment. In addition to the Wellcome Trust, the Park currently houses six biotech companies A landscaped science park with low-cost refurbished laboratories located between London and Cambridge Design and build options are available on this park situated to the west side of Cambridge Offers top quality laboratories and ofﬁces on the Norwich Research Park available on ﬂexible terms with access to services and equipment at the research institutes on the park (e.g. John Innes Centre stores)

Access to venture capital Having access to ﬁnance at all investment stages has also been critical to the growth of biotechnology in the east of England. The business angel network in Cambridge is one of the most active in Europe. It is estimated that there is over US $1 billion available from locally active venture capitalists such as 3i, Merlin, Avlar, Apax, NW Brown, Abingworth and Schroeder.

Biotechnology

299

Advice and support from ERBI ERBI is the bioscience industry group for the east of England. As Europe’s leading regional science-based industry group, ERBI has an international reputation for delivering support to its member companies that makes a real difference to their top and bottom lines. ERBI is recognized for providing solutions and programmes that help its members to save costs through purchasing schemes, increase productivity, ﬁnd research partners, enhance marketing and sales and improve human resources. For companies setting up in the east of England, ERBI offers a bespoke service, free of charge, that includes help with recruitment, ﬁnding ofﬁces and laboratories, access to scientiﬁc and business networks, PR and general information about the east of England.

International partnering opportunities Cambridge’s reputation as Europe’s leading biotech cluster means that Cambridge attracts visitors from all over the world. On these occasions, ERBI hosts formal partnering days, providing a platform for local companies to meet visiting delegates to explore unrivalled opportunities for collaboration. Access to ERBI’s free conﬁdential service is available from ERBI, St John’s Innovation Centre, Cowley Road, Cambridge CB4 0WS. Tel: +44 (0) 1223 421974; Email: [email protected]; Website: www.erbi.co.uk

Cambridge Nobel Laureates Chemistry 1962 Perutz, Max Ferdinand Kendrew, Sir John Cowdery ‘for their studies of the structures of globular proteins’ Chemistry 1967 Eigen, Manfred Norrish, Ronald George Wreyford Porter, Lord (George) ‘for their studies of extremely fast chemical reactions, effected by disturbing the equilibrium by means of very short pulses of energy’ Chemistry 1980 Berg, Paul ‘for his fundamental studies of the biochemistry of nucleic acids, with particular regard to recombinant-DNA’ Gilbert, Walter Sanger, Frederick

300

Industry Sectors of Opportunity

‘for their contributions concerning the determination of base sequences in nucleic acids’ Chemistry 1982 Klug, Sir Aaron ‘for his development of crystallographic electron microscopy and his structural elucidation of biologically important nuclei acid-protein complexes’ Chemistry 1997 Boyer, Paul D Walker, John E ‘for their elucidation of the enzymatic mechanism underlying the synthesis of adenosine triphosphate (ATP)’ Skou, Jens C ‘for the ﬁrst discovery of an ion-transporting enzyme, Na+ , K+ -ATPase’ Physiology or Medicine 1962 Crick, Francis Harry Compton Watson, James Dewey Wilkins, Maurice Hugh Frederick ‘for their discoveries concerning the molecular structure of nucleic acids and its signiﬁcance for information transfer in living material’ Physiology or Medicine 1963 Eccles, Sir John Carew Hodgkin, Sir Alan Lloyd Huxley, Sir Andrew Fielding ‘for their discoveries concerning the ionic mechanisms involved in excitation and inhibition in the peripheral and central portions of the nerve cell membrane’ Physiology or Medicine 1975 Baltimore, David Dulbecco, Renato Temin, Howard Martin ‘for their discoveries concerning the interaction between tumour viruses and the genetic material of the cell’ Physiology or Medicine 1984 Jerne, Niels K Kühler, Georges J F Milstein, César ‘for theories concerning the speciﬁcity in development and control of the immune system and the discovery of the principle for production of monoclonal antibodies’ Physiology or Medicine 1993 Roberts, Richard J Sharp, Phillip A ‘for their discoveries of split genes’

Biotechnology

301

Physiology or Medicine 2002 Brenner, Sydney Horvitz, H Robert Sulston, John E ‘for their discoveries concerning genetic regulation of organ development and programmed cell death’

5.4 Chemical Industries Neil Harvey and Alan Eastwood, Chemical Industries Association

Meeting needs and expectations The UK chemical industry lies at the heart of the European industrial economy, serving every branch of manufacturing industry, providing a source of innovation, intermediate products and process-enabling technologies. It employs around 200,000 highly skilled people nationwide, and accounts for 1.6 per cent of the gross domestic product (GDP) and 11 per cent of manufacturing industry’s gross value-added (GVA). It invests about £2 billion annually, typically representing about 14 per cent of total manufacturing investment, with a further £3.5 billion being spent on R&D (the majority in pharmaceuticals.) It is the United Kingdom’s top positive contributor to the balance of trade among manufacturing sectors, with an annual trade surplus of £5 billion on turnover exceeding £50 billion.s Other countries in the European Union account for around 60 per cent of exports and 70 per cent of imports. The United Kingdom’s chemical sector is a powerhouse among the country’s manufacturing sectors. It is made up of approximately 4000 ‘local units’, grouped under 3,100 companies. The United Kingdom has long been, and remains, one of Europe’s most attractive locations for international investment in the chemical sector. A commitment to free enterprise, low taxation, deregulated utilities, absence of restrictive labour practices and regulations, freedom to manage, the English language and business practices similar to those in the United States all combine to make the United Kingdom a logical location for global investors. Over 200 international chemical companies with manufacturing facilities in the United Kingdom clearly agree.

Chemical Industries

303

Geographical dispersion within the United Kingdom Chemical production is distributed throughout the United Kingdom. Historical, geographic, economic and logistical factors have led to the development of clusters based around Grangemouth (Scotland), on Teesside in northeast England, in a much larger and more dispersed area centred on Merseyside in the northwest of England and along the M62 motorway corridor to West Yorkshire and Humberside in the east. A national ethylene pipeline network links Grangemouth, Teesside, Hull and Runcorn in northwest England. All four regions are within 200 miles of each other and each has access to major port facilities that are interconnected by an extensive road and rail network. The Teesside group is extending north to Tyneside and beyond, where there is a strong focus on pharmaceuticals, biotech and service providers. While the north of the country is the base for most of the bulk commodity chemicals producers – with other speciality chemical producers also located near them – there are many more speciality, consumer and pharmaceutical chemical company operations spread across the rest of the United Kingdom. There are smaller clusters in the Midlands (Nottingham, Loughborough, Birmingham), the south and southwest of England (Southampton, Bristol/Severnside) and South Wales. There are many research-based science companies close to Oxford and Cambridge, while London and the southeast of England host many major pharmaceutical companies’ research establishments and corporate headquarters. Cornwall is also developing a new cluster of small, highly specialized research chemical producers. The geographical distribution of speciality chemical companies is shown in Table 5.4.1. The North East and Teesside tend to have the major integrated sites where large-volume ‘building block’ chemicals are produced. The share of activity in London and the South East is larger than casual observation of the landscape might suggest. The reasons are that many sites, as well as high-value manufacturing, undertake formulation activities as well as serve as ofﬁces, storage and warehousing.

Product diversity of the UK chemical sector The United Kingdom’s chemical sector is very diverse, not just geographically but in product coverage too. Petrochemicals and basic organics use North Sea oil and, in particular, gas reserves. With a substantial inorganic sector too, the United Kingdom has a solid foundation upon which further speciality chemical production is based. Further down the supply chain, the United Kingdom is a major European manufacturing and distribution centre for pharmaceuticals, paints and coatings, detergents and personal care products, as well as specialized products and process enablers for other manufacturing industries such as the automotive and electronics sectors. Plastics processors in the United Kingdom generate an annual turnover of some £18 billion.

304

Industry Sectors of Opportunity

Table 5.4.1 Distribution of UK chemical companies by UK region, by percentage of number of companies and by percentage of number of staff Region Coverage

Per cent of Companies

Per cent of Staff

17

21

Leeds, Wakeﬁeld, Halifax, Bradford, Huddersﬁeld, Hull, York, Grimsby, Immingham

9

10

North East

Teesside, Tyneside, Wearside, Durham, Northumberland

5

7

East

Norfolk, Suffolk, Essex, Cambridgeshire, Bedfordshire, Hertfordshire

10

13

East Midlands

Derbyshire, Nottinghamshire, Lincolnshire, Leicestershire, Northamptonshire

9

6

West Midlands

Birmingham, Wolverhampton, Coventry, Shropshire, Staffordshire, Warwickshire, Worcestershire

8

5

South West

Bristol, Avon, Somerset, Dorset, Devon, Cornwall

7

6

London and South East

Berks, Bucks, Oxfordshire, Hampshire, Sussex, Kent

24

21

Scotland

6

6

Wales

5

5

North West

Manchester, Liverpool, Cumbria, Lancashire, Cheshire

Yorkshire and Humberside

Table 5.4.2 provides a range of statistics explaining the size of the UK speciality chemicals industry sector versus the other industry sectors. They were derived from government surveys of the industry and reported according to Standard Industrial Classiﬁcation (SIC) codes.

UK chemical technology and the business environment Many of the world’s greatest inventions emanate from the United Kingdom, which has some of the best university chemistry departments to be found anywhere in the world. This knowledge base serves several multinational

3110

Total

214

50 62 68 34

Employment (thousands)

51.1

18.4 11.2 15.7 5.8

Turnover (in billions of pounds)

33.6

12.9 7.3 9.9 3.5

Product Sales (in billions of pounds)

16.6

3.9 3.7 7.4 1.9 1.56

0.36 0.34 0.69 0.17

GDP GVA (in (per cent billions of pounds) total)

4.8

0.4 1.3 2.6 0.5

Trade Balance (in billions of pounds)

2.10

0.79 0.42 0.70 0.19

Capital Expenditure (in billions of pounds)

a ‘Commodity’ is deﬁned as industrial gases, inorganics, organics, fertilizers, plastics, synthetic rubber and synthetic ﬁbres; ‘speciality’ includes dyestuffs, agrochemicals, paints, explosives, adhesives, ﬂavours and fragrances, photographic chemicals, unrecorded media and miscellaneous industrial specialities; ‘consumer’ includes soaps, detergents, cosmetics and personal care products.

885 1290 380 555

Number of Companies

UK statistics for the UK chemical commodity, speciality, pharmaceutical and consumer products

Commodity Speciality Pharmaceutical Consumer

Sectora

Table 5.4.2 sector, 2005

306

Industry Sectors of Opportunity

companies with global or European R&D centres in the United Kingdom. They recognize that the United Kingdom provides a business and regulatory environment to help push technological changes to meet: •

increasing demand for ‘lifestyle’ products;

•

quality and cost improvements, especially in life-science products;

•

public health and environmental challenges;

•

expectations for cleaner chemical processes and products with less environmental impact; and

•

requirements for protecting intellectual property and proﬁt repatriation.

To respond to these future business drivers, the United Kingdom has an evolving and ﬂexible industrial, regulatory and academic infrastructure to accommodate and welcome new investments that, for example, seek: •

the ability to perform a range of complex chemistries and formulations at scales from kilos to tonnes using ﬂexible technology platforms;

•

provision of special customer services such as research and screening, the supply of research and laboratory chemicals, contract synthesis, contract and/or toll manufacture of reaction and/or formulation chemistry;

•

well-supported, multi-functional assets on sites capable of operating to current good manufacturing practice (cGMP) standards, typical of the pharmaceuticals sector;

•

a robust regulatory and analytical infrastructure;

•

fast-track development and manufacture;

•

strategic commitment to custom synthesis and formulation manufacture in order to support a complex web of alliances and joint ventures between major players, especially in pharmaceuticals; and

•

secure technology licensing arrangements.

Outlook for the UK chemical industry in Europe The UK government is a staunch supporter of international free trade and a free enterprise culture. One aspect of this is the comparatively low level of personal taxation. The basic rate, currently 22 per cent, will fall to only 20 per cent in April 2008, and the maximum rate is only 40 per cent. UK corporate tax is also competitive, and will fall from the current 30 per cent to 28 per cent from April 2008. Small companies pay an even lower rate, currently 20 per cent (although this is scheduled to rise to 22 per cent over the next two years). There is also a big gulf in employers’ social contributions. For the UK chemical industry these amount to 28 per cent of wages and

Chemical Industries

307

salaries; for other European countries they range from 32 per cent to over 50 per cent; the Euro area average is 38 per cent.1 Flexible labour laws are particularly appealing to cyclical businesses and the UK chemical industry’s strike-free record in recent years is testimony to the cooperative culture that has developed between management and labour. The United Kingdom leads other European countries in its approach to privatization. Telecommunications, electricity, water and gas are all in the private sector and domestic and industrial consumers have the freedom to purchase from competing suppliers. While safety and environmental regulations are similar to those in many other leading industrial countries, UK regulators understand that high standards can be achieved without excessive bureaucracy. Statutory consents and permits for new facilities can be obtained rapidly, usually in a matter of weeks. Europe is the world’s biggest chemicals market and the United Kingdom is an integral part of that market. This is why the United Kingdom is the ﬁrst choice for so much chemical investment. The East Coast ports of Felixstowe, Humber, Teesside and Grangemouth are major chemical and container ports with large export and import ﬂows. They also offer frequent delivery services to Continental Europe and deep-sea access to the rest of the world. Likewise, the Port of Liverpool is the deep-sea gateway for the chemical industry hub in northwest England. The United Kingdom also has more transatlantic and global air connections than any other European country. A wide variety of brownﬁeld and greenﬁeld sites is available in the United Kingdom, many of which attract investment grants. Grangemouth and Teesside are obvious locations for the petrochemical and polymers sector. Both have the advantage of pipeline links with the North Sea oil and gas ﬁelds. Both are well-established major petrochemical locations with a wide range of utilities, services and engineering support for new investors. Teesside welcomes inward investment through its marketing arm – Wilton International. There is spare land and a utilities supply infrastructure already supporting one of Europe’s largest chemical complexes. Sites of up to 100 acres each, utilities based on two power stations (one being the largest privately owned power station in Western Europe) are supported by a range of services, including project risk management. Teesside is already home to established large companies such as BASF, Huntsman and Sabic as well as newer ventures making biodiesel; the United Kingdom’s ﬁrst world-scale bioethanol plant is also to be built here. For smaller operations the new Pioneer Chemicals Park is planned to help the incubation of businesses developing new chemical products and processes. All can draw on the R&D capabilities of the Wilton Centre, which has 80 serviced laboratories of varying sizes occupying a total of 74,000 square feet. Further south, the Humber offers opportunities for methane-based investments as well as a range of intermediates and specialities and has access

1

Source: Eurostat, Labour cost structure, 2004.

308

Industry Sectors of Opportunity

to the UK ethylene pipeline system. The site’s location on the Humber deep-water estuary further increases the range of manufacturing options. Products can reach markets serving 170 million people within 24 hours. Greenﬁeld sites are available with access to 300 storage tanks alongside deep-sea port facilities. Emphasizing its commitment to the future, a local training facility that includes a full-scale chemical plant has recently been established. Northwest England is already linked into the ethylene pipeline and has a large, well-established primary plastics sector. It is also home to much of United Kingdom’s ﬂourishing speciality chemical sector, with sites available for further growth, and is the principal base in the United Kingdom for chloralkali production. Continental Europe is easily accessible via excellent road connections to the Humber and other East Coast ports. Indeed, there are a host of options. Whatever an investor needs by way of raw materials, utilities, efﬂuent treatment, well-located sites or partners, the solution lies somewhere in the United Kingdom.

5.5 Creative Industries Jonathan Reuvid

Deﬁnitions The formal deﬁnition of creative industries is ‘those activities which have their origin in individual creativity, skill and talent and which have the potential for wealth and job creation through generation and exploitation of intellectual property’. In the United Kingdom the creative industries are within the remit of the government’s Department for Culture, Media and Sport (DCMS), which works with UK Trade & Investment to aid export performance. The DCMS identiﬁes the following main subsectors within the creative industries sector: •

advertising;

•

architecture;

•

art and antiques market;

•

broadcast production;

•

crafts;

•

design;

•

designer fashion;

•

ﬁlm and video;

•

interactive leisure software;

•

music;

•

the performing arts;

•

publishing;

310

Industry Sectors of Opportunity

•

software and computer services; and

•

television and radio.

Four industry groups have been set up by DCMS to carry out the work of stimulating exports: Creative Exports, Cultural Heritage and Tourism, Design Partners and Performing Arts International Development. DCMS has also established the Creative Industries Higher Education Forum with a mandate to assess ways of improving the interface between creative industries and higher education and to address skills, knowledge transfer and entrepreneurship. The DCMS produces regular statistical bulletins, which may be found on the Internet at http://www.culture.gov.uk. In this chapter, we focus on four subsectors: design, games, music and screen-based industries. Chapter 5.1 includes an analysis of the markets for art and antiques. Contact references for all subsectors are given in Appendix II.

Economic contribution of creative industries Collectively, the creative industries account for 7.3 per cent of gross valueadded (GVA) in the UK economy and 4.3 per cent of all UK exports. There are more than 120,000 creative businesses in the United Kingdom employing more than a million people, with a further 800,000 providing support services. The software and electronic publishing subsectors account for some 56,000 companies while music and the visual and performing arts account for 32,000 companies, together amounting to almost three-quarters of the total. Company numbers include only those above the value added tax (VAT) threshold. The United Kingdom’s creative industry is both diverse and interconnected. Within the pro-business environment of the United Kingdom, it has become a magnet for inward investors seeking to develop value and knowledge-based businesses that can compete in global markets. The industry is sufﬁciently large to be effective globally but remains compact enough to stimulate collaboration. For example, the choice of the United Kingdom as the location for Warner Bros. Pictures shooting of the ﬁfth ﬁlm of J K Rowling’s Harry Potter book series was based not only on the fact that the director, editor, composer and most of the cast were British but also on the availability of world-class technical personnel, studios and so on.

Sectors of creative industries Design The United Kingdom has a strong reputation for good design, which plays an important role for consumers and businesses. In terms of GVA, the industry

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contributed £11.6 billion to the economy in 2005. The industry employs over 180,000 people and sustains some 4,000 consultancies of which 31 per cent are located in London. Glasgow is also a strong design centre. The United Kingdom’s world-class design industry plays a key role in helping businesses to compete on value rather than price in crowded international markets. Headline projects include the interior of the Airbus A380 and the iPhone. Major multinational companies are drawn to the United Kingdom’s talent base and reputation for design innovation. Leading manufacturing companies in China, notably the automotive industry, and India are commissioning UK design skills.

Games The United Kingdom is both Europe’s most established and biggest market in electronic games and its leading developer. The United Kingdom is the world’s third-largest market for video games. Divisions of multinational corporations such as Electronic Arts, Sony and Microsoft Xbox have signiﬁcant leisure software development operations in the United Kingdom, reﬂecting the available pool of creative and technical talent. There are at least 150 games development studios across the United Kingdom, which places the United Kingdom in the vanguard of creativity and innovation. These studios, operating in a technically demanding and highly professional environment, are dispersed over centres of excellence in London, Scotland, the South East and Yorkshire and produce content for PCs, consoles, hand-held devices, mobile platforms and the Internet. Among the key players, Electronic Arts has located the headquarters of its European operations at Chertsey, employing nearly 500 people in a state-of-the-art games development studio designed by Sir Norman Foster. Subsequently, it established a second development studio in the North West at Warrington as a centre of excellence for its Formula 1 and other racing games.

Music The United Kingdom is renowned for consistently producing original and stimulating music as well as having one of the world’s largest live music industries. The industry comprises composition, publishing, musical instruments and related equipment, classical and non-classical performance, recording, manufacturing, retailing and distribution, and education. The DCMS estimated that the music sector, including the visual and performing arts, is worth about £5 billion a year to the economy and contributes export sales of £1.3 billion. In the subsector of music publishing, the United Kingdom is the fourth largest in the world with a 9.8 per cent share of international revenues from sheet music sales, royalties and performance rights.

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The United Kingdom is also second only to the United States as a source of repertoire. The mobile music services market in the United Kingdom was the strongest source of revenue growth for mobile phone companies and was worth US $335 million in 2006. UK consumer expenditure per head is higher than for any other nation and consumers continue to access new channels.

Screen-based industries The United Kingdom is home to around 1,500 independent television production companies, in addition to the BBC, that generated over £1.8 billion during 2006, an increase of 9.8 per cent on 2005. Overall, the television industry contributed around £12 billion to the UK economy in 2004. The industry also performs strongly in export markets that contributed 19.8 per cent of all TV revenue in 2006. UK television brands have achieved international recognition and are generating opportunities in other media. The key growth sector in both UK television and radio is digital broadcasting, in which the United Kingdom is a world leader and has introduced digital services via satellite, cable and terrestrial broadcasting. In television, the government is encouraging its development strongly and has set itself the ambitious target of replacing 45–50 million analogue TV sets by 2010. The sector has generated the world’s ﬁrst multi-broadcaster, multiplexed DVB-based terrestrial broadcasting services, offering improved picture quality and numerous channels without subscription. By the end of the ﬁrst quarter of 2003, 43.9 per cent of UK households, numbering 10.8 million, were accessing digital television, of which more than one and a quarter million are estimated to have had digital terrestrial television. Using the United Kingdom as a test bed for digital broadcasting technology, Japanese manufacturers such as Hitachi and Sony have consequently pioneered the introduction of integrated digital TVs (idTV) in the United Kingdom. This testing is important to the further development of the digital TV market. Analogue services will not be switched off until everybody who currently has access to them (more than 90 per cent of the population) can access free-to-view digital services. Other Japanese companies have chosen the United Kingdom as the location for their R&D centres and are establishing joint ventures with UK companies and universities. The UK movie production industry also excels with increased market shares in North America and many European Union (EU) countries in spite of a worldwide downturn in cinema admissions. In 2005, the top 10 performing UK movies grossed US $2.6 billion worldwide.

5.6 ICT

A range of key sectors, including aerospace, broadcasting and pharmaceuticals are supported by the United Kingdom’s information and communications technology (ICT) industry with its recognized status as a global hub for innovation and R&D. In particular, UK research strengths in emerging sectors such as organic and plastic electronics, displays and photonics provide the foundation for future global businesses. This chapter overviews the three subsectors of electronics, software and IT services and telecommunications. A more detailed summary of the software sector is provided in Chapter 5.9.

Electronics The continuing trend of convergence is beneﬁting UK companies at the component level. The United Kingdom also offers Europe’s largest base of fabless design houses. In this sector, leading companies are global standard bearers. For example, CDR provides chip designs for more than 50 per cent of Bluetooth devices while the chips of ARM Holdings are in most portable devices including Apple’s iPhone and 90 per cent of the world’s mobile phones. Innovation is a key strength of UK electronics businesses, propelling them to the forefront of the development of novel polymer and plastic electronics technologies, a rapidly growing global market projected to reach £15 billion by 2015 and possibly £125 billion by 2025. There are world-class centres for these technologies at the University of Cambridge, Imperial College London, and elsewhere in the United Kingdom. Companies owning critical patents are expected to beneﬁt as the sector develops through international partnerships and supply chain networks.

Software and IT services In 2006/07 the software and IT services sector accounted for 19 per cent of all inward investment, conﬁrming its dominant position in Europe as an

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investment location. There are now more than 100,000 specialist software houses in the United Kingdom, which is also home to leading global players. Not surprisingly, as a software development powerhouse, the United Kingdom hosts more software start-ups than anywhere else in Europe. Public sector engagement is an important factor in the UK market that the UK government has enhanced through investment related to its pervasive transformational agenda. Several multi-million pound IT integration projects are in the pipeline or currently under way. Mobile computing and the rise of identity theft have been the main drivers in raising the proﬁle of IT security. Mobile communications and the ﬁnancial services sectors both demand world-class IT security products. The United Kingdom is a leading centre for the development of software encryption and biometrics and controls 10 per cent of the global market for IT security products. Among the by-products of the software and IT services sector are automated inventory tracking, resulting from a combination of process management skills and security know-how. World-class retailers are using radio-frequency identiﬁcation (RFID) to streamline their supply chains. Other applications of system integration technologies are public transit systems and transport congestion management.

Telecommunications Following the United Kingdom’s pioneering programme of liberalization in the 1980s, telecommunications today is a US $65 billion industry. Around 7,800 companies employing more than 250,000 offer skills and capabilities that range across the supply chain. Often the partners of choice for global companies, UK telecommunications businesses are acknowledged as innovators. In this creative sector, developers and content creators work alongside. The United Kingdom has the infrastructure, as well as the skills, to support multiple content delivery platforms. The United Kingdom holds a dominant position as an Internet gateway with 36 per cent of Internet trafﬁc routed through UK servers. Its leading ﬁxed line operator, BT, manages the ﬁrst national rollout of an IP-based exchange with the £10 billion 21CN BT programme scheduled for completion in 2010. Today, there are major opportunities for overseas companies in the United Kingdom’s deregulated markets. As an example, BT recently announced that the Chinese company Huawei Technologies is a preferred supplier of communications equipment for its 21CN network. The mobile telephone industry is worth approximately £21 billion annually and is a striking success story. UK consumers adopt new technologies enthusiastically and are active mobile users, sending 35 billion text messages in 2005. An estimated 69.4 million mobile phones are in current use, representing more than one for every UK citizen. Although market penetration is high, the scope for growth in new market sectors such as 3G, data services and secure payment remains undimmed.

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The latest mobile phones offer audio, PDA, radio,WiFi, location and broadcast TV functionality. The convergence of ﬁxed and mobile (FMC) is accelerating and technological advances are generating converged, multi-functional devices.

Summary Digital content is transforming business models and value chains internationally in many industries and the United Kingdom’s strengths as an innovator in ICT have earned it an important role. The United Kingdom’s global presence continues to grow through successful collaboration, alliances and partnerships internationally.

5.7 Life Sciences

The life-sciences sector, of which the United Kingdom has one of the world’s strongest and fastest-growing markets, comprises the biotechnology, healthcare and pharmaceuticals industries that together employ more than 400,000 people and generate more than £23 billion in annual revenue. Core elements of the biotechnology subsector are detailed in Chapter 5.3 and of the pharmaceutical industry subsector in Chapter 5.8. However, an overview of each is included below. R&D investment continues to receive favourable ﬁscal treatment, with tax credits granted for 150 per cent of small and medium-sized companies and 125 per cent for larger businesses. Over the last decade, the government has more than doubled the funding for basic science to £3.4 billion, which includes £40 million for six centres of excellence in systems biology. This high level of investment is keeping the United Kingdom in the vanguard of life-sciences research and innovation. It has also allocated £134 million over four years to increase the number of clinical trials via the National Health Service (NHS).

Biotechnology In 2006, biotechnology-related inward investment rose from 28 new projects in 2005 to 79 after lacklustre growth since 2002/03. This UK sector is the largest in Europe and has attracted investment from biotechnology companies particularly in France, Germany, Japan and the United States. This increased investment activity, in which nearly half of the new projects are involved in R&D, is another indicator of the growing strength of R&D in the United Kingdom that is the catalyst for new drug discovery. As a result, 40 per cent of biotechnology products in the pipeline from European public companies and 45 per cent of new biotechnology drugs in late-stage clinical trials in Europe emanate from the United Kingdom. Smaller biotechnology companies have beneﬁted from the National Biomanufacturing Centre that provides support for the development

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and manufacture of a wide variety of innovatory biopharmaceuticals for early-phase clinical trials.

Healthcare The development of ground-breaking products of worldwide renown and healthcare generally has a long tradition in the United Kingdom, which is recognized by inward investors. For example, Terumo Corporation of Japan, which acquired Vascutek, the Glasgow-based manufacturer of endovascular devices, in 2002, has recently announced a £5 million investment to expand production at its Scottish subsidiary with the creation of more than 200 new UK jobs. In 2006, UK-based orthopaedic companies achieved a notable success with exports of almost US $1.8 billion of equipment. Among these, joint replacement instrumentation (JRI) has gained an increasing world market for hip and knee joints.

Pharmaceuticals A strong academic base together with increasing government support for R&D through tax and investment credits has attracted life-sciences companies eager to establish themselves in global markets on the back of the United Kingdom’s outstanding record in drug discovery. Second only to the United States and more than the rest of Europe combined, the United Kingdom is the location of companies that have developed ﬁve of the world’s top 20 medicines in current use. Employing approximately 700,000 people of whom one-third are directly involved in R&D, the United Kingdom is host to all the global top 10 pharmaceutical companies that have R&D and manufacturing operations. Their investment in the United Kingdom is increasing. AstraZeneca is spending £60 million on the current expansion of its oncology research centre in Chester, while GlaxoSmithKiline invested £25 million in 2006 into its manufacturing plant at Montrose, Scotland. As the world’s ﬁfth-largest pharmaceutical market, the United Kingdom spent £10.1 billion in 2006 through the NHS. Pharmaceutical exports from the United Kingdom rose from a record £12.2 billion set in 2004 to £13.8 billion in 2006.

5.8 Pharmaceuticals Lilly

A ﬁfth of the world’s top 100 medicines were discovered and developed in the UK, more than in any other country except the United States. Also, almost 50 per cent of the top 25 medicines prescribed by GPs on the NHS are UK in origin. As well as helping to improve the nation’s health, the pharmaceutical industry in the UK also makes a major contribution to its wealth, through exports and as an employer. The industry is consistently in the top three for trade surplus – in 2005, industry exports were £12.2 billion, creating a trade surplus of £3.4 billion. Nearly £10 million per day is spent by the pharmaceutical industry on discovering and developing much-needed new medicines, making it the single largest investor in research and development in the UK. This contribution has not gone unnoticed. The government has now not only increased spending on science to its highest level for over a decade, but also introduced a long-term strategy to support UK science, the funding for which was announced in the July 2004 Comprehensive Spending Review (CSR). As the then Chancellor of the Exchequer, Gordon Brown, said in his March 2004 Budget Statement: ‘. . . we cannot be a strong economy if we are weak in education and science. So ﬁrst on science and innovation, we will work with the scientiﬁc community and our science-based companies so that in this spending period we can raise the level of science funding as a share of national income, with one purpose: to make Britain the best and the most attractive location for science and innovation in the world’. The announcement was timely, coming shortly after the Association of the British Pharmaceutical Industry (ABPI) published the results of an opinion poll that showed overwhelming support for the government to support medicine research and encourage pharmaceutical companies to invest in the UK. In December 2006, the government took things further by accepting all the recommendations of the Cooksey Report. The report proposed funding reform and encouraged transnational research and faster licensing of medicines. ‘Both the Cooksey Report and the government’s funding

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announcement are very encouraging because they show that there is a great deal of understanding about the importance of research and development into modern medicines’, says Andrew Hotchkiss, Managing Director of Lilly in the UK. As a global and UK top 10 research-based pharmaceutical company, Lilly is a leader in providing innovative medicines and medical expertise in many of the major disease areas, including cancer, mental health, diabetes, osteoporosis and heart disease. ‘In 2005 we introduced the ﬁrst non-stimulant medicine for Attention Deﬁcit Hyperactivity Disorder. The ﬁrst treatment for malignant pleural mesothelioma, a cancer of the lining of the chest for which there is no known cure, was also approved for use in the UK. Lilly UK also launched the ﬁrst medicine for stress urinary incontinence’, Andrew reveals. ‘In January 2005, we launched a new medicine for the treatment of major depressive disorder. During the next few years we plan to introduce new treatments for type 2 diabetes, schizophrenia and for acute coronary syndrome. Our company is in an unprecedented period of growth and the UK has, and we hope will continue to have, a major role to play in our global success story. This is why we took the decision in 2003 to invest a further £220 million in our UK operations from 2003–2006. This investment further cements a relationship that goes back to 1934, when Lilly opened its ﬁrst UK ofﬁce. Lilly was founded in 1876 in Indianapolis in the United States, where the headquarters is still based. Now, the company employs more than 40,000 people around the world, 2000 of whom are in the UK, spanning research, manufacturing, sales and marketing. Lilly’s manufacturing facility is at Speke on Merseyside, the largest bulk biotechnology manufacturing site in the UK. Lilly Speke manufactures a human growth hormone and the antibiotic capreomycin. It is playing a major role as part of Lilly’s global programme with the World Health Organization and other partners to combat multi-drug resistant tuberculosis (MDR-TB). One of the world’s leading antipsychotics for the treatment of schizophrenia and bipolar disorder was discovered at the Lilly Research Centre in Windlesham, Surrey. When it opened in 1967, it was Lilly’s ﬁrst R&D site outside the United States. Since then it has expanded steadily. The ﬁrst phase of a projected £100 million expansion project that will create laboratory space for up to 120 additional scientists was completed in summer 2005. Phase two was completed and opened in the summer 2007. Both UK Trade & Investment and the South East England Development Agency (SEEDA) were instrumental in helping make this happen. Lilly’s decision to increase its investment in the UK is signiﬁcant. Plans to launch several new drugs are a major factor, but, as Andrew points out, there are many reasons why it makes sense for pharmaceutical companies to invest in the UK: ‘Lilly’s business is based around people and the skills and capabilities of the people that we employ’, he says. ‘We are fortunate enough to employ some of the world’s top scientists and a good supply of high-quality science graduates is a major factor for Lilly. The supply of graduate scientists in the UK has been growing since the mid-1990s and the

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proportion of graduate scientists in the young adult labour force is higher here than in most other countries, with the exception of France.’ Similarly, Lilly’s investment in Speke is being made because of the skills and capabilities of the workforce. Emphasizing this, Andrew reveals: ‘Through good working practices – minimizing downtime and eliminating errors – our staff at Speke increased production to 500 per cent of the human growth hormone plant’s original capacity. It was their expertise that drove Lilly to invest £45 million in expanding the site.’ Of course, a favourable investment climate is still important. The government’s monetary and ﬁscal framework, including making the Bank of England independent and imposing inﬂation targets, has put the UK in a better position to cope with the ups and downs of the economic cycle. As a result, the UK has avoided recession and continued to grow in the decade since 1997. However, the general feeling is that the UK could do more to reward and encourage investment and that the government should continue working with businesses to improve the tax regime and so provide incentives for investment in wealth creation and greater rewards for success. ‘Pharmaceutical R&D in the UK is equivalent to 30 per cent of sales’, says Andrew. ‘No other British industry returns even 10 per cent to R&D. Lilly currently re-invests nearly 20 per cent of sales revenue in R&D, which is why we are regularly acknowledged as having one of the best new product pipelines in the pharmaceutical industry.’ The political stability of the UK and the close partnership with the government is another important factor in the success of pharmaceutical companies in the UK. As the ABPI states, ‘the ability of this country to retain world-class pharmaceutical company investment is critically dependent on the willingness of the government to understand the complex issues involved and to support an environment in which the industry can conduct its research, manufacturing and marketing activities as effectively as in all the other countries that are competing for investment’. In recent years, the government and industry have worked together to set up the Pharmaceutical Industry Competitiveness Task Force (PICTF). This group looked at what needed to be done to retain and strengthen the UK as an attractive business environment for an innovative pharmaceutical industry. From more than 50 recommendations, the task force addressed a very broad range of issues relevant to the industry and its relationship with the government, regulators and the NHS. Areas covered include clinical research, licensing, intellectual property rights, the science base and the domestic market framework. Under the terms of the 5-year Pharmaceutical Price Regulation Scheme (PPRS), companies continue to have freedom to set launch prices, with a cap on proﬁts. Although the 2004 PPRS negotiations concluded with a price cut of 7 per cent, the agreement did assure stability, and continued to recognize and support the R&D investment made by the industry. Whilst this latest price cut is a concern, the Scheme still makes the UK more attractive than some other countries, where launch prices are more regulated.

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The industry also agrees with government that there is scope to work even more closely with the NHS to help improve the nation’s health and NHS productivity. As Andrew says: ‘Partnership frameworks have been developed between the pharmaceutical industry and the NHS in England, Scotland and Wales, which is providing a useful template for how we can work together ethically on areas of mutual interest for the beneﬁt of patients across the UK’. In March 2007, the Ofﬁce of Fair Trading (OFT) published a report into the PPRS. This recommended, among other things, appraisal of all medicines at launch, price negotiation and therapeutic/generic reference pricing. Such profound change would be anti-innovation and would undermine the pharmaceutical and biotechnology sectors in the UK. The PPRS has evolved over 50 years and has made the UK an attractive business location. In its response to the OFT Report in summer 2007, the government has the chance to send the pharmaceutical sector the message that free pricing and reimbursement continues to serve all well; ‘that further incremental change is required from 2010 and that therapeutic/generic reference is not the way forward. ‘One area of reform to consider is health technology appraisals’. Historically, the NHS has been slow to take on board new medicines. This is still the case, even though the National Institute for Health and Clinical Excellence (NICE) has been established. Although NICE has generally issued guidance recommending the use of newer treatments, there has been a tendency by the NHS to wait for NICE – so-called ‘NICE blight’ – and even when the guidance is made, implementation can still be slow. ‘While we welcome NICE’s aim to provide faster access to modern medicines, clearly there is still more to be done to ensure that patients have the opportunity to be prescribed newer treatments’, says Andrew. ‘This is particularly important at a time when the government is actively encouraging scientiﬁc innovation and patient empowerment. The time is right to conduct an independent review of NICE.

5.9 Retail Jonathan Reuvid

Consumer spending has been a key factor behind the relative strength of the UK economy compared with that of continental Europe. IT spending in retail remains healthy (although there are signs that this has begun to stall), the main areas of focus being supply chain management, improving productivity and efﬁciency, as well as technology developments to reduce fraud. Chip and Pin is now being rolled out in the UK, and the banking community is becoming more coordinated. Radio-frequency identiﬁcation (RFID) tagging is seen as having the potential to deliver improved supply chain information, tighter security and reduced losses through fraud and theft. Adoption of these new technologies will create substantial opportunities in integration and associated software products. Currently, the driving force for RFID appears to be major retailers such as Wal-Mart and Tesco, undertaking major projects with their supply chains. However, opportunities are emerging in other sectors such as pharmaceuticals, and it is apparent that as the technology becomes more widely understood, new applications will be found. For example, there is excitement within the direct marketing and postal communities that use of RFID and related technologies could enable a single item of promotional mail to be tracked through to delivery to the recipient, allowing for coordinated follow-up through other communications channels. Nonetheless, there are going to be standards and interoperability issues, as is often the case with new technologies, not to mention the potential issues with consumer rights and privacy laws.

Financial services The key drivers in banking and ﬁnance, a sector that has consistently invested heavily in IT, are largely driven by compliance. The impact of

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Basel II and Sarbanes Oxley keeps the sector buoyant. The requirement for improved capital risk management has driven demand for CRM, data warehousing, data management and integration with legacy systems. Nonetheless, the requirement from this community of experienced buyers is for truly integrated solutions as opposed to point products and services. The UK’s regulatory body, the Financial Services Authority (FSA), is widening its scope to cover other areas of the industry, such as mortgage companies and insurance providers. This, therefore, increases the size of the opportunity, driven by compliance, particularly integration, as companies’ reporting requirements become more detailed. Hence, niche areas such as life and pensions administration will enjoy growth above 10 per cent. The insurance and pensions sector has had to adapt to the ‘one per cent world’ created by the 1 per cent cap on charges, stipulated by the government on stakeholder pensions introduced in 2000, although this increased to 1.5 per cent in 2004. Although the 1 per cent only applied to this single product type, the ‘low charges’ precedent has been set. This has led to consolidation in the sector, with a focus on end-to-end supply chain efﬁciency and process streamlining. Simultaneously, the marketing of ﬁnancial services has become more adventurous, with new brands entering the market such as supermarkets and afﬁnity schemes. In general, both retail and investment banking are buoyant sectors for IT.

5.10 Software Charles Ward, Intellect UK

The UK versus Europe With a value of E60 billion in 2004, the UK accounts for 21 per cent of the European IT market and is, by a narrow margin, the largest market ahead of both France and Germany. In terms of Internet adoption, the UK’s penetration was 63.2 per cent of the population in 2004, signiﬁcantly higher than the European average of 54.6 per cent. Only the Nordic group of countries exceeds the UK’s adoption, which is projected to reach 78.9 per cent by 2008, equivalent to 49 million users. Internet commerce in the UK is predicted to grow dramatically from E120 billion in 2004 to E400 billion in 2008, with the B2B representing 86 per cent of the total. The UK is only exceeded by Germany in internet commerce (source: EITO).

UK IT market – general picture Along with most other Western IT markets, the UK has suffered from the post-Y2K and DotCom effect followed by economic downturn. After shrinking by 0.6 per cent in 2003, the UK market grew by 4.1 per cent in 2004, with 5.1 per cent predicted for 2005. At a headline level, growth is expected to continue at between 4 and 5 per cent until 2010. A number of commentators have pointed out that the underlying decline of the traditional IT market has been masked by the positive impact of infrastructure outsourcing and business processing outsourcing (BPO) and, to some extent, public sector spending. Over recent years, the general mood in the market has been one of caution, with the emphasis on leveraging existing IT investments and driving efﬁciency, which explains the upsurge in outsourcing. With replacement cycles being extended during the downturn, the market has beneﬁted from replacement of equipment and delayed projects coming to fruition. It is generally

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accepted that the market is emerging out of the infrastructure upgrade phase into the new investment phase. Current priorities are •

improved, integrated access to information;

•

better real-time monitoring of business performance;

•

lower cost of application development;

•

applications better aligned to business processes.

Looking forward, there continue to be optimistic signs, not least the impact of the massive waves of public sector spending on IT. That said, as with any huge market, there are sectors/sub-sectors in expansion that present opportunities for existing and new players. Increasingly, it is the ability to spot these exciting ‘micro-markets’ that can lead to business growth way beyond the headline average. However, suppliers must be aware of the overriding buyer expectations of ‘more for less’. There is downward pressure on prices and upward pressure of delivery of value.

The UK software market – product perspective The growth rate in the UK software market peaked at 10.1 per cent in 1998 and has fallen since. Sized at E13.5 billion, the UK software market picked up in 2004 and grew by 5 per cent, and 6 per cent predicted for 2005. The three main categories, business applications, infrastructure and information management, continue to grow steadily. Overcoming complexity is a driver in the enterprise space, as security and storage are with infrastructure software. Compliance continues to have a positive impact on business intelligence software. The continued absence of a ‘killer’ application to boost the market, combined with the sense of excess IT inventory, has impacted new licence sales of established software vendors. Such suppliers have been able to compensate by developing services and consultancy revenue streams, with the larger well-ﬁnanced players even developing BPO offerings. In addition, the established players are attempting to adapt their products, pricing and distribution in order to address the mid-market level opportunity. In the longer term, developments in packaging and delivery will allow vendors to offer their software as a service. Web services, hosted applications and managed IT services will shape the new business models. Competition will intensify as the established players who have enjoyed a long period of prosperity serving the corporate market seek to outperform the market growth by developing their product portfolios and addressing the mid-market opportunity. Many existing small- and medium-sized specialists will inevitably become acquisition targets or victims, as the bigger players reposition themselves. Nonetheless, the UK has been, and will continue to be, a fertile ground for small, innovative, agile software companies operating either in niche markets or on the periphery of the established players.

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BPO is the fastest growing segment within outsourcing and is relevant to the software community because niche software providers are successfully developing BPO offerings in response to customers wanting to cut costs, improve productivity, disengage from non-core activities, as well as transfer technology and operational risks. Although this would normally be seen as the market of the traditional outsourcers, a key customer requirement is domain intimacy, which is often more important than generic service capability. Over the medium term, the penetration of broadband and improved broadband service will act as a stimulant for growth in the digital content and interactive services. It is expected that the ‘new media’ type companies, which largely disappeared after the DotCom crash, will return and fuel growth in this sector, which is a hybrid between software, creative arts and communications.

The UK software market – vertical perspective The immediate market horizon is inevitably dominated by developments in the public sector, driven by the UK government’s ambitious modernization targets. As expected, the massive investment plans have triggered unparalleled interest in this market. It should be noted that developments in the UK are being closely observed by other European countries that could well adopt a ‘follow the leader’ strategy to modernization of their own public services.

Public sector market overview 2005 was the year when e-government theory was expected to become e-government reality. Citizens should have been able to access a variety of public services electronically from fully integrated government departments, agencies and bodies. Although progress has been made, the full beneﬁts of the modernizing government have yet to be realized. Mistakes have been made, lessons learned and sensible steps have replaced the giant strides that were once expected. Realism has replaced the ‘Big Idea’. The world has changed and become increasingly cautious. With a more intelligent customer, has come a greater awareness of technology, its cost and perceived beneﬁts at the highest levels of organizations and government. Consequently, suppliers need to ensure that they clearly understand customers’ business drivers and ensure that the right technologies are deployed efﬁciently in order to meet the ever more demanding return on investment objectives. This is particularly evident in the public sector, where one of the key challenges facing customers is how to transform policy ideas into the desired outcomes, especially when this involves IT-enabled business change. Concepts that appear straightforward on paper can be extremely difﬁcult to

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execute, especially when the technology is new or emerging, or when transaction volumes are very high. Indeed, the end objectives become even more challenging when political considerations are also factored in. Before a vertical analysis can take place of the market opportunities that exist for companies, it is ﬁrst necessary to understand the wider context.

The efﬁciency review Although much of the rhetoric surrounding the publication of Sir Peter Gershon’s report has focused on the consequences its recommendations will have on the civil service, of greater importance to the industry is whether the Government, will be successful in leveraging more beneﬁts to frontline services. Fundamental to this should be more efﬁcient procurement practices; increasing engagement with the market at an earlier stage in the procurement cycle; procurements negotiated on the basis of partnership and on equitable terms and conditions; and an enthusiasm, on behalf of the customer, to embrace innovative solutions and improve the accessibility of the market to smaller suppliers. Although the implementation phase of the review is very much in its infancy, the manner in which government procures its services will be signiﬁcantly altered moving forward.

e-Government Unit The appointment of Ian Watmore as Head of e-Government unit (eGU) represents a watershed in the modernizing government agenda. The eGU is currently developing an IT Strategy for government and a stream for IT professionals within the civil service. Both, potentially, will have a profound long-term impact on the manner in which government interacts with the supplier community.

Vertical analysis It is expected that the public sector’s total ICT budget for 2005/06 will be £12 billion, with the market for IT services alone comfortably exceeding £5 billion. However, the scale of the government’s modernization programme can be quantiﬁed by the following statistics: 200 agencies and 400 local authorities; more than 750 services provided by local government and over 520 provided by central government; nearly 5 billion transactions undertaken annually, of which 80 per cent are conducted at the local level; and, of course, close to 60 million citizens. For new entrants into the public sector marketplace, the current environment presents not only a number of exciting opportunities but also a number

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Industry Sectors of Opportunity

of daunting challenges. The level of public investment into electronic service delivery, together with the relative slowdown in the private sector market, has led to an increasing number of ICT companies attempting to enter the public sector, making competition increasingly ﬁerce. Nonetheless, opportunities exist for those companies who are willing to be patient and develop an understanding of the markets they ﬁnd attractive.

Central government In central government, the majority of contracts have already been issued [most notably within the Ministry of Defence and the Department for Environment, Food and Rural Affairs (Defra)]. It should also be noted that given the size of many of these multi-billion pound tenders, contracts are traditionally awarded to one of a select number of larger, multinational companies with existing relationships. However, opportunities do exist for smaller companies within the Framework Agreements these larger players have in place. Understanding the nature and timing of these opportunities is not easy.

Criminal justice The criminal justice market (covering the police, courts, probation and prison services) has become the next ‘big’ area of procurement. Although it is likely that government will award the majority of these contracts to larger players, smaller companies will still be able to play a role through the development of niche solutions (these will be particularly signiﬁcant in the forthcoming DISC and ID Card procurements). Nevertheless, a signiﬁcant level of commitment, both in terms of time and resources, will be required.

Local government It is the local government marketplace that probably presents the most accessible opportunities for new entrants. Within the UK, there are over 400 local authorities, each demographically different, resulting in a disparity in the manner in which e-government strategies have been implemented. Many urban authorities have taken a notable lead in implementing strategies, which have been considered, in some cases, to be superior to the work that has been undertaken by central government. In contrast, smaller rural authorities, lacking the necessary resources and expertise to attract suppliers to their tenders, have found it increasingly difﬁcult to implement their strategy effectively. This does not mean that smaller local authorities are any less attractive than larger authorities; it merely presents smaller suppliers or new entrants with an opportunity to enter the public sector market at a level that would allow for genuine partnership to develop and ﬂourish.

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Health In March 2002, the UK government announced the National Programme for IT (NPfIT), designed to modernize radically the NHS and covering the following areas: •

integrated Care Records Service;

•

e-Prescriptions;

•

e-Bookings.

Eight major contracts have now been awarded. The six largest of these form the core of the modernizing agenda of NPfIT and include ﬁve regional Local Service Provider (LSP) contracts, covering England, for a Care Records Service, and a further contract as a National Application Service Provider (NASP) to deliver the data spine where all the care records will be held. Two additional contracts have also been awarded to deliver an e-bookings service and broadband infrastructure known as N3. Each LSP has put together a consortium of companies to deliver its solution. Although the contracts have been operational for more than 18 months, a number of questions still remain such as how will LSPs treat installed legacy systems? Will LSPs need to add to their consortia in the future? What, if anything, can still be procured locally by the NHS? Clearly, in this climate, new suppliers will ﬁnd it particularly difﬁcult to become established, with companies unable to plan strategically with any degree of conﬁdence. Opportunities do exist within this market but patience is the key word.

Appendix I Contributors’ Contact Details

Artauis Limited 12th Floor, Southgate House St. George’s Way Stevenage Hertfordshire SG1 1HG Contact: Alfred Levy Tel: +44 (0) 1438 847101 Email: [email protected] Chemical Industries Association (CIA) King’s Building Smith Square London SW1P 3JJ Contact: Neil Harvey Tel: +44 (0) 20 7834 3399 Email: [email protected] City Financial Associates Limited 6 Laurence Pountney Hill London EC4R 0BL Contact: Simon Sacerdoti Tel: +44 (0) 20 7090 7806 Email: [email protected] East of England International 2 Quayside Cambridge CB5 8AB Contact: Nykki Rogers Tel: +44 (0) 1223 450450 Email: [email protected]

Appendix I – Contributors’ Contact Details

James Goodwin, MA, MBA Street Farm, Newbourne Woodbridge Suffolk IP12 4PX Tel: +44 (0) 20 794 7073939 Email: [email protected] HM Revenue and Customs New King’s Beam House 22 Upper Ground London SE1 9PJ Tel: +44 (0) 7865 3000 Website: www.hmrc.gov.uk HSBC plc 8 Canada Square London E14 5HQ Contact: Nick Stephens, Trade Services Tel: +44 (0) 20 799 20538 Email: [email protected] Intellect UK 20 Red Lion Street London WC1R 4QN Contact: Charles Ward Tel: +44 (0) 20 7395 6736 Email: [email protected] Jones Lang LaSalle 25 Bank Street London E1 14 5EG Tel: +44 (0) 203 147 6040 Contact: Nigel Almond Direct line: +44 (0) 203 147 1175 Email: [email protected] Library House Kett House Station Road Cambridge XCB1 2JX Contact: MarkLittlewood Tel: +44 (0) 1223 500550 Email: [email protected] Eli Lilly and Company Limited Lilly House Priestly Road Basingstoke Hampshire RG24 9NL

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Appendix I – Contributors’ Contact Details

Contact: Communications Administrator Tel: +44 (0) 1256 775412 Website: www.lilly.co.uk Merrill Lynch International Bank 2 King Edward Street London EC1A 1HQ Contact: Robert Willsdon Tel: +44 (0) 20 7996 4817 Email: [email protected] Mark Norcliffe 38 St. Andrew’s Garden Shepherdswell Dover G157LP Tel: +44 (0) 1304 830509 Mobile: (07962) 825882 Email: [email protected] PNO Consulting Ltd 51 Water Lane Wilmslow Cheshire DK9 5BQ Contact: John Devonald Tel: +44 (0) 1625 628089 Email: [email protected] Jonathan Reuvid Little Manor Wroxton Banbury Oxfordshire OX15 6QE Tel: +44 (0) 1295 738070 Email: [email protected] FPDSavills (Residential) 20 Grosvenor Hill London W1K 3HQ Contact: Lucian Cook Tel: +44 (0) 20 7499 8644 Email: [email protected] FPD Savills (Agricultural) Wytham Court 11 Wytham Way Oxford OX2 0QL Contact: Richard Binning

Appendix I – Contributors’ Contact Details

Tel: +44 (0) 1865 269000 Email: [email protected] Think London Level 35 25 Canada Square Canary Wharf London E14 5LB Contact: Sally Miller Tel; +44 (0) 20 7718 5400 Email: [email protected] Watson, Farley & Williams LLP 15 Appold Street London EC2A 2HB Contacts: Jonathan Martin Tel: +44 (0) 7814 8031 Asha Kumar Tel: +44 (0) 7814 8182 Email: [email protected] Wilder Coe Chartered Accountants 233-237 Marylebone Road London NW1 5QT Contact: Mark Saunders Tel: +44 (0) 20 7616 8849 Email: [email protected] Wilder Coe Business Recovery Southgate House St. George’s Way Stevenage Hertfordshire SG1 1HT Contact: Norman Cowan Tel: +44 (0) 1438 847101 Email: [email protected]

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Appendix I – Contributors’ Contact Details

Contact Details – City and Regional Profiles and Advertisers (Advertisers are positioned in the first section of the book. City and Regional Profiles are positioned after page xvii) Bristol City Council Investment And Enterprise Team The Council House College Green Bristol BS1 5TR Tel: +44 (0) 117 922 2928 BioDundee 3 City Square Dundee DD1 3BA Scotland Tel +44 (0) 1382 434913 Fax +44 (0) 1382 434650 Email [email protected] Highlands and Islands Enterprise Cowan House Inverness Retail and Business Park Inverness IV2 7GF Scotland Tel: +44 (0)1463 234171 Fax : +44 (0) 1463 244469 Email: [email protected] Chief Executive: Sandy Cumming International Business Wales Welsh Assembly Government Trafalgar House 5 Fitzalan Place Cardiff CF24 0ED Wales Contact: Carys Pugh D’Auria Tel: +44 (0) 2920 828683 Email: [email protected] Invest Northern Ireland International Marketing Team

Appendix I – Contributors’ Contact Details

Bedford Square Bedford Street Belfast BT2 7ES Northern Ireland Email: [email protected] Tel: +44 (0) 28 9023 9090 Fax: +44 (0) 28 9043 6536 Locate in Kent 2 Kings Hill Avenue Kings Hill West Malling Kent ME19 4AQ Tel: + 44 (0)1732 520700 Fax: + 44 (0)1732 520701 Email: [email protected] Northamptonshire Enterprise Limited Enterprise House 30 Billing Road Northampton NN1 5DQ Tel: +44 (0) 1604 609393 One NorthEast Stella House Goldcrest Way Newburn Riverside Newcastle upon Tyne NE15 8NY Tel: +44 (0) 191 229 6355 / 6363 Fax: +44 (0) 191 229 6242 Email: [email protected] South East England Development Agency Cross Lanes Guildford Surrey GU1 1YA Email: [email protected] Tel: +44 (0)1483 484200 Fax: +44 (0)1483 484247 South West of England Regional Development Agency Sterling House Dix's Field Exeter Devon EX1 1QA Tel: +44 (0) 1392 214 747 Fax: +44 (0) 1392 214 848 Email: [email protected]

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