The discussion has crystallised around three main themes: restricting access to support for companies which are registered in offshore tax jurisdictions, preventing payments being used to pay dividends, fund buy backs or otherwise return capital to shareholders, and limiting executive pay and bonuses.
Use of offshore tax jurisdictions
In Europe, Denmark was the first to act, banning companies registered in countries on the EU’s list of non-cooperative tax jurisdictions from accessing its aid. Other European jurisdictions have followed (Poland) or are considering doing so (France, Italy, Belgium).
In the UK, the Welsh government has already announced that any business owned by a company or individual resident in a 100% tax haven will not be eligible for financial support from the Welsh government’s Economic Resilience Fund. A similar move has been proposed in Scotland and press reports say that the Scottish government is “strongly” sympathetic and is giving it “detailed consideration”.
We have not yet seen the details of how the Welsh or Scottish restrictions will work. How will “tax haven” be defined? Where in the group’s corporate structure will the offshore vehicle need to appear? Now this particular genie is out of the bottle, there will inevitably be pressure on the UK government to match the actions of the devolved administrations.
Dividends, buy backs and executive pay
The discussions around imposing restrictions on the ability of a company to pay dividends, fund buy backs or remunerate executives are as complex as the use of offshore tax structures. Any limitations on dividends will naturally impact pension fund income and other stakeholders,
And any changes to rules about executive pay will take time to implement – to dovetail with existing rules and to allow for negotiation with individuals who in some cases already have long-term remuneration packages.
To date, in the UK, any restrictions on dividend, buy backs and executive pay have been limited to the banking sector. Those restrictions have been applied by the banks’ regulator, the PRA, on a supposedly consensual basis, rather than by legislative action.
However, recent press reports suggest that the UK government is now looking at ways of bringing in formal constraints on businesses which access UK government support mechanisms. One likely way appears to be when it extends the Coronavirus Large Business Interruption Loan Scheme (CLBILS); as we discussed here, the government is considering raising the cap from £50milion to £200 million. Reports suggest that the restrictions would be imposed on any business which accesses the higher loan levels.
New schemes are also likely to have restrictions imposed. For example, details of the Future Fund – the rescue package for early-stage companies – were announced on 18 May 2020. The rules of this new scheme explicitly state that government funding cannot be used to repay any borrowings or pay any dividends or bonuses.
Osborne Clarke comment
We have already been advising clients on the possible risk of clawback or restrictions being imposed on them and how to mitigate against that risk – for example in respect of their furloughing of staff under the Coronavirus Job Retention Scheme. It is clear that the UK government is now looking at formalising some constraints at least in respect of some of its schemes. If you are concerned about how to protect your business and would like to be kept up to date as details of any restrictions emerge, please contact your usual Osborne Clarke contact or any of our experts below.