Why Britain could lose out in a global game of chance
June, 02nd 2008
The managing partner of Clifford Chance believes that government plans to amend the tax on business could backfire
As warnings go, it is as chilling as it is, perhaps, predictable. Increase the tax burden at your peril, Britain, because you will pay a high price if you get it wrong.
Moreover, David Childs knows what he is talking about. The global managing partner of Clifford Chance presides over a London-based worldwide law firm - and his clients are looking anew at their relationship with London and Britain as an international financial centre.
Put bluntly, they are thinking of upping sticks and moving. The sudden changes to taxation of non-domiciled UK residents caused some disquiet; capital gains tax upheavals lifted that to real unease; and the latest proposals to taxation of companies' overseas earnings is threatening to turn chatter into change.
The worry is people can move quite easily. Setting aside Northern Rock and financial regulatory issues, you have to remember that what made London international was its timezone. There are a number of factors for deciding on having a headquarters here and one of those is tax. We have known for a while that quality of life, transport and infrastructure have all been negatives. In the past we have not worried about tax systems being a disincentive. Now the real worry is that government may make tax a disincentive. Related Links
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Why is Mr Childs so concerned? Clifford Chance is the world's largest law firm, it was the first to break the 1 billion mark for annual turnover two years ago and if it wants to retain that pre-eminence and double turnover during the next decade, then it is Mr Childs's job to prepare for his clients' changing aspirations.
We know that a number of UK multinationals are thinking of leaving the country - moving their headquarters out with their tax base, he said. Often they go hand in hand.
Well, not quite, or at least not yet: so far only United Business Media, the publisher, and Shire, Britain's third-largest drugs company, have acted on their promise to move their tax domicile from the UK to the Republic of Ireland, but neither has moved its headquarters outside Britain. Other businesses, including Aberdeen Asset Management, the fund manager, and WPP, the world's second-largest media and advertising group, have said that they are considering moving their tax domicile outside the UK.
Moving headquarters overseas would be much more serious. Such a move would have a far greater effect on the jobs market and the wider economy, not to mention the country's corporate tax take.
Last week Michael Geoghegan, group chief executive of HSBC, said that his bank kept a regular review on where it should be headquartered. Did that mean that Europe's largest financial services company would move its global headquarters from Canary Wharf to Hong Kong? The bank is building giant new offices in Shanghai. The City speculated widely, if gloomily.
Mr Childs declines to name which of his firm's clients are thinking of moving HQ from London, but the switching focus of international finance from West to East is forcing Clifford Chance to re-evaluate the long-term centrality of London for its legal partnership.
People who think of moving resources to London will think again, he said. What you don't see is those people who chose not to move to the UK who otherwise would have done. I think the warnings given by the CBI, by Richard Lambert [its Director-General], are right. Tax is becoming a bigger issue. People are in the UK notwithstanding the poor infrastructure.
Clifford Chance is not considering moving its headquarters out of London, Mr Childs points out. The location of the firm's headquarters has no impact on the rules governing taxation of his partners' earnings. This neutrality on the firm's tax position means that Clifford Chance will resource itself according to where the work is emanating from.
At present, notwithstanding the credit crunch, London is still in growth mode for legal work, albeit at a slower pace that three months ago, and the legal market in the United States is simply too vast for any firm with global aspirations not to have a large foothold. But the focus is switching. The fastest growth in the industry is coming from China, where foreign law firms can operate but only practising overseas law, and India, where overseas law firms cannot even set up shop - yet.
If I could wave my magic wand, in three to five years I would want to have three hubs and, if I could do it, with three headquarters: London, New York and Shanghai. There are reasons for that. The US is always going to be important to us. London remains important to us - if our politicians do not throw away its current advantages - and there is no doubt Asia will be very important to us.
Clifford Chance derives about 40 per cent of it turnover from London, 14 per cent from the United States, 8 per cent from Asia and the vast bulk of the rest from its continental European offices. In four years' time, Asia will certainly become very important to us, particularly when we are in India - and there is no doubt we will be in India.
The Bar Council of India has maintained its opposition to foreign law firms opening local offices even for the practice of overseas law, but proposals before parliament and pressure from the business community make it unlikely that the status quo will remain for long. Even so, the restrictions have not prevented Clifford Chance from building its own business support operation in Bombay. Opened in September last year, the operation employs 110 staff maintaining IT support and accounting work for all the firm's offices from New York to Tokyo. By April of next year, that number will be 300, or 10 per cent of our support staff worldwide, Mr Childs said.
Clifford Chance employs about 3,800 lawyers and 3,300 support staff. More than half the partners work outside London. Turnover for the latest financial year to April 30 rose 11 per cent to 1.32 billion, triggering a rise in average profits per partner of 13 per cent to 1.15 million.
Reaching that milestone was the result of more than a decade of planning and preparation for what the firm's increasingly international-looking corporate and banking clients wanted. Ten years ago Mr Childs, then head of the London corporate team, and other divisional heads concluded that the firm needed to move from giving European legal advice to international legal advice. At the time the firm's annual turnover was just over 300 million.
The partners at the time talked of the internationalisation of business and in 1998 embarked on a programme of rapid expansion, beginning with a manifesto pamphlet, Vision for the Future. It included the observation that our main competitors will be a small number of truly global law firms as the legal business became one of the last industries to globalise.
On January 1, 2000, Clifford Chance pulled off simultaneous mergers with Rogers & Wells in the US and Pnder in Germany to create the first large international law firm. One year later the partners decided to move their headquarters from the City to Canary Wharf, the first such move by any large British law firm out of the City to the docklands.
Five years on and Mr Childs is still trying to listen to what his clients will want next. Last year more Clifford Chance partners than ever moved from London to Dubai and Shanghai. A new office has just opened in Saudi Arabia. How many more staff move overseas or how quickly Shanghai expands to be on a par with London or New York is likely to depend as much on the Government's approach to taxation as the speed of growth in the Asian economies.
For the time being, Clifford Chance is responding to clients' global needs by having prepared a centralised system of billing that allows an up-to-date consolidated bill record from all the firm's offices for any single client at the push of a button, Mr Childs said. The firm is also flexible about how it bills offering everything from traditional charging by the hour for time spent on work - by far the most popular way of being billed - to fixed fees with allowances for performance or so-called bought discounts, under which clients are offered cheaper rates dependent on the range of work that they outsource to one law firm.
Now that billing can be calculated worldwide for work done for a client often located in another jurisdiction, it matters less where lawyers are, in fact, based. If that means making Shanghai the focus of his firm's next expansion, then Mr Childs simply will be responding to a move by British and overseas companies to look for the best business opportunities and talent outside London. Clifford Chance will simply do the sensible thing and follow the work.
It is the kind of logic that may make the Government think hard about its proposed changes to the tax regime.