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  • Overview

    Article first published in Real Business in May 2014.

    On 21 April 2014, BIS published a paper resolving to create a public register of beneficial owners of companies incorporated in the UK.

    All UK companies are already required to file an annual return which lists the legal owners of shares in the company. However, those shareholders may not be the beneficial owners of the shares, as they may be holding the shares on behalf of other another person or persons.

    Vince Cable melodramatically claimed the creation of this public register of beneficial owners would tackle “the darker side of capitalism and the smoke and mirrors which have existed for too long”. He believes that the requirement to disclose the ultimate owners of UK companies will make it more difficult for companies and individuals to evade tax or funnel corrupt funds.

    As a Partner in a solicitors’ firm in Tunbridge Wells, I have acted for a large number of corporate clients where there are completely legitimate reasons to separate legal and beneficial ownership.

    For example:

    • the trustees of a family trust may hold shares in the family company (so the beneficial owners will be the members of the family);
    • the personal representatives of a deceased shareholder may be registered as the holders of shares, even though the capital and income deriving from the shares will be distributed to the beneficiaries under the deceased shareholder’s estate;
    • the company may be part of an international group structure, where other companies further up the chain in the group are incorporated in jurisdictions where it is customary for agents to hold shares on behalf of beneficial owners (such as in the BVI or Channel Islands);
    • individuals in the public eye (such a politicians and celebrities) may not want their involvement in a company to be public knowledge (maybe trying to allow the company a degree of privacy which the individuals themselves can no longer enjoy).

    Whilst there may well be a very small minority of individuals or companies who hide their beneficial identity for slightly shady purposes, my suspicion is that there are perfectly innocent reasons for the vast majority of circumstances where legal and beneficial ownership are not identical.

    But since when has the government considered proportionality in its crusade for rafts of anti-avoidance legislation?

    As a result, in addition to the standard register of members, all companies will have to maintain a separate register of beneficial owners.

    The test for who constitutes a beneficial owner will be based on the same test used in the existing anti-money laundering (AML) legislation.

    At its most basic, it should include any person who holds 25% of the shares or voting rights in a company, or someone who otherwise exercises control over the company and its management.

    This apparently simple definition throws up all sorts of complexities when you dig a little deeper. There are pages and pages of guidance issued by various regulatory bodies seeking to assist their respective professions in the implementation of the AML legislation. It is difficult enough for us regulated professional firms to get to grips with the various beneficial ownership tests, so I sympathise with the small to medium sized companies which now have to struggle with the same concepts.

    Take the example of a small private company with five shareholders each holding 20% of the shares. None of them hold more than 25% each, so on the face of it, the company does not have any beneficial owners to include on the register, unless any one or more of them can be said to individually control the management of the company. In a perfect democracy at board level, none of them would satisfy this test either.

    But let’s say two of them are brothers, which means that, under the AML legislation, their shareholding interests are merged and quite by accident the two of them will be counted as beneficial owners of the company and the other three will not.

    What about trustees who hold more than 25% of the shares in a company? The “beneficial owners” of a trust, according to the AML legislation, are the individuals with a specific interest in at least 25% of the trust capital, a class of persons to benefit from the trust and/or the individuals who control the trust.

    By way of example, the beneficial owners of an individual’s will settlement, with a life interest for his wife and the remainder interest for his children and grandchildren, will be the wife and each of his children and grandchildren, as well as the trustees of the settlement.

    Will the introduction of this register of beneficial ownership achieve its purpose? I do not think so.

    In order to succeed, the concept of disclosure of beneficial ownership will have to be embraced and implemented by foreign jurisdictions. Otherwise, anyone seeking to hide behind an opaque corporate identity will simply incorporate his company in a more privacy-friendly jurisdiction. This has been the case for decades. The UK government is being extremely optimistic if it thinks the authorities in the BVI, Channel Islands, Delaware and other “tax havens” will voluntarily relinquish the reason why so many businesses incorporate there.

    It is all very noble trying to lead the fight against tax evasion and funnelling corrupt funds, but a leader should never jump before ensuring that others will follow.

    When measured against the considerable administrative burden which will be imposed on UK companies by the introduction of a register of beneficial owners, I cannot escape the feeling that UK government has shot itself (or, more specifically, its business community) in the foot.

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