We’re seeing an increasing number of start-up companies engage in a ‘US Flip’. Essentially, it’s a corporate restructuring to transfer ownership to the US (see below for more details), the idea being to access more investment from the US market. It’s typically done by companies who are looking to grow their business to the next stage of their journey, and by those that have an existing US base and investors (such as software companies).
What is a US flip?
It’s a corporate restructuring which involves the creation of a US incorporated entity. The ownership of the UK business is transferred to that new US company, so the UK company becomes a subsidiary of the US parent company. The shareholders of the original UK company receive shares in the new US parent company in exchange for their original shareholding in the UK company.
This is frequently a change in ownership only: a US flip doesn’t necessarily mean a transfer of operations to the US. We often find, in fact, that businesses remain in the UK and simply have a US parent company for investment opportunities.
Why do it?
- Access to US investors. This is often the driver for a US flip. US investors and VC funds are, of course, open to investing in early-stage UK companies, but there can be some reluctance. Some US investors may even require their investment to be made in a US entity as part of the deal. Additionally, we find that US markets are often able to raise capital for funding rounds quicker and easier than in the UK.
- Possible sale to a US acquirer. Having a US holding company may make the business more attractive to potential US buyers. IPOs on US-based stock exchanges, rather than a UK one, are also becoming more popular and having a US holding company can make this easier.
- Increased international sales. Some UK businesses have their main customer base in the US. Simply having a presence there can boost sales and add marketing credibility
- Future move of operations. If a business plans to move to the US in the future, establishing a presence now can make it easier to transition the operations of the business to the US.
While these are all potential benefits, they may not be right for all businesses. Similar benefits could be achieved through, for instance, setting up a US subsidiary of the UK company – so it depends on what the business wants to achieve.
The tax considerations
The UK tax implications of a US flip vary depending on the purpose of the transaction and the existing investors. However, from our experience, the common groups of people affected by a US flip are as follows:
- Shareholders: it is possible to carry out a US flip tax-neutrally from the shareholders’ perspective, so long as the shareholdings before and after the transaction are the same (or they hold the same proportional interest). Complications can arise when other investors holding convertible securities (eg convertible loan notes and SAFE instruments) wish to convert these investments as part of the US flip. Careful planning is required to ensure the transaction can be undertaken tax-neutrally.
- Seed investors: individuals who have acquired shares via Seed Enterprise Investment Scheme (SEIS) and/or Enterprise Investment Scheme (EIS) may lose valuable tax reliefs on a US flip depending on how the transaction is structured.
- Employees: a US flip can result in adverse tax consequences for employees, especially where they are holding share options from an approved scheme such as Enterprise Management Incentive (EMI) options. Again, it is possible to preserve UK tax benefits in certain circumstances, but the US flip must be structured correctly to avoid adverse tax implications.
- The company: there may also be direct tax consequences for the company, especially if it is transferring operations and/or assets to the US. For instance, R&D tax credits may be lost where business operations move abroad. There would also be transfer pricing implications to consider.
What else to consider
- Cost: although a US flip can be achieved without any tax cost, there will be professional costs (legal and accountancy fees) associated with the transaction.
- Extra complication/admin: having a US holding company can make your day-to-day affairs more complex, especially if you elect to trade via the holding company. There will also likely be filing obligations for US accounts/tax purposes, albeit this will be subject to the activities of the holding company and state of registration. Delaware is often a popular location for incorporation due to its corporate tax/filing laws (indeed, you might hear reference to a Delaware flip as well as a US flip)
How can CT help?
We have experience with helping UK companies plan for and implement a US flip whilst minimising any UK tax exposure for shareholders and other stakeholders. Usually, this involves a 3-stage approach:
- Assess the UK tax risks: firstly, we would identify the UK tax risk to your company and its shareholders (and other stakeholders) to establish how the US flip can be structured without incurring immediate tax charges – this may involve many different options or there can be one preferred route. If a US flip is being carried out in tandem with a funding raise, this can add further complications and obtaining UK tax advice from the outset is crucial.
- Seek HMRC approval: once the preferred process to carry out the US flip has been established, we would recommend writing to HMRC in order to seek approval of the transaction. HMRC clearance will provide shareholders with comfort that the UK tax authorities are satisfied that the transaction is being carried on for a “bona fide commercial reason”. We have found that investors will not proceed with a US flip without such clearances.
- Implementation and completion: following the receipt of HMRC clearance, we would work with your legal advisers to ensure the paperwork for the transaction is correct for UK tax purposes and ensure all filings are made to HMRC before and after completion of the flip.
If you have questions about a US flip, please get in touch with your usual CT contact or the team via personaltax@ct.me.
