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.”
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 Pünder 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.
David Childs
Born: Woking, Surrey, June 28, 1951
Education: Sheffield University; University College, University of
London
Career: Joined Clifford Chance as a trainee, qualified in 1976 and has
been a partner since 1981. Specialised in corporate finance, particularly
public takeovers, merger and acquisitions, joint ventures and equity issues.
Global chief operating officer in 2003. Elected managing partner in 2006.
Family: Married, three children.
Other interests: reading, history, travel. Trustee of The Place2Be, the
children's charity. Menagerie including two dogs, two donkeys, chickens,
ducks and sheep.
The leader questioned
If you could change one thing in the financial and commercial environment,
what would it be?
In the UK, a government whose actions totally support the maintenance of
London’s position as one of the world’s leading financial centres
Who is or was your mentor?
My partner Michael Mockridge, who very sadly died two years ago
Does money motivate you?
A little — but only a little. Clifford Chance going from strength to strength
is what really motivates me
What is the most important event to happen in your working life?
Becoming managing partner of Clifford Chance in 2006
What gadget must you have?
My BlackBerry — difficult to imagine life without one now
What does leadership mean to you?
Responsibility
Which business person do you most admire?
Louis Camilleri, who I first met in the late Seventies when I was on
secondment to Philip Morris International in Switzerland and he joined as, I
think, assistant to the Treasurer. He proceeded to rise through the ranks
and eventually became chairman and chief executive of the parent company
Altria Group
How do you relax?
As soon as I reach the countryside in Kent, I start to unwind
China and India are the place to be. 90 million Briitains do not count in the global equation any more. When will Britain realize that it is no loinger is an important player in the world today. Britain has no resources to speak of and its educated classes are being matched by India and China.
Jim Wills, Brisbane, Australia
15 years of Labour and the only transport infrastructure project to be delivered is an extra lane on the M1 between junctions 6-10. We could offer business teriffic infrastructure if they hadn't been throwing our money away all these years.
James, Derby, United Kingdom
As a lawyer at a similar firm, trust me Mark, we pay our tax. I took home about 55% of my last paycheque.
The true reason why quality of life, transport & infrastructure are so poor is that socialists like Ken & Labour councils have presiding over years of waste & jobs for the lads for life.
Jake, London, UK
Its not a "company" its a partnership, and all partners and their employees pay UK tax. Mark, do your research instead of posting reactionary, ill-informed comments.
Ben Burger, London,
Quality of life, transport and infrastructure have all been negatives because companies like his don't want to contribute their fair share of tax to pay for those things.
Mark, London, England