TheChek News Flow

Government’s independent adviser finds companies are concerned about the tax implications of growing trend

Businesses need more clarity and simpler processes for the taxation of cross-border workers, the Office of Tax Simplification, an independent adviser to the UK government, has warned.

The OTS, which consulted more than 60 organisations, said most businesses were “strongly of the view” that being able to offer employees the ability to work from a different country was important for attracting and retaining staff but cited “concern” about the tax implications.

The cross-border working trend has been on the rise in recent years, with the study citing data from Airbnb that showed the accommodation site reported 20 per cent of all bookings in the first quarter this year were for a month or longer — double the number of the same period three years previously.

Yet the OTS found that take-up among the businesses surveyed was limited. Respondents typically reported between 2 and 5 per cent of staff worked from another country on a short-term basis, rising to up to 10 per cent for several large employers.

Allowing staff to work from overseas risks companies having to pay income tax and social security on behalf of employees in other jurisdictions, as well as the risk of triggering a corporation tax presence.

“The tax rules that govern cross border working have not kept up with the pace of change, and can be an incredibly challenging legal area for businesses to manage,” said Philip Swinburn, employment tax specialist at law firm Macfarlanes.

The OTS found that to prevent an overseas tax presence being triggered, employers typically permitted short-term overseas stays of not longer than 10 to 30 days per year. The report said the administration of registering for taxes in other countries was viewed as a “significant burden”, especially for partnerships.

“Multinationals are equipped to deal with these problems as they can use overseas subsidiaries to deal with the admin burden, but small and medium sized companies are facing the same requests and are having to entertain them to remain attractive to employees,” said Tim Stovold, head of tax at accounting firm Moore Kingston Smith.

The OTS report said international co-ordination — likely through the OECD — was needed to make cross-border working easier to facilitate and minimise the risk of double taxation.

However, it said the UK could take a lead in offering a streamlined approach. For hybrid workers coming to the UK, “there could be a simplification blanket policy where anything under a set period, possibly 60 days or less, spent working in the UK would not trigger tax, social security, or a permanent establishment”, the report said.

“This would reduce the administrative burden for employers and employees and was seen as beneficial if the government wished as a policy objective to encourage people to come to the UK for a period of time,” it added.

The report also suggested a number of ways that HM Revenue & Customs could make it simpler to deal with the payroll compliance when employees are working for short periods in the UK, along with proposals to reform the tax regime around working from home.

This is the last report from the OTS, which was set up in 2010, as it will be wound up at the end of the tax year after shortlived chancellor Kwasi Kwarteng announced its closure in his “mini” Budget in September.

The government said: “Tax simplification is a priority for this government, and we thank the Office of Tax Simplification for this report.”

Russia’s leader’s comments mark second admission this month that military operations could be protracted

Vladimir Putin has called the situation in Ukraine “extremely complicated” in an apparent attempt to prepare Russia’s population for a long-lasting war as his sputtering invasion nears the 10-month mark.

In an address to security officers on Tuesday, the Russian president admitted they faced difficulties in four regions of Ukraine partly occupied by Russian forces, saying working there was “hard.”

Putin annexed four regions of eastern and southern Ukraine in September in an attempt to secure Russia’s gains on the ground and deter western support for Kyiv.

But the gambit has backfired spectacularly as Ukraine’s counter-offensive, backed with supplies of advanced western weaponry, has retaken territory Putin claimed as Russian. Among the Ukrainian gains are the city of Kherson, the only regional capital Russia had captured during the invasion, which began in February.

“The people living there, the Russian citizens, rely on your protection. And it is your duty to ensure their security, rights and freedoms,” Putin said.

Putin’s comments marked the second time this month he has admitted the war in Ukraine — which he originally thought would be finished in less than a week — is set to go on for a long time.

Earlier in December, he told his human rights council the invasion could be a “long process”. However, he also celebrated the territorial gains from the annexation.

Putin appears to have little intention of climbing down from his maximalist goals — which essentially amount to destroying Ukraine in its current form — even as Russia struggles to gain ground, according to former senior Kremlin officials.

Russia has repeatedly said it is open to peace talks with Kyiv, but only on the condition that all of its demands are accepted.

The US and its European allies are continuing to back Ukraine, which has made the recovery of its lost territory a compulsory precondition for any talks.

“I would venture to say that things could be a heck of a lot less complicated for the Russians in Ukraine if they would just get the hell out, and just take their troops out of the country,” US National Security Council spokesman John Kirby said on Tuesday. “Short of that, which obviously doesn’t seem to be something that Mr Putin is willing to engage as an idea of simplifying issues in Ukraine, we’re going to continue to make sure we can support Ukraine’s effort to defend itself.” 

Putin also indicated Russia’s domestic crackdown on dissent and heightened preparations for possible threats would continue.

Russia has made “discrediting the armed forces” — essentially any unauthorised criticism of the war — illegal, while Putin declared martial law in the four annexed regions and raised alert levels in eight other provinces on the Ukrainian border.

“Places where citizens congregate, strategic sites, and transport and energy infrastructure should be under constant control,” Putin said on Tuesday.

“Counter-intelligence agencies, including military counter-intelligence, must be as prepared and as concentrated as possible,” Putin added. “The actions of western secret services must be clamped down on harshly. Traitors, spies, and saboteurs must be exposed in good time.”

MILAN — Francesco Ragazzi is all grown up — and so is his brainchild Palm Angels.

The brand has been logging a yearly high double-digit growth since 2017 and has several projects in the pipeline, including a fall 2023 show in Paris during fashion week; the expansion of its womenswear category; a product elevation; store openings in New York, Paris, Seoul, and Costa Mesa, California; the launch of a unisex fragrance produced in-house at the end of 2023 or early 2024, and the development of more accessories, knitwear and outerwear.

On top of that, in April Palm Angels will move into new headquarters in Milan, which founder and creative director Ragazzi sees as an additional metaphor of “growing up and leaving the home you shared with your parents.”

That would be the New Guards Group’s stately building in the city, which Palm Angels is giving up to move into a new palazzo in Via Broletto, opposite the Ferrari headquarters and on a floor above the Chanel offices — which is all fairly impressive given that the brand is only seven years old.

In an exclusive joint interview, Ragazzi, flanked by chief brand officer Stefano Robino, does not forget to credit those who believed in his vision, such as Davide De Giglio, cofounder of New Guards Group and who helped him “develop my creativity into a business.” Likewise Remo Ruffini, chairman and chief executive officer of Moncler, where Ragazzi worked for nine years, starting as an intern after graduating in fashion communication at Milan’s IED Istituto Europeo di Design school, rising to the role of artistic director. Ragazzi has also been a guest designer for the Moncler Genius project.

Asked about the relationship with New Guards Group, the Off-White licensee that in addition to Palm Angels includes Marcelo Burlon County of Milan, Heron Preston, Alanui and Kirin Peggy Gou, among others, Ragazzi described it as “a creative incubator, a platform that allows you the possibility to express yourself and provides production, logistics and finance, but then the brand walks on its own — just as parents would let their child do.”

Palm Angels is the second fastest-growing brand within the New Guards Group portfolio, said Robino, who declined to reveal company sales as per group policy.

While Ragazzi and De Giglio each had a 50 percent stake in Palm Angels, when New Guards Group was sold to Farfetch in 2019, each retained a 20 percent shareholding.

Day-to-day operations have not changed after the Farfetch deal, but Robino said Palm Angels has been moving away from a cross-functional to a more vertical and structured organization, with an injection of new human resources to support the expansion — including Zegna and Moncler alum Domenico Galluccio as marketing and communication director.

Ragazzi said that when he launched the brand, he and some of his peers introduced a new, “more direct” way to communicate with consumers, which was “less stiff, less institutional and freer” compared with the past. At the time, Palm Angels was “on a highway with no traffic” but, in time, “big luxury giants have learned how to be closer to the new generations and we are in competition with them — and they have much more financial resources.” For his part, he has turned his attention to increasing the quality of his products, with a more timeless look and elevated content.

“There are enormous opportunities, and the world is moving so quickly, that one must adapt accordingly,” said Robino. “The size of our company allows us to be agile.” He also pointed out that Made in Italy production and an “Italian mindset” contribute to offering the top quality they seek.

While Palm Angels was launched as a menswear brand, they have seen a growing interest from women buying into men’s apparel, so that a key goal is to develop the women’s business. Menswear represents 80 percent of sales. “We are aiming at increasing the women’s business to at least 35 percent in the next three to five years,” said Robino.

To highlight this category, Ragazzi, who has staged shows in Milan and New York before, has chosen to show in Paris during the next women’s fashion week — although there will also be some menswear looks, he said, while declining to provide details about the location and the exact date for the time being.

Ready to wear accounts for 90 percent of sales, but, based on growing interest in sneakers and women’s shoes, Ragazzi and Robino see strong potential in the footwear business. Sneakers currently account for 6 percent of total sales. Accessories — bags and leather goods — make up for the rest, but the objective is for shoes and accessories to grow and reach 30 percent of revenues, and for apparel to represent 70 percent. Jersey shirts and outerwear account for 50 percent of the business.

Despite the tragic consequences of the COVID-19 pandemic, Ragazzi admitted that the lockdowns propelled the brand’s digitally driven business, with strong consumer demand for sweatshirts and pants, T-shirts and easy and comfortable looks.

For the brand, which also has kids’ and eyewear collections, it is also a priority to respond to customers’ growing demand for outerwear and knitwear by expanding these categories. The collaborations with Moncler, Missoni and Vans have helped support this strategy.

Last summer, Palm Angels and Missoni launched a co-branded men’s and women’s collection that included tracksuits and zippered cardigans in signature Missoni patterns, and hoodies in solid tones decorated with waistbands or drawstrings in graphic motifs. Spray paint splatters peppered sweatshirts, oversize T-shirts and dresses. Angela Missoni and Ragazzi are part of an extended family as he is the nephew of Bruno Ragazzi, Missoni’s longtime partner.

The Vans Vault x Palm Angels collection of sneakers bowed last fall.

“When you collaborate with the best in class, you always learn something. It’s an advantage to work with leaders in a specific segment,” said Ragazzi.

“We collaborate with brands that have a history,” echoed Robino.

Most recently, as reported, Palm Angels inked a three-way collaboration with Tod’s and Moncler which was unveiled earlier this month for fall 2022.

The men’s and women’s collection hinges on two Tod’s signature shoes, reinterpreted by Palm Angels for Moncler Genius, with a dedicated communication campaign fronted by Naomi Campbell. The “Tod’s x 8 Moncler Palm Angels” project is part of Tod’s Factory, a creative laboratory launched in 2018.

Raising the lid on a box containing the Gommino loafers, Ragazzi still marveled at his brand — highly recognizable with its Gothic lettering — being inscribed alongside that of Tod’s and Moncler. “I grew up with these brands, I am humbled and proud of this,” he said.

Ragazzi started Palm Angels in 2011 as a photographic documentation of the skater culture in Los Angeles. The project became a photographic book, published by Rizzoli in 2014, and the fashion line was launched the following year.

Europe remains Palm Angels’ main market, accounting for 45 percent of sales, and the U.S. market follows, representing 25 percent of total revenues. “The perception is that this is an American brand because of its laid-back attitude — it’s a natural association,” said Ragazzi. “In any case, this is a super key market for us.”

To wit, the company opened two directly operated stores in the U.S. last year, in Miami in August and in Las Vegas in November, and a directly operated unit will open in New York at the end of May on Greene Street. Ragazzi highlighted its positioning, near Amiri, Loewe and Saint Laurent, among others.

In October, Palm Angels will open a directly operated store in South Coast Plaza in Costa Mesa. The designer will once again work with French architectural firm Gilles & Boissier, which conceived the Milan directly operated store for the brand that opened last year to convey “a strong retail identity.”

With the new additions, there will be six directly operated stores by the end of 2023.

Asia and the Rest of the World area (the Middle East and South East Asia) each account for 15 percent of sales.

“Our goal is for the U.S. to represent 30 percent of sales,” said Robino. Likewise, he is aiming for Europe to account for 30 percent, Asia for 35 percent and the Rest of the World for 5 percent.

The retail rollout will also include the opening of a franchised store in Seoul around March next year and the biggest unit for the brand in Paris on Rue Saint-Honoré, also in March. “It will cover almost 3,900 square feet over two floors,” said Ragazzi of the directly operated store in the French capital.

“Asia is still a young market for us and we see a strong appetite for the brand, so our goal is to further grow in Asia and in China in particular,” said Robino. A franchised store opened in Wuhan a month and a half ago. Palm Angels is present in Hong Kong, Bangkok and Hainan through franchised stores, which total seven globally.

Wholesale accounts for 80 percent of sales, franchised stores represent 15 percent and retail 5 percent of the total.

Robino said that the objective is to have a more balanced distribution, strengthening the retail channel and growing it to account for 30 percent of sales through the opening of stores in strategic cities and major resort destinations. The company currently has 350 wholesale accounts.

Asked about his dream project, Ragazzi said he would like to “make Palm Angels the brand of the future. After all, I grew up with the big established brands and they started somewhere, too.”

Serica Energy announces £644mn takeover of rival North Sea company owned by Swiss commodity group

Swiss oil trader Mercuria will become the largest shareholder in one of the UK’s top 10 gas producers after two North Sea companies agreed a £644mn takeover deal.

London-listed Serica Energy, which is responsible for 5 per cent of the gas produced in the UK, on Tuesday announced a takeover of Tailwind Energy Investments, a rival North Sea oil and gas group owned by the Swiss commodity group.

The takeover has been agreed despite fears that a rise in the UK windfall tax on fossil fuel producers in November would force oil and gas producers to focus their investments abroad.

Under the terms of the deal, which is valued at £644mn including debt, Serica will issue up to 111mn new shares to Mercuria and the directors of Tailwind Energy, who together own the privately held company.

Serica will also pay £58.7mn in cash upon completion of the deal, which is aimed for March if shareholders in the London-listed group approve the arrangement at a meeting in January. Serica will also take on Tailwind’s debt, which was £277mn at the end of November.

The arrangement will hand Mercuria a 25.2 per cent stake in Serica, dwarfing the shareholdings of other existing investors, who are currently led by retail investors David and Debbie Hardy. Two non-executive directors nominated by Mercuria will join the board of Serica once the deal closes.

The takeover will increase Serica’s exposure to oil prices. Currently more than 85 per cent of the company’s production is gas but this is expected to fall to 53 per cent. Tailwind’s assets include significant interests in the Triton area of oilfields in the UK North Sea.

Tailwind also has more than $2.5bn of tax losses, which could be used by the enlarged group in future to reduce its payments to the UK government.

Serica’s chief executive Mitch Flegg said the takeover achieved the company’s goal of “materially increasing” its scale and diversity in the UK North Sea but it could also potentially lead to expansion overseas.

“Through the introduction of Mercuria as a new strategic investor, we will be differentially positioned to take advantage of the opportunities we expect to arise through industry consolidation . . . and potentially overseas,” said Flegg.

However, analysts suggested some Serica shareholders might prefer bigger cash returns than a stake in a bigger company.

“Serica is a highly cash generative business and the question will be whether shareholders want greater near term returns, or support a larger, longer-term business with aspirations to do further deals potentially beyond the UK North Sea,” said Investec analyst Nathan Piper.

Shares in Serica Energy were down 7 per cent at mid-morning on Tuesday.

Tailwind was set up in 2016 among a wave of new oil and gas companies that aimed to buy unloved assets in UK and Norwegian waters from retreating energy majors and utilities, which were shrinking their portfolios following the oil price crash of 2014. Many of those newer oil and gas companies — which were often backed by private equity companies — are now looking for an exit.

Earlier this year, Siccar Point Energy, which was backed by private equity group Blackstone, was sold to Ithaca Energy. Italian energy major Eni has held early talks to buy Neptune Energy, founded in 2015 by former Centrica boss Sam Laidlaw, for as much as $6bn.

Oligarch owners of investment group LetterOne, which bought Upp last year, face a number of sanctions

The British government has ordered the sale of Upp, a regional broadband provider owned by oligarch-backed investment company LetterOne, citing concerns around national security.

LetterOne acquired Upp in 2021 as part of a £1bn plan to build a regional British broadband network to compete with BT that would have covered 1mn premises in eastern England by 2025.

Its owners, including Russian oligarchs Mikhail Fridman, Petr Aven and German Khan, have been put under sanctions in various jurisdictions.

Grant Shapps, secretary of state for business, energy and industrial strategy, on Monday said that LetterOne’s ownership of Upp represented a “risk to national security”.

Under the UK’s National Security and Investment Act that came into effect this year, Shapps ordered LetterOne to sell Upp within a specified period. The government has also told Upp to complete a security audit of its broadband network prior to sale.

LetterOne, which owns retailer Holland & Barrett, has been seeking to sever links to its founders to prevent sanctions against the company, including cutting its owners from decision making and freezing their shares and dividends.

LetterOne said it was disappointed by the decision. In a statement, it said that “L1 is not sanctioned and has taken fast, decisive action to put in place strong measures to distance L1 from its sanctioned shareholders. They have no role in L1, no access to premises, infrastructure, people and funds or benefits of any description.”

It added that Upp “already has processes in place that remove any perceived threat to national security”, with a UK leadership team and a governance model with only UK, US and EU personnel on the board of directors.

“We believe that L1 ownership of UPP is not a threat to national security in any way,” it said.

The deal was welcomed when it was first agreed by former prime minister and local MP Liz Truss, who said that “the £1bn investment and hundreds of jobs by Upp is great news”.

The National Security and Investment Act came into force on January 4 2022, and allows the UK government to review transactions up to five years after they are struck.

The law has only been used a few times this year, including to stop an IP licensing agreement between Beijing Infinite Vision Technology and the University of Manchester.

Most recently, the acquisition of Newport Wafer Fab by Chinese-owned semiconductor manufacturer was blocked, using the retroactive powers to review a transaction from before the start of NS&I Act.

The sale of Upp marks the first time that the act has been used in a deal involving sanctioned Russian individuals.

Unusual deals boosted growth but are now a risk to software maker

Palantir PLTR -7.97% Technologies Inc. helped fuel the SPAC boom with an unusual strategy. The data-analysis company invested more than $400 million in startups that simultaneously signed deals to buy Palantir’s software. Palantir got a surge of revenue growth that it trumpeted to investors.

The bets have backfired.

Palantir’s 20 startup investments, which include a flying-taxi company and numerous electric-vehicle startups, are down more than 80% on average. One has gone bankrupt and one has been delisted from the New York Stock Exchange. More than half are warning they may go bust.

Palantir, co-founded by Peter Thiel in 2003, has stopped doing such investments. Growth has slowed and its stock is down more than 60% this year.

The results make Palantir a high-profile casualty of the boom-turned-bust in special-purpose acquisition companies, which surged as an alternative public-listing technique the past few years. They are now dealing losses to a wide range of investors including venture capitalist Chamath Palihapitiya and BlackRock Inc.

“The market has turned and it is now clear that these investments were unsuccessful,” a Palantir spokeswoman said in a statement. “It was a bet on a group of early stage companies that, with the benefit of hindsight, we wish we did not make.”

Palantir’s approach is inviting particular criticism. It often made investments in companies then signed revenue contracts similar in size. Some deals called for the startups to pay Palantir back large chunks of the investment within days of receiving the money.

“It seems to be a pay-for-revenue strategy that’s not only not working but like there maybe should be some more regulation around this,” said Matt Simpson, managing partner at Wealthspring Capital and a SPAC investor who typically pulls money out before deals are completed. He said Palantir’s participation in some deals gave investors confidence to back the startups and could have contributed to others losing money.

Short sellers betting on Palantir shares to fall have made more than $1 billion in paper profits this year, according to data-analytics company S3 Partners.

The company’s activity took off in early 2021, when it began writing checks to companies merging with SPACs as part of private investments in public equity, or PIPEs, associated with the deals. The idea for a startup is to raise more money from professional investors to add to the cash held by the SPAC so it can grow the business as a public company.

Palantir had a typical game plan for its SPAC portfolio. It agreed to invest between $10 million and $40 million. In turn, the startup committed to a multiyear contract of a similar or higher dollar value. The arrangement gave Palantir more than $700 million in total contracts.

Those signing up included Lilium NV, a flying taxi company with no revenue that was at least three years away from starting production. Palantir invested $41 million in Lilium and Lilium signed a five-year contract that paid Palantir $50 million. In another deal, online grocery-delivery company Boxed Inc. received $20 million and signed a five-year, $20 million contract. Days after receiving Palantir’s money, Boxed paid $15 million to Palantir as part of the contract, securities filings show.

A contractor for the U.S. government as well as companies like Airbus SE and United Airlines Holdings Inc., Palantir often charges tens of millions of dollars a year to provide software that aims to sort through pools of data and organize it for the businesses.

Palantir has said the SPAC investment effort was part of an attempt to bet on fledgling companies that could become big customers in the future. At the time, Palantir was awash in cash, holding more than $2 billion at the end of 2020—an amount that has since grown to more than $2.4 billion.

“These are folks that are focused on winning,” Palantir Chief Operating Officer Shyam Sankar said on a May 2021 earnings call.

Many companies invest in startups that are also customers, but it is unusual for that arrangement to play out on such a large scale in publicly traded firms, analysts say. Palantir’s contracts represented a large expense for most of the companies it backed, RBC Capital Markets analysts estimate.

“If Palantir’s software is so good, then I don’t know why you have to pay customers to use it,” said Rishi Jaluria, a managing director at the firm.

While the contracts were a tiny amount of Palantir’s $1.5 billion in revenue last year, they were a large chunk of the company’s revenue growth, a particularly important figure for investors. Strong revenue growth helped push Palantir’s market value above $50 billion in 2021, when the SPAC deals were at their peak, analysts said.

The deals represented at least a quarter of the $925 million in contracts signed in the second quarter of 2021, filings show. RBC estimates the contracts signed in 2021 now bring in roughly $30 million a quarter and early this year represented roughly one-third of the company’s revenue growth. The figure is expected to drop if more startups file for bankruptcy.

The arrangement failed for both sides for companies like digital-manufacturing firm Fast Radius Inc., which reached a SPAC deal that valued it at as much as about $1.4 billion last summer.

Palantir agreed to invest $20 million in the company, and at the same time, Fast Radius agreed to a six-year, $45 million contract.

That expense represented a substantial chunk of the roughly $100 million in cash that Chicago-based Fast Radius got from the merger when it closed in February. That sum was much smaller than expected after most SPAC investors pulled their money out before the deal.

As part of the deal, Fast Radius paid Palantir about $10 million, a large up-front payment.

The stock crashed. By early November, Fast Radius had filed for bankruptcy protection. Palantir was listed as its largest unsecured creditor that is owed $2.9 million in the bankruptcy filing. Its $20 million investment is now essentially worthless.

Fast Radius recently said it would be acquired by a technology company for about $16 million after a bankruptcy sale process.

At least 11 companies backed by Palantir have issued notices to investors saying they had “substantial doubt” about their ability to survive another year without raising more money.

Those include electric-vehicle-data company Wejo Group Ltd. , electric-car startup Faraday Future Intelligent Electric Inc. and scooter firm Bird Global Inc.

RBC’s analysis shows that many of the companies have months left of cash.

“A lot of these are not good-quality businesses,” Mr. Jaluria said.