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July 12

CREDO

Your regular Scottish Banking & Financial Services bulletin from Brodies LLP

Focus on...Taxation of funds Under the Scotland Act 2012, from April 2016 the UK rates of tax will each be reduced by 10% and the Scottish Government will be obliged to impose a Scottish rate of income tax which will apply to Scottish taxpayers. The Scottish rate of income tax could be more or less than 10% (or indeed equal to 10%). The tax arising from the Scottish rate of income tax will continue to be collected by HMRC and will be remitted to the Scottish Government, but the block grant from Westminster will be reduced (by a figure yet to be determined). The Scottish rate of income tax rate does not apply to savings income and dividend income, but it does apply to types of investment income like income from property. The administrative implications are significant, and HMRC has published a technical paper proposing various carve-outs where operating the Scottish rate of income tax would be too complex. In relation to funds it is proposed that:

▪ REITs will continue to deduct tax at the UK rates ▪ AIFs will not be affected, as the payments made to investors are dividends or interest in the case of bond funds and so are excluded from the definition of the Scottish rate of income tax ▪ PAIFs will continue to deduct tax at the UK basic rate ▪ For both REITs and PAIFs, the UK government proposes that Scottish taxpayers will pay tax at the UK rates on non-savings income from PAIFs and REITs, but is seeking comments from stakeholders on this position ▪ Where income is subject to a withholding of basic rate tax, this will be at the UK rate ▪ Other types of non-savings or dividend income may be affected Click here to see the HMRC technical paper, and for further information contact either alistair.campbell@brodies.com or isobel.dinverno@brodies.com.

Platform

Nick Scott Head of Property 0131 656 0234 nick.scott@brodies.com The Real Estate Finance Market has undergone seismic change in the past few years, and Scotland has not escaped unscathed. The reasons for this change are well understood. The current market faces significant challenges, not least: ▪ Continued de-leveraging of the real estate books of many parts of the banking sector ▪ The ongoing Eurozone crisis, which impacts on funding costs ▪ The adoption of FSA slotting models (which can mean an increased cost of capital being attributed to real estate lends) ▪ The recent valuation reductions promulgated by the economic climate, the Eurozone crisis and the lack of activity in many areas of the real estate market There are, however, local deals to be done and financed, and not only in the prime property sphere (where asset values seem high). The areas of activity we’ve seen cover all spectrums including: ▪ Low leverage financing to funds owning good quality and performing real estate assets ▪ Commercial real estate financing –

Hadrian’s Wall

Peter Kelly Banking Partner 0131 656 6259 peter.kelly@brodies.com

▪ ▪ ▪

financing is available for good management teams, for non-prime (but good quality assets). The key for financing is understanding and complying with set credit criteria Refinancing of current deals / deals completed recently which were purchased with cash / equity (where there is low leverage) Refinancing of distressed assets, where we’ve been supporting purchasers bidding for property-backed loan assets Smaller deals (even residential development) deals by experienced operators Development deals, for example hotel developments / office developments. Recently, we acted on the largest Scottish office development in Aberdeen which was bank financed (relying on strong pre-lets). We also acted for one of our banking clients in relation to the development of c.800-bedroom student residences at Stirling University

So bank financing can be available for the right deal and there is continuing interest from private equity firms in acquiring property related assets.

model over recent years as a successor to PFI which enables private sector profit from public infrastructure to be scrutinised and capped in a The Scottish Futures Trust has way that didn’t occur in the past. The model is currently published its annual benefit statement, which shows that it being assessed for the first time by major international saved the Scottish public sector £131m during the year contracting consortia in the Transport Scotland-sponsored to April 2012. A major M8 Improvements Project. contributor to this was the expansion of the Schools for He also contrasted the the Future programme to 67 operationally independent schools instead of 55. SFT, sitting outside the Scottish Government and not The chairman of SFT, Sir reliant on consultants, with Angus Grossart, a veteran merchant banker, highlighted the English equivalent, Infrastructure UK, which the development of the NPD

appears to be embedded within the UK Treasury framework. The Infrastructure UK proposals for a new PFI in England are expected to be announced in early autumn (and maybe even trailed before then) so that an English pipeline of projects can then be developed. Click on the links to see: ▪ the Scottish Government press release ▪ the SFT annual benefit statement ▪ an interview with Angus in The Herald newspaper.


Market Reports Brodies revenues up 16%: We are reporting a 16% increase in turnover to £42.8m and a 22% increase in operating profits for the year ended April 2012, following sustained investment in our business during the first year of a new threeyear cycle. Brodies remains the biggest law firm in Scotland. Given our results and mergers recently announced, the concept of there being a Big 4 of Scottish law firms is clearly history. Click here for further details.

Four new partner hires: Since April we’ve hired four new partners: Gill Grassie and Robert Buchan (Edinburgh) who are IP specialists, Eric Galbraith (Glasgow) who is an experienced corporate lawyer and Finlay Crossan (Aberdeen) an oil and gas expert.

Scotland Law Firm of the Year 2012: Who’s Who Legal Awards has named Brodies as Scotland’s leading firm on quality grounds following a six-month research process that canvassed the views of peers and clients. This is the third time we’ve received this accolade. Who’s Who Legal is the official research partner of the International Bar Association

Our 2011 Annual Review: The Brodies Annual Review 2011 has been published and made available to clients. It highlights the activities of the firm over a wide range of sectors and transactions, and clearly demonstrates the scale of our operations in Scotland and beyond. Click here if you’d like to share in our experiences through 2011.

Snapshot Michael Stoneham, Partner 0131 656 0061 michael.stoneham@brodies.com

Michael Stoneham joined Brodies a year ago as a banking partner with a focus on energy, infrastructure and housing finance. One key current mandate is to support the Scottish Government on financial innovation. Another key activity is extending the range of the firm’s infrastructure, energy and social/affordable housing capability. If you weren't a lawyer, what would you be? I would love to have been a great tennis player, with the grace of Laver or Rosewall, but I’ll have ended up simply showing the temper (but not the ability) of McEnroe or Nalbandian. So it would have to be an archaeologist, digging up and analysing evidence of past civilisations.

What is the best advice you have received in your legal career to date? Listen and look. Listen very carefully to what people are saying to you and try to interpret what they really mean or want, so that you can respond to their agenda and not impose your own; and look very carefully at wording in a document, work out what it actually states and whether it’s clear or ambiguous in its meaning. If you were given a wild card entry for the Glasgow Commonwealth Games 2014 which event would it be for and why? I’d pick a sport to keep me going for the next 20 years, to make the training worthwhile. So it would have to be bowls or darts.

Kilting Corner In RBS v Stuart Hill, the bank brought an action to discharge a demand for £23m received from Mr Hill, a Shetlander. One of his arguments was that the court had no jurisdiction as Shetland is not part of the United Kingdom. The judgment contains analysis of the legal position on this point since 1469, and concludes that Shetland was a part of Scotland in 1707 and so eventually became a part of the UK. Staying with the Shetland theme, in Shetland Line v Scottish Ministers, the losing bidder in a procurement process, held to re-award a contract for ferry services to the Northern Isles, challenged the decision made by Transport Scotland to accept a bid made by Serco. Procurement was held under the competitive dialogue procedure. Shetland Line contended that the winning bid did not in fact meet the requirements that had been specified by Transport Scotland whereas its did. The court rejected the action, holding that, at best, there was a weak prima facie case put forward, and that the public interest - maintaining the ferry service beyond the imminent expiry of the existing contract - justified subordination of the private interests of a disappointed bidder. The judgment contains an analysis of the competitive dialogue process in this case. Finally, an English court of appeal case concerning a Scottish company. In Enviroco v Farstad Supply it was held that, because the group parent Asco plc had granted a Scottish share pledge over the shares in Enviroco in favour of Bank of Scotland, with the bank becoming the registered shareholder, Enviroco was no longer a subsidiary of Asco plc. That meant that Enviroco was not an affiliate of Asco UK and could not claim on an indemnity given by Farstad in favour of Asco UK and its affiliates. This decision, which we believe is to be appealed, may have significant implications in the context of Scottish share securities. But it does not mean that the funder becomes the holding company of Enviroco. That seems to have been left an orphan by the judgment. Click here to read the judgment of the first case and click here to read the judgment of the second case. Contact bruce.stephen@brodies.com or julian.voge@brodies.com for guidance on the last case.

Credo is the Latin root of credit and trust which emphasises the underlying credibility of the borrower's promise to repay; the foundation stone of our financial system. If you have any comments or questions on the content of Credo please email michael.stoneham@brodies.com or your regular Brodies contact. To unsubscribe please click here.

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