Ringfencing

[edit] General

Ringfencing or 'to ringfence' may refer to financing, governance, tax, or in construction and in general it may mean to protect an asset (often financial) by some means. Philosophically it is an idea which might put certain things inside or outside of a logical boundary and thus it can also be applied to a number of other fields such as software development, design, value engineering processes and so on.

[edit] Financing

In financial governance ringfencing can refer to how a regulated organisation might financially separate itself from a parent company (or vice versa) because one or the other engages in non or less regulated business. It may be that although the organisation operates as a single entity, a portion of the organisation (or its assets) or are none the less formally, legally and financially separated. For instance this might be a legal and capital separation between a project and its investors by way of an ad hoc project company aiming to separate cash flow and project assets from other activities.

In 2012 the UK Independent Commission on Banking (ICB) recommended ringfencing as an alternative to total separation of banks, that is between highstreet public banking and the banking investment industry. Sir John Vickers, who chaired the Commission told MPs and peers: "I believe the ringfence will work. With the legal and other safeguards it will work, including on the cultural aspect," when referencing the parliamentary commission on banking standards.

[edit] Tax

From a tax perspective it has quite a specific meaning, in that setting-up a 'ringfence' is to employ a method of tax avoidance which often involves offshoring certain assets. The tax savings arising from ringfencing often relate to an offset between the tax liable from income and tax liable from capital assets.

Ring Fence Corporation Tax (RFCT) is calculated in the same way as Corporation Tax, but with the addition of a ‘ring fence’ that treats certain activities as a separate trade. Specifically in the UK the ringfence prevents taxable profits from oil and gas extraction being reduced by losses from other activities or by excessive interest payments. RFCT and the supplementary charge only apply to companies involved in the exploration for, and production of, oil and gas in the UK and on the UK Continental Shelf (UKCS).

[edit] Development

In land and property development there might be a difference between paying tax on a property-by-property basis or on a portfolio basis. On a portfolio basis, the expenses of one property can be offset against income from other properties, thus the ability to release ring-fenced losses on the taxable sale of a property is restricted. On a property-by-property basis the same does not apply with expenses, however, if a land sale becomes taxable (due to sale within a certain time-frame) the ring-fenced losses for that property can be released and offset against other taxable income of the owner.

The term has also been used as part of the Common Agricultural Policy (CAP) of the EU for some time. Here ring-fencing is a way to ensure that member states jointly devote a similar portion of their CAP budget to support farm investments and agricultural practices to deliver environmental development benefits. The environmental ring-fencing in the CAP has been 30%, the use of which has included direct greening payments to farmers and several types of rural development interventions, such as the organic farming and agri-environment-climate schemes.

[edit] Construction

Due to the size and risks involved in construction projects it is not uncommon for consultants to set up an entity for the sole purpose of a development, this may be known as a Special Purpose Vehicle (SPV) and can help reduce (or at least allocate) the financial risks that may arise. This is a form of ringfencing which provides opportunities for companies to limit their exposure to the individual asset or project. Likewise because of issues relating risk and insurance over longer period it has been known for companies or practices to register a new company on a yearly basis as a form of protection or ringfencing from issues that might arise from previous years of trading.

On the smaller more practical level, although ringfencing is not a formal design and construction term per se, it might be used in a project to describe elements that should be protected from any value engineering or cost saving exercises. These items might be considered as fundamental to the performance or functioning of a building or to meet the building regulations, such as numbers of opening windows, levels of insulation or lighting etc.

Funds may also be rignfenced. For example funding allocated to a project or other activity might be separated from other funds to ensure that it remains available for its intended purposes and cannot be spent on anything else.

[edit] Related articles on Designing Buildings

• Business model.
• Company acquisitions in construction.
• Consortium.
• Construction loan.
• Construction organisation design.
• Construction organisations and strategy.
• Joint venture.
• Leaseback.
• Midland Expressway Ltd v Carillion Construction Ltd & Others.
• Partnering and joint ventures.
• Partnership.
• Special purpose vehicles SPV for building development.
• Types of construction organisations.