With many people unable to travel as freely as they used to due to Covid, how can you avoid the risk of companies becoming resident or losing residency when they do not want to? Guidance released by HMRC says that they do not necessarily consider a company resident if, due to exceptional and temporary circumstances, they are temporarily forced to conduct the management of business in the UK. A holistic view is taken to decide whether or not the changes are justified before the company would gain or lose resident status. Updated guidance issued by the OECD on 21 January 2021 on the establishment of a permanent establishment is equally supportive (although the application of a double tax agreement is not considered further here). However where tax planning is involved, it may be best not to rely too heavily on a sympathetic view.
"...There is in addition, the question of the usurper who bypasses the board to control the company..."
For UK tax purposes, where a company is not incorporated in the UK, it is resident in the place where its central management and control takes place. This means the place where the directors meet, transact their business and exercise their powers. It is not resident in the offshore jurisdiction where it is incorporated or where its controlling shareholder resides (unless that shareholder usurps the functions of its board).
In practice that means for a company to remain non-resident, the majority of directors should be resident offshore, board meetings must happen outside the UK and significant decisions must be taken outside the UK. Take for example a board meeting that happens by phone or video conference, where some directors dial in from the UK and some from, say the Isle of Man, that meeting will be held partly in the UK and partly in the Isle of Man. It doesn’t matter that the majority of the directors are in the Isle of Man. The solution is for all of the directors to physically be outside the UK and in the country of residence when they meet. Meticulous and contemporaneous records executed and kept in the place of residence and a constitution that does not conflict with and ideally enforces the company’s preferred residence will be critical.
So it is reasonable to expect that a company that is not incorporated in the UK, has a majority of directors who are non-UK resident, whose board meetings are held outside the UK and makes all of its key decisions outside the UK will be non-resident for UK tax purposes. Not necessarily so. There is in addition, the question of the usurper who bypasses the board to control the company. Where this happens the company is resident where the usurper exercises that power. When considering usurpers, the mind jumps to the controlling shareholder, but an adviser who calls the shots may be a usurper too. Does the Board always take the advice of its lawyer or accountant or parent company because that advice is always sound or is it automatically complying and surrendering its control?
This line can be exceedingly difficult to judge, particularly where an offshore company is wholly owned by a UK parent company and where the offshore company has been set up to fulfil a specific and limited function. The recent decision of the Court of Appeal in HMRC v Development Securities [2020] EWCA Civ 1705 shows that even where the majority of directors are non-resident and all of the board meetings are held outside the UK, if the real decisions of the company are being made by a UK-resident parent company, and the board undertakes a mechanistic process to ensure that they are legally implemented, then the company will be UK. In that case, the parent company crossed the line between influence and strategic and policy direction to giving instruction.
But how do you tell who the “true directors” are? The Court placed heavy reliance on the minutes of board meetings to ensure that the decisions made by the board were well-examined and well-thought out. The key question was whether the board asked not just if they could take a course of action, legally, but if they should. Had they demonstrated that they were actively engaged in the decision making rather than being at the service of a higher power that was UK resident?
This is an area where certainty is hard to find; there are many factors to consider and many scenarios where the lines blur. Sometimes what starts as good practice drifts with time, delegation, change and cost. Sometimes in an effort to ensure residence a mechanistic approach that allows no real control is deployed. In either case an assumption that is the corner stone of complex and critical tax planning tumbles down. Jurisdictions are keen to secure and protect their revenues; the UK is no different. It is likely that this is a factor that will receive considerable attention and adverse conclusion can be expected to be drawn from a lack of evidence. A regular review of a company’s residence and careful consideration is a very reasonable but often overlooked form of assurance. We regularly prepare “domicile packs” and “domicile statements” for individuals, doesn’t it make sense for a company to do the same?