Out-Law Guide | 29 Feb 2016 | 5:16 pm | 10 min. read
This guide was last updated in August 2017
Liability for UK corporation tax
A company is liable for UK corporation tax on its worldwide income and gains if it is resident in the UK for tax purposes. A non-UK tax resident company may still be liable for UK corporation tax if it is trading in the UK through a UK permanent establishment, such as a branch or agency. In this case the non-UK resident company would be liable for UK tax on the worldwide income and gains related to that permanent establishment.
A non-UK tax resident company that is not trading in the UK through a permanent establishment is liable for UK tax on some UK source income, including rental income. Most other UK income is taxable only to the extent that UK tax is withheld at source, such as on certain interest payments.
If a company claims to be resident offshore for tax purposes when it is not, not only will the company be liable for UK tax on profits and gains, together with any interest and penalties, but HM Revenue and Customs (HMRC) have in some cases argued that the directors, and potentially the investors, are fraudulently avoiding tax, which is a criminal offence.
There are a number of factors and tests that determine whether a company is resident offshore for tax purposes or not.
Central management and control test
Broadly, a company is UK tax resident if it is either incorporated in the UK or, despite being non-UK incorporated, the business of the company is centrally managed and controlled in the UK. The concept of central management and control has been developed by case law and involves considering the location where the highest level of decision-making in the company takes place.
Where a company is considered to be UK tax resident under either of the above tests but is also resident in another jurisdiction by virtue of the terms of a tax treaty with that jurisdiction, the terms of any residence tie-breaker clause in the tax treaty must be considered. This is known as the Treaty Override Rule. This note does not consider the Treaty Override Rule further and focuses on the central management and control test.
The central management and control test is based on the facts and substance of how a company is managed and HMRC will consider all records, correspondence and surrounding facts and circumstances when reaching a decision.
What constitutes the central management and control of a company's business?
Central management and control is not the same as the day-to-day management of the business. Ordinarily, the place where a company is centrally managed and controlled will be the location where the final decisions that bind the company are made. It will be the place where matters of general policy and strategy for the company are made.
Such matters would include:
Who exercises that central management and control?
Generally the constitution of a company will identify who has the authority to manage the business of the company. Normally, a company's constitution will give the directors the authority to control the company's business.
However, any fettering of the directors' discretion in favour of the shareholders may suggest that shareholders control the company and, therefore, that their location could dictate where the company is deemed to be centrally managed and controlled. Indeed, if central management and control of a company is exercised outside board meetings by other parties, or at other times and places, the locations of these events may also determine the tax residence of the company.
The directors can delegate administrative or other day-to-day tasks associated with running the business without being at risk of relinquishing central management and control of the company. However, any delegated functions should be subject to adequate supervision and review by the directors.
In practice if a company is unable to find appropriate non-UK resident individuals to act as directors it may procure the use of overseas professional directors to maintain non-UK tax residency. Of course, this would have cost implications for the company. The courts have held that a company can be centrally managed and controlled by professional directors where those directors properly considered their decisions and took advice where appropriate.
Where is that central management and control exercised?
If a company is considered to be controlled by its directors, the place where the central management and control of a company is exercised will often be the place where directors meet to manage the company's business. Generally, this is the place where board meetings are conducted.
However, the place where directors meet is only relevant if those meetings are how central management and control is factually exercised, so only if the people taking those decisions taken at those meetings can cause those decisions to be put into effect. It is essential that the directors have authority and make independent and informed decisions concerning the central business policy of the company.
For example, if the highest level of control rests with a particular chairman or managing director and the board simply 'rubber stamps' the decisions of that individual, the central management and control of the company will be the place where the individual or group usurps the position of the board and exercises control of the company.
Case law differentiates between situations where the decisions of the directors are usurped or dictated by a third party and alternatively, where the directors retain central management and control irrespective of the fact that a third party may influence their decisions, or may desire a certain outcome. Where a third party, such as a professional adviser, is merely exercising influence over the directors without controlling the directors, the location of central management and control should remain the place where the directors exercise their control.
How much direction can the shareholders give?
The shareholders of the company may retain the right to dismiss the directors in certain circumstances. However, it will be important that the directors are seen to exercise control of the company. It is accepted that shareholders will have plans for what they want the company to do and that the directors are ordinarily willing to go along with their shareholders' wishes.
However, there is a very fine dividing line between the board acting on the proposals and recommendations of the shareholders but still exercising their authority as directors, and the board being directed by the shareholders in a way which, in reality, means that the shareholders are usurping the function of the board and removing the authority of the board.
If the board simply rubber stamps shareholder decisions, the board will not be regarded as exercising central management and control of the company; rather, the company will be tax resident where the control is in fact exercised, which is likely to be where the shareholders are located.
Particular care should be taken where an offshore company is brought into existence as part of a tax planning scheme and the transactions it undertakes are uncommercial. In July 2017 the first tier tax tribunal decided that although the directors of Jersey companies had approved transactions at board meetings in Jersey and taken company law advice, it was the UK parent company which decided to undertake the planning and engaged the board to perform these specific actions, and was in effect exercising central management and control of the Jersey companies.
How to ensure that a company remains resident offshore
All of the company's board meetings should be held outside the UK and usually in the place where management wants the company to be resident, the offshore jurisdiction.
Preferably, the company's articles of association should prohibit board meetings from being held in the UK and should prohibit directors voting whilst physically in the UK. This would enable the company to demonstrate that it is not legally possible for it to be managed from the UK. If this is not practicable, special care should be taken to show that participants from the UK do not dominate the decision-making process.
Holding physical board meetings in a specific place in the offshore jurisdiction would provide useful evidence to demonstrate that central management and control is exercised in the offshore jurisdiction. It is easier to demonstrate that central control and management is not conducted in the UK if there is a clearly identifiable place outside the UK where management is conducted.
Board meetings should be held at regular intervals, and at least on a quarterly basis, in the offshore jurisdiction so that relevant matters may be discussed and decisions made in an informed and timely manner. It is important that the company's constitutional processes are followed to demonstrate that central management and control is exercised by the directors in board meetings, otherwise it could be maintained that, in practice, the powers of the board are being usurped and that the company is actually being managed and controlled by an outsider, such as a UK adviser or shareholder.
Full and accurate board minutes should be prepared for all of the company's board meetings, proving that the board of directors made fully informed and considered decisions. Email correspondence from any UK directors should be kept to a minimum, since it will be important that the company's decisions are seen to be made outside the UK and at board meetings.
It is also important that meeting agendas and relevant documentation are circulated sufficiently far in advance of the meeting to allow the directors the opportunity to consider them and make informed decisions. The practical burden of proof that the company is centrally managed and controlled in the offshore jurisdiction is likely to rest on the company, not HMRC, therefore board minutes and accompanying papers will provide important evidence that the directors were provided with full information and that they carefully considered such information before making any decisions relating to the management of the company.
For evidential purposes, it may be helpful if the directors are seen to take external advice where appropriate. It may also be useful if any ancillary documents, such as directors' diaries, hotel bills and airline tickets are retained.
The company's directors should make all decisions affecting the policy and management of the company's business at board meetings held in the offshore jurisdiction. Such decisions should include matters relating to financing the business; investment policy; and business strategy.
The company's directors must have sufficient information to make informed decisions. The directors should be encouraged to ask for information and seek advice about the decisions being made. The board of directors must not be seen to merely follow and implement instructions from people resident in the UK.
An effective decision is made at a meeting after sufficient discussion. The board of the company should meet, discuss the relevant matter and minute the discussion. Passing resolutions around for signature does not suffice to demonstrate this.
Where board resolutions are passed in writing they should be signed in the offshore jurisdiction and not in the UK, or if all directors are required to sign, the chairman in the offshore jurisdiction should sign it last and only then date it.
The majority of the board of directors should be resident outside the UK, ideally in the offshore jurisdiction. The majority of directors actually attending board meetings should be resident in the offshore jurisdiction. It may be persuasive if there can be no quorum unless there is a majority of directors resident in the offshore jurisdiction. Such directors should include those with senior managerial roles and those who are involved in running the business of the company. HMRC has been known to call as witnesses the directors of companies claiming to be resident offshore and to cross examine them to determine whether they have sufficient understanding of the business to be able to make effective decisions.
UK resident individuals can be directors of the company, provided they are in a minority. Ideally no UK resident director should participate in board meetings via telephone, video facility or email while physically present in the UK. If this occurs, particular care should be taken to ensure that the UK participant does not dominate or lead the meeting and that decisions are effectively taken by a majority of directors who are offshore. No part of management should be undertaken in the UK.
If the chairman of the board of directors has a casting vote they should not be resident in the UK. This is particularly important if there are an equal number of directors resident in and outside the UK.
Consideration should be given to using non-UK resident alternate directors, particularly where the board of directors includes UK resident individuals. When a UK resident director cannot attend a board meeting in the offshore jurisdiction, the physical attendance at the meeting of a non-UK resident alternate strengthens the position that the meeting in the offshore jurisdiction was indeed where the board decisions were made.
Directors should not be authorised or otherwise permitted to give instructions to third parties from within the UK.
The company can engage the services of UK resident professional advisors. The professional advisors can propose, advise and influence the company but cannot dictate the management decisions.
The company should appoint any professional advisors directly and there should be an engagement letter signed by the directors of the company and the relevant professional advisors. All communication and documents between the directors and professional advisors should be worded in a way one would expect for a company that is truly managed and controlled by its directors. If the residence of a company is eventually challenged, such documents may provide important evidence. Documents that contain language that is suggestive of rubber-stamping may be used to support a challenge that the company is not resident in the offshore jurisdiction.
The company's registered office and postal address should be in the offshore jurisdiction. The company's statutory books (for example, share registers and minute books) and corporate records should be kept outside the UK and preferably at the company's registered office.
The company should also ensure that it complies with any tax requirements of the tax authority of the offshore jurisdiction and, if possible, obtains a certificate of tax residence from that tax authority.
At all times, the company’s secretary should be resident outside the UK. Any administrative or other similar services from a third party specialising in providing such services should be provided from organisations resident outside the UK.
It is advisable that the company’s bank accounts are maintained in the offshore jurisdiction and outside the UK.