CORPORATE RESIDENCE IN THE CONTEXT OF COVID-19
16 / 07 / 2020
Under the UK tax code, companies that are not incorporated in the UK (non-UK companies) may be resident in the UK for tax purposes if their “central management and control” (“CMC“) takes place in the UK. Consequently a non-UK company which is centrally managed and controlled in the UK is subject to UK tax on its profits (subject to the applicability of any relevant double tax agreement). In this article we consider the potential effects of the global lockdown triggered by COVID-19 on the CMC of non-UK companies when attempts to ensure CMC takes place outside of the UK may be frustrated.
What are the general principles of CMC?
Broadly a non-UK company is resident where its board meet but this is ultimately a question of fact, and, in certain cases, HMRC will investigate the company’s operational practices, study the board minutes and other available documents, and even interview witnesses. They also consider whether or not the directors genuinely exercise CMC, and if they do, where they in fact do this.
There has always been a risk that non-UK companies may be treated as UK tax resident if their directors take significant decisions in the UK. Positive steps on the part of the board are often required to ensure that this is not the case. This risk has been sharpened by the global lockdowns imposed as a result of the COVID-19 crisis which have prevented people from moving freely in and out of the UK, often rendering them with no choice but to exercise their duties as company directors from the UK.
Have concessionary measures been introduced by the government in light of COVID-19?
While HMRC made some concessions to the rules regarding individual residence in the UK under the statutory residence test in view of global lockdowns, no such concessions have been made in respect of corporate residency. This is in contrast to the position taken by the Irish Revenue, for example, where company directors’ presence in Ireland can be disregarded for CMC purposes if that presence can be shown to relate to COVID-19 travel restrictions.
So what does this mean in practice, at least for the foreseeable future?
For any directors concerned about potentially bringing their non-UK company onshore whilst they or their fellow board members are or have been ‘stuck’ in the UK, we would highlight the relevance of continuity to determining where the CMC of a company actually abides. HMRC’s guidance acknowledges that occasional board meetings can be held in the UK without an offshore company becoming UK tax resident. Consistent with current practice, we would expect HMRC to look beyond the current crisis and have regard to a company’s longer-term practices regarding decision-making, although the relevance of historic practices may decrease as travel restrictions go on.
There may be some practical steps which can be taken by directors of non-UK companies to reduce the risk of inadvertently bringing their company’s CMC onshore during travel lockdowns or when self-isolating, such as deferring major strategic decisions where possible and keeping accurate and contemporaneous records of all meetings. Please contact us for more advice on this, and any other associated tax considerations, and we will be pleased to assist.