A recent Upper Tier Tribunal case serves as a reminder of the importance for the directors of non-UK companies to be able show that they have acted independently in the management of the company.
Company residence
The Tribunal was asked to consider the tax residence status of Jersey SPV companies that had been used in tax planning arrangements. The tax planning relied on the Jersey companies not being tax resident in the UK. HMRC looked to defeat the planning by arguing that the companies were UK resident and enjoyed success at the First Tier Tribunal.
The decision was overturned by the Upper Tier Tribunal because it was insupportable in law based on the FTT’s findings of fact.
The technicalities
A company is resident in the place where it is centrally managed and controlled, which for these purposes means the decisions of significance or strategic importance; not the day-to-day running of a company. Where a company is managed and controlled by its board of directors it is resident where the board of directors reside.
The planning involved Jersey companies buying property from a UK holding company at overvalue. HMRC argued, and the First Tier Tribunal agreed, that the uncommercial nature of the transaction meant that the Jersey companies’ decisions to buy the properties must have been made by the parent company in the UK.
A similar argument was made in one of the leading cases on residence, Wood v Holden, in which the House of Lords decided against HMRC. In that case, their Lordships addressed the question of where decisions were made but resisted HMRC’s invitation to consider the quality of those decisions, noting that directors of companies make good and bad decisions all the time, but they remain the directors’ decisions.
What does this mean?
The technical position regarding company residence remains the same. The important point to note is that the directors of the Jersey companies were able to show that they had made the decisions to purchase the properties. HMRC were unable to convince the Tribunal that someone else, namely the UK parent company, had directed them to make that decision.
Consequently, in any challenge to the residence status of a non-UK company, the first line of defence must be, as a minimum, that directors of the company can show that they made the decisions of key strategic importance. In practical terms, this must involve the directors formally meeting, recording that meeting and preserving that record for future reference.
There is much more that can be done to reinforce the directors’ position by ensuring adequate briefing ahead of key decisions, collecting information relevant to the decision taken and recording the decision-making process.
We have helped a number of non-UK resident companies make their tax position more robust by advising on internal procedures, staff training, risk awareness and record keeping. Please contact us if you would like to learn more about the work we have been doing.