Have you packed your company with you?
It is unsurprising to arrive at your destination to discover that that you have left something important behind. It is perhaps less common to discover on arrival that you have accidentally packed your company. However, this is becoming a frequent situation for recent movers to the United Kingdom (although equally applicable to many other destinations). In particular, during times where an urgent exit is necessary – a situation that for many has been brought about by COVID-19 – there is often little time to deal with the reality of ensuring the “central management and control” of your company has not followed you on your travels.
UK corporate residence
A company is resident in the UK for corporation tax purposes if it is either (i) incorporated in the UK or (ii) “centrally managed and controlled” from the UK.
(i) Incorporated in the UK
This is no more problematic than before the relocation, as the company has always been UK resident.
(ii) Central management and control
It is much less clear-cut to determine whether or not the central management and control of a company is exercised from the UK.
Central management and control is not defined in legislation, and has been developed over time through case-law. Put simply, a company is centrally managed and controlled from a place where key decisions regarding the company are made. This is distinct from where a company is run on a day-to-day basis, or where it carries out its business.
When considering if a company that was not incorporated in the UK has become UK tax resident, HMRC will examine who is exercising central management and control (usually the board of directors) and where they are exercising it from. Crucially, where central management and control is exercised is a question of fact. It matters much less where central management and control is supposed to be exercised than where it actually is taking place.
Issues around central management and control most frequently arise when the individual relocating to the UK is a director, shareholder or de facto decision maker (often referred to as a “shadow director”) of a non-UK company. The company will become UK tax resident if the central management and control of the company is carried out from the UK following the individual’s relocation.
Consequences of UK corporate residence
Companies that are considered resident in the UK for corporation tax purposes are subject to UK corporation tax on their worldwide profits at a general rate of 19% (rising to 25% from 1 April 2023). This may not be of great concern as the UK’s corporation tax rate is comparatively low when compared to other countries.
However, when a company ceases to be resident in the UK for corporation tax purposes, it is deemed to have disposed of its assets at their market value immediately before it ceases to be UK resident and to have reacquired them at the time it ceases to be so resident (known as the “exit charge”). Any gains are then subject to corporation tax at 19% (the current rate).
The exit charge can therefore result in a very large and unexpected corporation tax bill in circumstances where a company becomes and then ceases to be UK tax resident. This is relevant where, for example, an individual moves to the UK then later returns to Hong Kong, all the while carrying on an existing role in a non-UK company.
Planning for a move
People moving to the UK who are involved in non-UK companies should take advice ahead of leaving so any necessary planning steps can be carried out. Planning implemented after arriving in the UK may already be too late to prevent a company becoming UK resident.
As the issue of central management and control is determined as a matter of fact, it is not sufficient to merely appoint a majority of non-UK resident directors when key decisions continue to be made from the UK. Instead, a detailed analysis of how each company is managed should be carried out. This would include a detailed review of its articles and governing documents.
In some instances, it is sufficient to provide advice and recommendations on the best practice going forwards, but in most instances, it is necessary to also amend the articles and make alternative appointments to the board of directors.
The following are some steps that can be taken to help reduce the risk of a company being considered centrally managed and controlled from the UK. These are by no means exhaustive and advice should be taken in respect of each company:
- The board of any non-UK company should comprise a majority of non-UK resident directors with sufficient experience to properly undertake their roles at all times. In particular, the board should be autonomous and not merely act as a “rubber stamp” for decisions taken by others. In situations where UK resident individuals maintain a degree of influence over decisions then any directors should nevertheless have genuine and substantial involvement in any decisions relating to the management of the company so that, while they may consider advice given, any decisions made are their own.
- Board meetings should always be held outside of the UK and ideally consistently in the jurisdiction of residence of the company. Where meetings are held virtually or by telephone the chairperson should be present in the jurisdiction where the meeting takes place along with a majority of directors.
- Any communications from UK residents should only be in the form of recommendations or advice. A UK resident must not issue direct orders to the directors and if they do then the board should make their decisions independently and with regard to the best interests of the company. Any decisions should be documented in writing.
- Any meetings should be held at regular intervals and each of the directors should be provided with sufficient information ahead of any meeting to enable them to make informed decisions at the time of the meeting.
- All material contracts should be executed by the company outside of the UK and the company’s bank accounts, governance documentation and records of meetings should be kept in its jurisdiction of residence.
Anyone with significant involvement in a non-UK company (even if not in a formal capacity) should consider the risk of the company being centrally managed and controlled from the UK. The consequences of this may be that the company will be subject to UK corporation tax on its worldwide profits and a possible future exit charge.
Careful planning can ensure a company does not accidentally find its way into a person’s packing, and can help free up room in the suitcase for other items!
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