Whether your company is resident in the UK or not may seem like a very easy question to answer – and for most it absolutely is.
Any company incorporated in the UK is, by default UK tax resident and would be expected to pay corporation tax on its worldwide income.
Many other countries in the world determine a company’s tax residence by reference to their place of incorporation. With that in mind, is this going to be the shortest tax article ever?
If only it were that simple. In many countries (including the UK) a company can also be considered tax resident if it is “centrally managed and controlled” in that country. Central management and control refers to the key strategic decisions relating to a company. The sort of decisions that are typically taken by the director(s). For the large majority of UK companies there is no question they are centrally managed and controlled in the UK. Again it is all pretty simple.
All that said, in the last few years and certainly since the pandemic the trend for people to move overseas while retaining their role with a UK company has continued to develop. Especially for services business the physical location of the individual has become much less important to the effective performance of their duties given the explosion in the use of platforms like Teams and Zoom.
Where the person moving has a controlling interest and is the guiding mind behind the business then such a move can have some unintended and rather unpleasant consequences for the company’s tax residence.
Let’s take the example of an IT development business whose sole owner and director has strangely got fed up with the lousy British weather and decided that it’s time to find a place in the sun.
They pack up their home and move permanently to somewhere where the sun shines more than 10 days a year – let’s say Spain for the sake of argument (they have a granny from Dublin so have been able to get an Irish passport). As is increasingly the way of it their developers are scattered all over the globe and the physical footprint of the company in the UK is really quite limited.
They quite happily run the company from Spain. From time to time their accountant tells them they need to have a board meeting to vote dividends so they dutifully do so, minuting that the meetings take place in San Sebastian… In time they decide to acquire a Spanish company.
As their cash is tied up in the UK company they decide to acquire the Spanish company as a subsidiary of the UK company. The lawyers diligently prepare the relevant board minutes to give effect to the acquisition, again showing the location of the meetings as being in Spain.
All trundles along for some time. Our director is very careful to limit their time in the UK to make sure they are treated as UK non-resident and they file Spanish personal tax returns on that basis. They even make sure they register and operate a Spanish payroll to deal with employment tax and social security obligations.
One day a letter arrives from Spanish tax authority saying that they think that they believe that the UK company is in fact tax resident in Spain. Our director is confused by this as it is a UK company so how can it be resident in Spain? The Spanish authorities reply that they believe that the company’s “effective head office” is in Spain and ask where the key strategic decisions of the company are taken. Digging out his board minutes our director has to reply “in Spain…” There you are then say our Spanish friends, we have you bang to rights (or its Spanish equivalent).
But hang on says our director, HMRC in the UK says that my company is also resident in the UK – how can a company be resident in two places?
The fact is that it is perfectly possible for the tax authorities in two different countries both to think that a company is tax resident in their jurisdiction. This has the potential to produce a world of complexity. Most often where there is a double taxation agreement between the two countries this will provide a “tie-breaker” test to decide which of the two countries can claim tax residence.
The usual test here (including in the UK-Spain agreement) is that residence is awarded to the country where the “effective management” of the company is undertaken. Effective management is a lower level of management to Central Management and Control – more at the operational level than the strategic. There are lots of factors that can be considered in arriving at this and the answer is not always entirely clear-cut.
In the case of our (by now rather confused) Spanish resident director, they not only set the strategic direction of the company but also run it on a day-to-day basis, while their spouse is responsible for maintaining the books and records and liaising with the accountants in the UK. It seems pretty clear that effective management is also undertaken in Spain so under the tax treaty the company is now considered to be a Spanish resident… The flip side of this is that the company has migrated its tax residence out of the UK.
Sadly it is not as simple as just switching where the company pays tax. From a UK tax point of view the company is no longer within the UK tax net so HMRC are not going to get their pound of flesh in terms of tax in the future. As a result, there are rules in place for a situation where a company leaves the UK tax net. In short, the company is considered for UK tax purposes to have sold its assets for their market value at that date it stops being a UK resident.
There are exceptions where the company continues to carry on a business in the UK through a “permanent establishment” – this can be a get out of jail free card for some of the assets. However in our case the company by now has little or no business in the UK so this exit charge could prove to be a very expensive hit – especially as there is no cash realised to pay the tax.
Our director is by now feeling more than a little glum. Their mood is not lightened by learning that, because the company did not give notice to HMRC of its intention to migrate out of the UK tax net, they might personally be liable for substantial penalties and potentially liable for any unpaid tax the company might have in the UK…
Our director’s desire to move to warmer climate has possibly led to a whole world of pain not only for their company but also for them personally… In an increasingly globally mobile world this is just one of the tax issues that moving overseas can create, but as may be seen it is possibly one of the more expensive.
Cross-border tax is rarely a simple deal and understanding the risks and taking steps to manage them is essential to avoid some very costly mistakes… To avoid these mistake please get in touch.
