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Nabarro Michael Cant

Comment: UK tax authority turns the spotlight on offshore management


Michael Cant (pictured), partner at Nabarro LLP, outlines the implications of the recent tax residency case, Laerstate BV v HMRC.

It comes as no surprise that, as UK tax revenues fall, HM Revenue & Customs ("HMRC") seek to take a tougher line on those claiming to fall outside the UK tax net. The rising number of corporate migrations is making residency a hot topic, with a significant percentage of UK commercial property being held in offshore vehicles (for example, in non-UK resident companies and unit trusts). One of the key benefits of such vehicles is that they fall outside the scope of UK capital gains tax. HMRC’s recent success in the case of Laerstate BV v HMRC could prove to be a useful tool in the Revenue’s armoury to attack such offshore vehicles on the basis that their true place of management and control is in the UK.

UK residency

A vehicle is UK resident for tax purposes if its place of central management and control is in the UK. This test has developed through the UK courts and it is generally accepted that central management and control is where key strategic decisions are taken rather than where day-to-day management of the vehicle occurs. For a company, key decisions will usually be where the directors meet, however if management of the company is carried on outside board meetings, it is necessary to look at where and by whom the high level decisions are made. Ultimately, it is dependant on the facts as to where central management and control takes place.

Laerstate BV v HMRC saw HMRC undertake highly detailed investigations and a more rigorous approach to determine that the offshore vehicle in question had its central management and control in the UK. Accordingly, it was UK resident for tax purposes and subject to capital gains tax. A number of important considerations have been highlighted by this case if you are to ensure that an offshore vehicle remains offshore for UK tax purposes:

1. Board meetings
It is imperative that board meetings take place outside of the UK. They should represent the true authority of the company and the board should meet with sufficient regularity to allow it to exercise central management and control. The company’s "actual course of business and trading" and key decisions in "policy, strategic and management matters" should take place at board meetings. Board meetings must not merely be a rubber stamping exercise with decisions being made elsewhere. Directors, particularly those which are UK based, should attend board meetings in person rather than by telephone and written resolutions and corporate representatives should be avoided unless absolutely necessary.

2. Board minutes
Board minutes should be sufficiently detailed to evidence the decisions made at the board meetings. They should reflect the occurrence of events in "real time" to demonstrate central management and control, as opposed to "off the shelf" minutes being used. The minutes should also record what information was provided to the directors and how the issues were deliberated.

3. Directors
The majority of directors of an offshore company should be non-resident. They should be fully aware of and actively involved in the key management decisions of the company. Directors should be of sufficient calibre for the role required within the company and have awareness of the relevant market. Directors should also be kept fully informed of developments concerning the company, especially those which are pertinent to its central management and control. Furthermore, all necessary documentation should be provided to the director in advance of board meetings to ensure they have sufficient time to consider the issues.

4. Document signing
It remains important that key documents and board resolutions are signed outside the UK. However this approach may not always be sufficient to demonstrate non-UK residency. The test for residency looks for where central management and control of a company "abides" and following HMRC’s recent success, a company’s wider decision-making process will be considered rather than focusing on specific acts. Ancillary documentation often gives a clearer picture of where the central management and control of transactions take place prior to key documents being drawn up and signed offshore. Consideration should therefore be given to all aspects of company procedures.

5. Diaries and records
In Laerstate BV v HMRC, no stone was left unturned to determine the residency of the offshore company. In their investigations, HMRC went into great detail including matching travel records to board meetings attended. It would be sensible for all directors to retain documentation such as tickets, receipts, mobile phone bills and diaries as evidence of their location. For UK based directors, it is imperative that they have sufficient records to demonstrate that they conduct business in respect of the company outside of the UK.

6. Third party advisers
Third party advisers dealing with the offshore vehicle should be fully briefed to treat the vehicle as the client. Advisers should not look to any UK resident contact for instructions as this may portray decision making taking place in the UK.

Laerstate v HMRC serves as a prompt for offshore vehicles to look carefully at the management of their existing operations, and consider carrying out an audit of current arrangements particularly where there is a strong UK footprint. The tax consequences of not having strict and robust procedure in place for the management of offshore vehicles are severe and, having obtained a successful outcome in Laerstate, HMRC are expected to attack this issue with renewed vigour.

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