One of the key factors that determine the tax liability of a company in the UK is whether it is tax resident in the UK. For companies incorporated in the UK it is straight forward; they are. However, companies incorporated overseas could also be held to be tax liable in the UK if their ‘central management and control’ was located in the UK. In the absence of any statute law to determine tax residence one key test determining the location of the central management and control was the place where board of directors met. Over the years technological advancement like video conferencing complicated this test further. So HMRC has now issued a draft guidance specifying certain circumstances in which HMRC would not usually seek to establish if a company was tax resident in the UK. Enquiries will still be undertaken to fulfil obligations under a double taxation agreement or where arrangements appear to have been made to exploit these examples by creating form of compliance without substance.
The circumstances are:
· the company is wholly owned by a UK headed group or a UK headed sub-group with a non-UK resident ultimate parent;
· the company is incorporated outside of the UK in a territory where it is considered to be resident for tax purposes by virtue of its incorporation there;
· the country of incorporation and residence has a double taxation agreement with the UK which contains a residence tie-breaker;
· the company is genuinely established in its territory of residence;
· the company does not have investment business as its main business, and;
· the central management and control of the business of the company is at least in part exercised at meetings of its board of directors.
HMRC also clarified that the place from which an individual (e.g. a director, chairman etc) exercises central management and control was the relevant factor for locating the residence of a company rather than the territory in which their personal tax liabilities arose.
