Corporate Residence – Andrew Parkes
National Technical Director, Andrew Parkes, considers a relaxation in the UK’s corporate residence rules for funds.
In this article I consider a relaxation in the UK’s corporate residence rules for funds, something that may reassure UK based fund managers. I apologise in advance for all the Shakespeare references, my daughter has just started studying the Bard at school!
To UK or not UK
One of the benefits of the UK as a location is the flexibility offered by its rules on company residence, specifically the central management and control test. Whatever its other limitations (and boy there are quite a few), the test does allow non-UK incorporated companies to be tax resident in the UK.
This, plus HMRC’s and many other Tax Authorities’ sensible approach to Competent Authority Agreements (see Miles’ article below), means that it is possible to have your Dutch or Irish incorporated company tax resident in the UK, which can be very useful.
Et tu Brute
However, the flip side of the coin is that the central management and control test can make a company UK resident by accident, which I have seen on more than one occasion – no tax avoidance involved, just the rules bringing, often a personal company, to the UK.
For many businesses this is an inconvenience, but for the fund industry it would be disastrous. A definite tax knife in the back for the investors if the fund became subject to UK tax. Hence, overseas directors being appointed, advisers and fund managers being very careful in what they write in emails or racking up the air miles as they attend board meetings from outside the UK.
Much ado about nothing?
Then in 2020 the world shut down in response to Covid-19. Expecting it to be a short hiatus, HMRC confirmed that the odd board meeting/decision made in the UK would not affect company residence, but the restrictions dragged on and here we are 18 months down the line.
In a normal situation, if a company has been carrying on all of its board meetings etc in the UK for the past year and a half, it may have trouble persuading HMRC that it was not UK resident. However, with Covid (and if it is a “normal” commercial situation), HMRC are unlikely to be looking for windfalls (the arguments will be more trouble than they are worth) and the “facts and circumstances” that apply to central management and control gives them a wide latitude to ignore such cases.
You can’t rely upon HMRC turning a blind eye though, and many companies will have been busy arranging telephone calls or video conferences with the Chair being outside the UK, or at least the call originating outside the UK as they have been told that this means the meeting is deemed to have taken place outside the UK.
Sadly this is unlikely to provide protection from UK tax residence. Although it has not been tested in a tax situation, HMRC have seen non-tax cases where a person was held to be attending a meeting where they were physically located (i.e. you don’t magically move to the Channel Islands because you were called from Jersey) and I would expect HMRC to take this line if the situation arose (i.e. if your backside is on a chair in London, you are attending that meeting in London).
Midsummer Night’s Dream
For the fund industry at least there is a way out. In 2011 HMRC introduced a relaxation to the central management and control rule. Neither an Undertakings for the Collective Investment in Transferable Securities (UCITS) nor an Alternative Investment Fund (AIF) can be tax resident in the UK unless:
- it is incorporated here;
- it is a Real Estate Investment Trust (REIT), an investment trust or a unit trust with a UK trustee.
The definition of AIF is very wide as it is a collective investment undertaking that raises capital from investors and invests the money in line with a defined strategy (there are exceptions which need to be considered) and is likely to ensure that many funds simply cannot be tax resident in the UK.
So, if you are a UK fund manager and were frantically trying to leave the UK to hold a board meeting elsewhere you can almost certainly relax. However, this relaxation only applies to residence, it does not stop a trading fund from having a UK permanent establishment if the Investment Manager Exemption does not apply – so care still has to be taken in other areas.
We also have to wonder how many fund managers will use this simple residence exemption rather than the much more complicated UK Asset Holding Company regime.