It should be easy to establish where your company is based for Corporation Tax purposes. But it can be surprisingly complex. Shona Barker, Senior Manager in our Business Taxes team, explains how it can all go wrong and how to fix it or better yet, avoid the pitfalls in the first place.
When you incorporate a company in the UK, the law assumes your company is tax resident here unless you do something explicitly to change that. But tax, just like life, can sometimes get messy.
Usually, when you register a company at Companies House, you don’t need to do a whole lot of thinking. HMRC will automatically set up a Corporation Tax record for the new company and write to your registered office with the details. You need to pay your taxes and file your returns. And that’s about it.
It is possible for a company to deliberately migrate abroad and shift its tax residency somewhere else, although this is not straightforward. There’s a convoluted procedure, and it might not give you a favourable tax outcome. But sometimes the commercial rationale makes the cost worth it.
It is also possible for a company to ‘accidentally’ leave the UK, which is a special kind of headache…
How could this happen? Apart from incorporation, a company may also be tax resident in a country where its central management and control is undertaken. Just because the directors of a company are not personally UK tax resident, it doesn’t necessarily follow that the company has an effective place of management overseas. Nor does it mean that central management and control are not exercised from the UK. It’s a bit of a red flag, but not definitive on its own.
On the other hand, it is entirely possible for the management and strategic direction of a company to gradually change over time, until there’s no real substance left in the UK. (Other than perhaps goodwill, which can be problematic. You can’t see it, but it can be worth a lot. And HMRC isn’t going to let you escape without paying tax on its full value.) Similarly, care must be taken where the impact of Covid19 and the improved technical ability to “work from home” has changed the location of where some people are now working.
If you look at the relevant double tax treaties, along with the fact pattern of what has transpired, it can be the case that a company has drifted abroad over time, and a tiebreaker clause now puts that company outside the UK. Or possibly both in the UK and overseas. (The only thing messier than drifting overseas is ending up resident in two jurisdictions at once.)
To leave the UK, a company strictly needs advance approval from HMRC. Failure to obtain it can result in penalties and a long, drawn-out process involving discussions with tax offices in multiple countries.
So, how can it be resolved? When leaving the UK, HMRC will insist on a guarantor, which must either be a UK resident company or a UK branch of a foreign bank. This is the case even if there’s no exit tax payable, or if you’ve already settled it. There’s no compromise to be had.
If your company is part of a wider group, finding a UK company to act as guarantor won’t be a hardship. But standalone companies are going to have to make friends with their bank managers, pronto.
Your company may need to register in the overseas jurisdiction first to prove to HMRC that it has definitely left the UK.
I was never there, guv’nor! Although a company is assumed tax resident by virtue of its incorporation, if it has been run abroad since day one it may be possible to argue that it was never within the charge to UK Corporation Tax after all. Should this argument hold up, it has the rather neat effect of HMRC cancelling all accounting periods and avoiding the dreaded exit tax.
Should I stay or should I go? You might not want to leave the UK, but if your corporate governance has deteriorated to the point where you are struggling to argue that the company is still tax resident in the UK, you may not have a choice.
Some overseas jurisdictions can offer a lower tax rate, which can be appealing. But bear in mind that when you leave the UK an exit tax is calculated on your deemed chargeable gains and, if there are intangibles that you need to suddenly revalue, this can be significant. You’ll need expert advice not just from a Corporation Tax specialist, but a valuations specialist too.
How to stay out of trouble It’s always far better to avoid being in this kind of mess in the first place. Companies with overseas elements should review their corporate governance periodically to make sure that they’re really tax resident where they think they are.
If you think your company might have a residency issue, or if you would like to plan a corporate migration the right way, please get in touch with Shona Barker or your usual PKF Littlejohn contact.