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Will the last business to leave the UK please turn the lights off?
We hear much about companies removing their business from the UK for tax or regulatory reasons, particularly in the financial sector. Recently announced departures include Henderson, Charter, Regus, Beazley and Brit Insurance. And the man at the golf club is always ready with unsolicited advice to “go offshore like I did”. So what is involved: how practical is it?
The first thing to understand is that any company will be liable to UK tax on its worldwide profits if it is managed and controlled in the UK, regardless of where it is registered. “Management and control” is not defined in the Taxes Act but in broad terms this is directed at the highest level of control of the business of a company – where the “head and brain” are located rather than the “hands”. The place of central management and control is therefore wholly a question of fact. The place where the company's board of directors meets is normally important but not necessarily conclusive, particularly where the Board can be seen to be “stooges” who in reality do nothing more than rubber-stamp decisions that have in substance been taken elsewhere.
OK. Let’s assume we can surmount the first hurdle and demonstrate that our company is non-resident. The second challenge is that a company, whatever its tax residence, will always be liable to UK tax in respect of profits which it earns in the UK. If your company manufactures widgets in a factory in the UK it will inevitably be exposed to some UK tax; this will also usually be the case if it imports widgets to the UK and distributes them through a sales team based in the UK (though the answer may be different if all the contracts for sales are legally made outside the UK). It then becomes a question of identifying what costs might be injected into the UK business: interest costs, perhaps, or licensing or royalty costs in respect of assets held offshore. Even here, you do not usually have free reign to charge what you like: “transfer pricing” rules restrict tax relief to the level of costs which would be charged between unconnected persons trading at “arm’s length”.
The third point which you overlook at your peril is that there are swathes of legislation which are designed to counter imaginative initiatives taken to export income from the UK. They are legion: but one of the main ones is the so-called “transfer of assets abroad” legislation. Very broadly, this applies where a UK resident effectively transfers income to a non-resident person in circumstances that the transferor can potentially benefit from the income. It will not apply in every situation: but it will always need to be considered where any offshore planning is contemplated.
Paths do exist through the minefield - though they may tricky to negotiate and they only take you to approximately where you want to go. But forewarned is forearmed: before plunging into the deep waters of offshore planning please speak to your usual contact partner.
