We explore these below, along with guidance on how to mitigate against them.
Where a company is tax resident will determine the jurisdiction that has primary taxing rights. A UK-tax resident company is taxable on its worldwide income (subject to various exemptions), but a non-UK tax resident company will be taxable only on income arising in the UK. Similarly, a UK company which has an overseas branch or permanent establishment will normally only be taxable there on the income attributable to that establishment, unless the company becomes tax resident in the foreign country.
Typically, a company will be tax resident in the country of incorporation, but where ‘management and control’ is exercised in a different country, the company’s tax residence may change to that other country.
For a non-UK incorporated business, it is essential that this does not become ‘managed and controlled’ in the UK, or the UK tax authorities may determine that it has become UK tax resident.
One area of sensitivity is around the location of board meetings, and this is particularly challenging at present with directors unable to travel and potentially being stuck outside their home country.
HM Revenue & Customs (HMRC) has confirmed that they will continue to apply existing practice and their own guidance when determining the tax residency of a company. The current guidance is helpful in confirming that decisions or board meetings held in the UK for a very limited period of time may not be indicative of UK tax residency. However, they have not stated that, where this is necessary due to the outbreak of Coronavirus, it would not result in a change in tax residency of a company.
It would be helpful if HMRC could create a concession on corporate tax residency during these challenging times. In the meantime, businesses should continue to carefully manage their tax residency position.
We’ve outlined some practical steps that directors should take now to manage this.
1. Establish whether any overseas directors are stranded in the UK as a result of the Coronavirus. If so, consider whether board meetings can be postponed until travel restrictions are lifted and directors can travel to attend in person.
2. Establish what key decisions need to be made in the coming weeks and months and whether they will need board approval. Where these decisions cannot be delayed, ensure there are sufficient decision makers in the country of incorporation that can approve this, without needing directors stranded overseas to be involved. This may require delegating power or appointing temporary board members.
3. Review the documents governing the powers granted to directors (e.g. the articles of association or equivalent and any other constitutional documents), and any other board governance documents, to assess whether these are appropriate during the Coronavirus crisis. For example, if they require the majority of directors to be in attendance at meetings, can this be temporarily relaxed?
If board meetings are required to take place whilst travel restrictions are in place:
- The meeting should be chaired by someone present at the country of incorporation.
- The date and time should be expressed with respect to the country of incorporation.
- UK-based directors should avoid dialling into the meeting. Where this is not possible, it should be minuted that due to exceptional circumstances, certain directors are in the UK because travel restrictions have prevented them from attending the meeting personally. The number of directors dialling into the meeting from the UK should be no more than the number needed to meet the attendance quorum.
- Consider implementing a special approval process so that directors stranded in the UK are not permitted to make decisions and must refer issues for formal approval to directors based in the country of incorporation. These directors could be empowered to execute the board’s duties for the duration of the outbreak.
- Contemporaneous documentation should be retained to evidence the above, and the company’s articles of association and other governance guides should be reviewed to confirm that these recommendations are in line with them.
Many of the above comments are in the context of the UK’s rules on tax residence. Other countries may have specific rules, and some have already issued guidance on the impact of Coronavirus (e.g. Australia, Jersey, etc).
There may be other tax implications of directors and key employees being stranded in an overseas jurisdiction or from being repatriated to their home country. For example, this could give rise to creating a UK permanent establishment and/or payroll and individual tax implications. We consider these in further detail on the hub here.
Would you like to know more?
If you would like to discuss any of the above guidance or have other queries about how you can make the right decisions for the future of your business and your income, please contact your usual Blick Rothenberg contact or one of the partners to the right.
You can also visit our Coronavirus – Practical Guidance for businesses today Hub for our latest insights and sign up here to receive important Practical Guidance updates delivered directly to your inbox.