Summary and implications
It is common to use offshore vehicles to hold investment assets. These vehicles are based in low-tax jurisdictions, for instance the Channel Islands, and will usually be companies or units trusts.
There are potential tax benefits in using offshore holding vehicles. The main benefit is that these vehicles are outside the scope of UK capital gains tax.
In order to obtain the tax benefits, it is essential that the vehicle's "central management and control" is located outside the UK. HMRC has recently turned the spotlight on offshore management.
HMRC gets tough
The recent case of Laerstate BV -v- HMRC (11 August 2009) shows the increased rigour that HMRC will apply and the detailed investigations they are prepared to undertake to determine residency.
The Tribunal's decision has highlighted that:
- Central management and control is not necessarily exercised by the board of directors - the board of directors can be usurped;
- A company's activities as a whole are important as opposed to identifying and considering specific instances of purported management;
- The signing of board resolutions and key documents outside the UK is not always sufficient to demonstrate non-UK residency; and
- HMRC will investigate the minutiae of what actually happened to reach a conclusion, including examining directors' travel records.
Laerstate BV -v- HMRC
a) Background The matter revolved around the struggle between Dieter Bock and Tiny Rowland over Lonrho plc during the 1990's. Laerstate, a wholly owned Dutch company resident in the Netherlands, acquired a substantial shareholding in Lonrho in December 1992. For most of the period in question the company had two directors - Mr Bock and Mr Trapman. Mr Bock was the sole shareholder of Laerstate. Mr Bock resigned as a director prior to the sale of the shares in Lonhro to Anglo in 1996.
It was decided that Laerstate BV was managed and controlled in the UK. Its driving force was Mr Bock, who for the most part made decisions in the UK which were simply implemented by Mr Trapman in the Netherlands. Mr Bock alone exercised control, before, during and after the period in which he was a director. HMRC determined that, in practice, Mr Bock exercised control of the company and it was therefore UK resident for tax purposes for the entire relevant period. HMRC sought to tax the capital gain.
c) Points considered
To determine the location of the company's central management and control the Tribunal looked at the period before, during and after Mr Bock was a director:
- The company acquired shares in Lonrho prior to Mr Bock becoming a director. However evidence suggested that the decision to enter the subscription agreement was made by Mr Bock in the UK and merely implemented by Mr Trapman.
- During the period when Mr Bock was a director, he conducted the business and carried out activities of a strategic and policy nature. Professional advisers looked directly to Mr Bock for instructions and often referred to Mr Bock as the client.
- Even following his resignation, Mr Bock continued to exercise control in overriding the remaining director's powers. Mr Trapman executed the share sale documentation without having sufficient knowledge of the transaction.
The Tribunal found that the mere physical acts of signing resolutions or documents do not suffice for actual management.
HMRC went into enormous detail including matching travel details to board meetings attended. There was evidence that some resolutions were passed and documents executed outside the UK. However, throughout the relevant period, the company's actual "course of business and trading" and the key decisions in "policy, strategic and management matters" were made by Mr Bock in the UK rather than by Mr Trapman or at board meetings outside the UK. Furthermore, substantial communications between Mr Bock and the company's professional advisers were undertaken substantially in the UK. The Tribunal found that Mr Trapman was simply a mouthpiece for the company, having no input in the top level management of the company.
The Final Chapter?
We do not yet know whether the taxpayer will appeal the Tribunal's decision. Given the likely sums involved the saga may continue.
It is well known that the consequences of not having strict and robust procedures in place for the management of offshore structures are severe. However, the Laerstate case serves as a prompt to look carefully at the management of your existing offshore operations, and consider carrying out an audit of your current arrangements. We would be happy to help you with this or to come and talk to you about appropriate policies, procedures and actions for your organisation.
You need to be able to demonstrate offshore management in practice and not merely that the directors or trustees are 'going through the motions'.
W ood -v- Holden 
In this case the High Court (upheld by the Court of Appeal) overturned a first instance decision that a Dutch company was centrally managed and controlled in the UK. Chadwick LJ in the Court of Appeal drew a distinction between exercising management and control and influencing those who do. In this case it was held that there was no evidence that anyone from the UK dictated the decisions made by the director of the Dutch company. However, this case differed from Laerstate, which considered the minutiae of the actions of the offshore company and its decision-makers.
Where is control exercised?
It is necessary to look at where, and by whom, high level decisions are made. This will usually be where the directors meet, but this can not be assumed. Contrary to a company's constitution, decisions may be taken outside board meetings, or by others, including a company's advisors.
In order to ensure an offshore company (decisions of directors) or offshore unit trust (decisions of trustees) are not UK tax resident, they should:
- Only make strategic decisions at board meetings held outside the UK;
- Ensure board members have sufficient experience and information to reach decisions at those meetings;
- Prepare board minutes of meetings held with care, detailing the information provided to board members and the issues deliberated; and
- Ensure all advisers dealing with the offshore vehicle are fully briefed and treat the vehicle as the client.