Summary and implications
The recent First Tier Tax Tribunal decision of Laerstate BV –v- HMRC is the latest instalment in the tax residence saga. It demonstrates the increased rigour that HMRC will apply and emphasises the detailed investigations they are prepared to undertake to determine residency. This was a case where HMRC "had up the drains" to understand exactly what had been going on. It can be seen as a response to the loss HMRC suffered in the earlier case of Wood -v- Holden. There, some commentators criticised HMRC for not having done enough to show what had actually gone on.
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 director's travel records.
The matter revolved around the struggle between Dieter Bock and Tiny Rowland over Lonrho plc during the 1990's. The Appellant, a wholly owned Dutch company, 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 the Appellant. Mr Bock resigned as a director prior to the sale of the shares in Lonhro to Anglo in 1996. HMRC determined that the company was UK resident for tax purposes and therefore sought to tax the gain realised.
Central management and control
A foreign company is UK resident for tax purposes if its place of "central management and control" is in the UK. This will usually be where the directors meet, but if management of the company is carried on outside board meetings, it is necessary to look at where and by whom the high level decisions are made.
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 the 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 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. The Tribunal found that the mere physical acts of signing resolutions or documents do not suffice for actual management.
- Even following his resignation, Mr Bock continued to exercise control in usurpation of the remaining director's powers. Mr Trapman executed the share sale documentation without having sufficient knowledge of the transaction.
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. Accordingly, the Tribunal determined that the company was UK resident for tax purposes.
In order to ensure an offshore company is not UK tax resident, it 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; and
- Prepare board minutes with care, detailing the information provided to board members and the issues deliberated.
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.