A recent decision of the Tax Chamber of the UK’s newly constituted First-Tier Tribunal, Laerstate BV v Commissioners for HMRC, provides a reminder that the maintenance of non-UK corporate residence requires careful management, particularly when influential personnel are active in the UK.
The Tax Chamber found a Netherlands company (“Laerstate”) to have been UK resident as a result of (i) a director exercising his powers of central management and control of Laerstate from within the UK, and (ii) for a period following that director’s resignation from his office, his continued exercise of that central management and control from within the UK in usurpation of the remaining director’s powers.
Laerstate had, for a period, two directors, one who remained outside the UK and was not economically interested in the company (Trapman), and another who frequently visited the UK and was the owner of all the company’s equity and debt (Bock). Laerstate effectively operated as a personal holding company for Bock’s interest in Lonrho, a UK company of which he became CEO, and its key strategic decisions related to the acquisition and disposal of those shares.
The evidence reported in the decision shows a valiant effort on behalf of Laerstate’s representative at the hearing to establish, from the available sources, that its central management and control was exercised at board meetings held outside the UK, such that it was non-UK resident. Evidence was provided that various director’s resolutions had been executed outside the UK, that meetings of the two directors had been held outside the UK, and that documents had been executed on behalf of the company outside the UK.
However in the light of its somewhat patchy nature, this evidence proved insufficient to persuade the Tribunal Judges that central management and control of Laerstate was exercised at board meetings. As a result, the conduct of the directors (who had the relevant powers) outside of those meetings became crucial, and HMRC were able to provide evidence that Bock had operated as the company’s decision maker whilst in the UK.
HMRC’s arguments that the company was UK resident, through UK central management and control, were assisted by evidence that:
- there was an interval of 18 months in which no board meetings had been held;
- many of the offshore board meetings did not involve strategic decision making;
- the chronology suggested that key decisions had been taken when Bock was in the UK and without formal board meetings having been held;
- professional advisers were instructed by, and corresponded with, Bock, and not with Trapman;
- Bock conducted negotiations whilst in the UK in a manner that suggested that he made decisions for the company;
- Trapman was often without even “the absolute minimum information” necessary to make the relevant decisions at the time they were made; and
- after Bock resigned as a director Trapman was simply acting as directed by Bock, not acting independently after considering suggestions Bock made.
The case is a useful reminder that, where non-UK residence of a company is desired:
- board meetings should be held regularly outside the UK, and strategic decision making should be reserved for, and occur only at, those meetings;
- the board members should be provided with sufficient information to enable the meeting to make all necessary decisions;
- evidence of the information provided, and of deliberation of the issues at the meeting, should be created and retained. Contemporaneous rather than pre-prepared board minutes are preferable; and
- directors and other influential personnel must conduct their activities in relation to the company in a manner consistent with these principles, especially when in the UK.
Although not points relevant to this decision, it is also worth noting that it is strongly advisable for all or at least a majority of directors to be non-UK resident, and for non-UK resident directors to have appropriate expertise. Participation in meetings by telephone from within the UK should be avoided, and physical attendance at the offshore meeting should be the normal procedure.
Where relevant personnel operate in the UK, a company’s affairs must be very carefully managed if UK tax residence is not desired. The story told in the decision is one of commercial pressures over-riding the careful corporate governance practices required.