Leaving the UK? Watch out for tax impacts on your company

Recent changes in the UK’s tax regime for individuals, and perceptions about the future direction of travel, mean business owners and/or company directors may be considering leaving the UK. In some circumstances, this can have implications for the tax residence status of the companies they manage or control, or may result in such companies having an overseas taxable presence in the form of a permanent establishment (PE). Both outcomes can result in significant tax consequences for the company.

How is a company’s tax residence determined?

Under UK domestic law, a company is resident in the UK if it is incorporated in the UK or its place of central management and control is in the UK. If major shareholders or directors of a UK company move overseas, this may indicate that the company’s place of central management and control is no longer in the UK.

For companies that are UK incorporated but start to become managed elsewhere, it will be necessary to review the relevant double tax treaty, if there is one, to establish where the company is tax resident. A company may be dual resident where it satisfies the residence criteria of both the UK and another jurisdiction and a relevant double tax treaty does not apply to determine residence in one jurisdiction, or if no action is taken to conclusively determine its residence position.

UK corporation tax implications of becoming non-resident or dual resident

For companies that may or have already become non-UK resident, whether willingly or not, there are a number of UK tax implications that may arise, including the following:

• Before it migrates, a company is required to notify HMRC of its intention to do so, and obtain HMRC’s approval regarding arrangements to settle corporation tax liabilities, as well as certain other tax liabilities (see below). Failure to notify HMRC can result in a penalty up to the amount of the company’s relevant outstanding tax liabilities at the date of migration. The directors of the company and other related parties may also be liable to a similar penalty.
• The company will generally be treated as disposing of its assets and stock at the date of migration, for consideration equal to their market or fair value, which may result in taxable profits arising. Deferrals may be available in some circumstances, and there may be exemptions where the relevant asset remains within the UK tax net, for example because it is used as part of a UK PE.
• If the company continues to undertake a trade in the UK via a PE, other rules will require consideration. For example, the hybrid and other mismatches rules could apply, meaning certain expenditure may be non-deductible for UK corporation tax purposes.

Similarly, for companies that may or have already become dual resident, a number of UK corporation tax implications may arise, including the following:

• Double taxation may occur (ie the company may be taxed on the same profits in two jurisdictions) and a dual resident company may not be able to access all tax benefits under a relevant double tax treaty to mitigate this double taxation.
• The UK’s hybrid and other mismatches rules will again need to be considered in case certain expenditure incurred by the company may be considered non-deductible for UK corporation tax purposes.
• Certain restrictions to the UK corporation tax regime apply to dual resident investing companies, being companies that do not undertake a trade. For example, dual resident investment companies cannot surrender losses to other group members by way of group relief.

What is a permanent establishment?

Broadly, a PE can arise where a company that is resident in one jurisdiction operates in another jurisdiction. If a shareholder, director or employee of a UK company moves overseas, this may result in the company creating an overseas PE.

Generally, a PE can arise where a company has either:

• A fixed place of business in another jurisdiction through which the business of the company is wholly or partly carried on.
• An agent, who is not independent, acting on behalf of the company who has, and habitually exercises in another jurisdiction, authority to do business on behalf of the company.

In some jurisdictions, a home office of an employee, director, or business owner may be sufficient to create a fixed place of business and this is increasingly an area of focus for tax authorities in those jurisdictions as workforces have become more internationally mobile.

In order to establish whether a UK company has an overseas PE, the first step will be to determine whether there is a PE under the domestic rules of that jurisdiction. If the answer to that question is ‘yes’, it will be necessary to review the relevant double tax treaty, if there is one, to establish whether this changes the position.

UK corporation tax implications of having an overseas PE

For companies that are expecting to have, or already have, an overseas PE, a number of tax implications may arise, including the following:

• The company is likely to be taxable on the profits of the PE both in the UK and in the overseas jurisdiction, although double tax relief may be available in the UK for tax suffered overseas.
• It may be possible to make an election in the UK to exempt the profits of the PE from UK corporation tax.
• In order to establish the profits of the PE, analysis will need to be undertaken to determine the allocation of the company’s income and expenses attributable to the PE’s overseas activities, as if it were a separate enterprise.

In some circumstances, it may be preferable to incorporate a subsidiary of the UK company in the overseas jurisdiction, rather than creating an overseas PE of the UK company. The potential advantages and drawbacks of each approach will depend on the specific circumstances and so will require careful consideration.

Other tax implications of a change in corporate residence or an overseas PE

A change in corporate residence or the creation of an overseas PE is also likely to result in tax consequences and obligations in the overseas jurisdiction. There may also be UK or overseas employment tax, social security and/or indirect tax consequences, including the need to obtain HMRC’s approval for arrangements to settle certain tax liabilities.

What actions should companies take?

If a shareholder or director of a UK resident company is considering leaving the UK, it is important for the company to consider how this may impact its UK and overseas tax position and obligations. This is a complex area and, if timely action is taken, there may be ways to mitigate adverse consequences. Companies that may be impacted should seek advice from specialists at the earliest opportunity, both in the UK and overseas. Engaging with a UK adviser that is part of an international network can help to ensure that UK and overseas advice is aligned.

For more information, please get in touch with Ryan Broomfield, or your usual RSM contact.