Unwary business owners leaving the UK could trigger exit charges

A move overseas may appeal to some business owners and company directors, but many are unaware that this could prove costly to their companies. An individual’s personal residence 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). This can have major tax consequences for the company.

Generally, 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 could mean that the company’s place of central management and control is no longer in the UK.

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.

Individuals moving overseas often focus primarily on their own tax situation, rather than what it might mean for the company they own or work for. For companies that may or have become non-UK resident, a key issue is that 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. This is broadly known as an ‘exit charge’ for companies, and while deferrals and exemptions may be available in some circumstances, it can result in significant taxable profits arising.

Further obligations include a company being required to notify HMRC of its intention to migrate, and obtain HMRC’s approval regarding arrangements to settle corporation tax liabilities and certain other tax liabilities. Failure to do so can result in a penalty up to the amount of the company’s relevant outstanding tax liabilities at the date of migration, and the company directors may also be liable to a similar penalty.

Additional complexities, such as the hybrid and other mismatches rules, can also arise if the company continues to undertake a trade in the UK via a PE, and could result in certain expenditure being non-deductible for UK corporation tax purposes.

Sometimes companies can be dual resident, meaning they satisfy the residence criteria of both the UK and another jurisdiction. In such situations, double taxation may occur (ie the company may be taxed on the same profits in two jurisdictions). Such a dual resident company may not be able to access all tax benefits under a relevant double tax treaty to mitigate this double taxation. Again, there are various complex rules that would need to be considered, which could result in expenditure incurred by the company being considered non-deductible for UK corporation tax purposes, or restrictions to tax relief.

If instead a company is not dual resident, but has an overseas PE, it 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.

There are other potential tax implications, such as UK or overseas employment tax, social security and indirect tax consequences.

It’s clear there are many complexities for shareholders or directors of UK resident companies to be aware of if they are debating leaving the UK. Business owners and company directors should be wary that a place in the sun could give rise to surprise costs, and it’s recommended that any companies potentially impacted take swift action to mitigate any adverse consequences.