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Jonathan Schwarz, author of 'Booth & Schwarz: Residence, Domicile and UK Taxation, outlines the factors determining company tax residence.

Introduction

A corporation is a legal entity. It is, under the law, an artificial person, separate and distinct from its members and endowed with an existence independent of their existence. (Salomon v Salomon & Co [1897] AC 22)

Although a corporation’s personality is artificial, it is not fictitious. Since 1889 the word ‘person’ in any Act of Parliament has included ‘a body of persons corporate’ unless the contrary intention appears,(Interpretation Act 1978 s 5 and Sch 1) and a corporation may, accordingly, be fined for contempt of court, (R v J G Hammond & Co [1914] 2 KB 866), be convicted of an offence involving a fraudulent intent, (R v ICR Haulage Ltd [1944] KB 551) and be a ‘respectable and responsible person’ to whom to assign a lease. (Ideal Film Renting Co v Nielson [1921] 1 Ch 575). This chapter examines the residence of companies. Corporation tax has undergone the rewrite process and its fruits are to be found in the Corporation Tax Act 2009 which generally has effect for accounting periods ending on or after 1 April 2009 and the Corporation Tax Act 2010 which generally has effect for accounting periods ending on or after 1 April 2010.  The term ‘company’ is not, of course, descriptive only of a limited company but, under CTA 2010 s 1121 must be taken to mean, in this context, ‘any body corporate or unincorporated association’ excluding ‘a partnership, a local authority or a local authority association’. More to the point, it may possess the status of residence and ordinary residence:

‘Now the definition of the word “residence” is founded upon the habits and relations of the natural man and is therefore inapplicable to the artificial and legal person whom we call a corporation. But for the purpose of giving effect to the words of the Legislature an artificial residence must be assigned to this artificial person, and one formed on the analogy of natural persons.’ (Calcutta Jute Mills Co Ltd v Nicholson (1876) 1 TC 83 at 103, per Huddleston B).

The territorial basis of taxation applies to companies who are chargeable to corporation tax on their profits. (CTA 2009 s 5) Profits for this purpose means income and chargeable gains. (CTA 2009 s 2(2)). A UK resident company is chargeable to corporation tax on all its profits wherever arising, (CTA 2009 s 5(1)), but a company not resident in the UK is not within the charge to corporation tax unless it carries on a trade in the UK through a permanent establishment there.(CTA 2009 s 5(2)). Where it does so, it is chargeable to corporation tax only on profits attributable to the permanent establishment and on trading income and chargeable gains relating to assets used or held by or for the permanent establishment. (CTA 2009 Pt 2 Ch 4). A company that is not resident in the UK may also be liable to income tax on certain income from sources within the UK not attributable to a permanent establishment. (ITA 2007 s 815).

Until 1988 there was no statutory definition of residence for companies. The statutory definitions are now conveniently gathered in CTA 2009 Pt 2 Ch 3. In terms, these statutory provisions apply for the purposes of the Corporation Tax Acts. (See ICTA 1988 s 831(1)(a): ‘the Corporation Tax Acts’ means the enactments relating to the taxation of the income and chargeable gains of companies and of company distributions (including provisions relating also to income tax)). The predecessor legislation applied these statutory provisions for the purposes of the Taxes Acts. (Effectively extending the provisions to income tax and capital gains tax. See TMA 1970 s 118(1), ‘Taxes Acts’ and related provisions.). The rewrite has approached this extension by incorporating CTA 2009 Pt 2 Ch 3 by reference into specific enactments. (See TMA 1970 s 109A; TCGA 1992 s 286A; ITA 2007 s 835A).

Although HMRC has long standing published practice in this area (principally Statement of Practice SP 1/90 and the more thoughtful International Tax Manual, Chapter 3), the application of this practice has not given rise to the same difficulties faced in the individual residence area. Updated guidance in the International Manual INTM120000 and following, now includes helpful examples of  when HMRC will question the residence of companies and those circumstances in which they will normally not review residence. As will be explained, the courts have been required to interpret the expression and a substantial body of case law has resulted.

UK Incorporated Companies

The residence of companies is now addressed in CTA 2009 Pt 2 Ch 3. Any company incorporated in the UK is deemed to be resident in the UK for the purposes of the Corporation Tax Acts. (CTA 2009 s 14(1)). Any other rule determining residence is excluded. (CTA 2009 s 14(2)). The case law which determined the test of residence on the basis of the location of a company’s central control and management is of no relevance to any company which is incorporated in the UK. Although the term residence continues to be applied to such companies, the ordinary meaning of the term has been suspended in favour of a formal test. Thus the tax liability of companies incorporated in the UK is determined by the place of incorporation and not any factual enquiry as to where or how it conducts its business.

There are two limited exceptions to the incorporation rule by way of transitional relief from the time of adoption of the rule in 1988. (CTA 2009 Sch 2 Pt 5). The first operates if the company was non-resident before 14 March 1988 and had become so before then, pursuant to a general or a specific Treasury consent (CTA 2009 Sch 2 Pt 5 para 13(1). It must also have remained non-resident to 1 April 2009) obtained under what was ICTA 1988 s 765 or its predecessors. (See CTA 2009 Sch 2 Pt 5 para 15(2). ICTA 1988 s 765 was repealed by FA 2009).

If the consent was a specific consent, and if the company does not cease to carry on business, the company can remain non-resident regardless of where it is based, and it only becomes UK resident if it in fact becomes resident under the central management and control test. (CTA 2009 Sch 2 Pt 5 para 13(2)).

If the consent was a general consent, a further condition has to be satisfied, namely that the company was taxable in a foreign territory. (CTA 2009 Sch 2 Pt 5 para 13(2)(c)). By ‘taxable’ is meant being liable to tax on income by reason of domicile, residence or place of management. (CTA 2009 Sch 2 Pt 5 para 15(1)). The second application of the exception is for companies which commenced business before 15 March 1988 and become non-resident on or after 15 March 1988 but before 1 April 2009, pursuant to a specific consent applied for before 15 March 1988. (CTA 2009 Sch 2 Pt 5 para 14(1)). If it ceases to carry on business, or becomes resident under the central management and control test, the exception will cease to apply. (CTA 2009 Sch 2 Pt 5 para 14(2)).

Residence under Case Law

Wisely, the Tax Law Rewrite Committee refrained from attempting to put the case law test of residence into statutory form. The test of central control and management is now only in most cases applicable to foreign incorporated companies. Thus, a foreign incorporated company will be resident in the UK if the central management and control of the company is exercised in the UK.

The phrase ‘central management and control’ was coined not by Parliament but by Lord Loreburn in one of the earliest of all the cases concerning company residence, De Beers Consolidated Mines Ltd v Howe (1906) 5 TC 198 at 213, at the beginning of the 20th century. The head office was formally at Kimberley, and the general meetings were held there. Profits were made out of diamonds raised in South Africa, and sold under annual contracts for delivery in South Africa. Further, some of the directors and Life Governors lived in South Africa, and there were directors’ meetings at Kimberley as well as in London. But the majority of directors and Life Governors lived in England. The directors’ meetings in London were the meetings where the real control was always exercised in practically all the important business of the company, except the mining operations. London always controlled the negotiation of the contracts with the syndicates to whom the diamonds were sold, determined policy in the disposal of diamonds and other assets, the working and development of mines, the application of profits, and the appointment of directors. London also always controlled matters that required to be determined by the majority of all the directors, which included all questions of expenditure except wages, materials, and such like at the mines, and a limited sum which might be spent by the directors at Kimberley. In finding the company resident in the UK, Lord Loreburn formulated the principle as:

‘A company resides, for the purposes of Income Tax, where its real business is carried on … I regard that as the true rule; and the real business is carried on where the central management and control actually abides’.

In Bullock v Unit Construction Co Ltd (1959) 38 TC 712, Lord Radcliffe summarised the position as it existed in 1959 as:

‘… the necessity of establishing some common standard for the treatment of different taxpayers meant that the Courts of Law were bound in course of time to produce and apply some general principle of their own to form an acceptable test of residence ... [T]he principle was adopted that a company is resident where its central management and control abide: words which, according to the decision of the House of Lords that finally propounded the test, De Beers Consolidated Mines Ltd v Howe, are equivalent to saying that a company’s residence is where its ‘real business’ is carried on…. (738)

… as precise and unequivocal as a positive statutory injunction … I do not know of any other test which has either been substituted for that of central management and control, or has been defined with sufficient precision to be regarded as an acceptable alternative to it. To me … it seems impossible to read Lord Loreburn’s words without seeing that he regarded the formula he was propounding as constituting the test of residence.’

The above is an extract from Booth & Schwarz: Residence, Domicile and UK Taxation by Jonathan Schwarz, and is published with the kind permission of Bloomsbury Professional.