If a trustee asks an adviser, for a review of the offshore structure for ‘tax purposes’ should the tax adviser admit where it is weak or not? The answer is – it depends!
Ivan set up his business group headquarters in Guernsey fifteen years ago which is owned by a trust. The business is predominantly UK based and is now substantial.
The first area of vulnerability, I would advise Ivan, is whether any part of the structure could be treated as UK tax resident. The leading case on this is Wood v Holden, 2006.
In this case, the judge decided that a company will be resident in the place where decisions are made by its board of directors, subject to one exception. Where an ‘outsider’ has ‘usurped’ the function of the board and effectively exercises management and control from the UK, without regard to the board. In this case, the company will be treated as resident and taxed in the UK.
However, to cross this line, depends on a finding of fact. An ‘outsider’ can propose, advise and influence the decisions of the board, but must not ‘usurp’ its function. The line is crossed only where the outsider ‘dictates’ the decisions of the board and the directors do as they are told.
There have been a number of cases since 2006, which give further clarification.
In the case of Laerstate BV v HMRC 2009 a controlling shareholder and one of the two directors Dieter Bock, resigned from the board, but continued (in practice) to exercise central management and control of the company from the UK, notwithstanding that he was no longer a director. It was decided that the influence of Dieter was such that the company was UK resident and liable to UK tax. This decision hinged on the fact that the board listened to what Dieter demanded, regardless of the fact that he was not a board member.
In Lee v Butler v HMRC 2017, HMRC successfully argued that a trust was effectively managed in the UK (a similar test, but not identical test to central management and control) in circumstances where decisions were made by a trust company in Mauritius, but the ‘shots were called’ from the UK. Again, the trust company listened to what was being dictated by non-board members in the UK.
HMRC has also made reference to recent developments in Australia. In Bywater Investments and Hua Wang Bank Berhad 2016 a company was held to be resident in Australia where an individual was carrying on the ‘real business’ in Australia with decisions being rubber-stamped by a non-resident director.
The second area of vulnerability, I would advise Ivan, which can affect the tax treatment of offshore structures, is whether the trust has a ‘fixed place’ of business in the UK, through which trust or company business is carried on, or if somebody habitually exercises, in the UK, authority to bind the offshore headquarters.
These are important areas and need to be looked at with care, because once HMRC starts an investigation it will demand to see all board papers and minutes, and possibly also the email correspondence between the directors and other key individuals. It is specifically looking for the unguarded comment, or casual conversation, on which it will build its case based on these ‘facts’.
However, getting back to my question, should an adviser admit where a structure is weak? The answer is – it depends. HMRC cannot demand to see advice which is ‘privileged’; advice from a qualified lawyer. It can however, demand to see advice from an accountant – which is not privileged.
Therefore, Ivan’s trustees, if they are concerned that that structure could be investigated by UK HMRC should first seek the advice from a lawyer to determine where the structure could be regarded as weak and how to make it more robust.
As part of this exercise, advice should also be sought as to what to do, to avoid a tax investigation, becoming a nightmare.
Long before UK HMRC starts sniffing the trustees should first seek advice from an independent accountant to tell them how to fill in all the relevant tax returns, to avoid the 200% onerous penalties for failure to correct, which I covered a few weeks ago. Then trustees need to be advised as to what to do as and when a tax inspector comes sniffing.
The temptation is to respond to the demands of the tax inspector, without first taking advice from a good dispute resolution lawyer. Tax authorities have been ordered not to compromise and have the mind-set that offshore structures are set up for one reason only - to avoid tax. So, they care little if their investigation is harsh, long winded and unfair.
If a trustee wishes to act in the best interests of his beneficiaries, it should engage the best dispute resolution lawyer to resolve the dispute. If this is not done, the dispute can, and will, drag on for years and years, benefitting only the professionals.
If you would like your offshore structure reviewed or to engage a dispute resolution lawyer, please contact me on 020 3740 7422 or e mail me on firstname.lastname@example.org.