I have acted for Joshua for many years. He is a beneficiary of a trust, which I will call Larchwood Trust, with his sister Marcelle which was set up for him in 1998 by their father. Joshua is resident in the UK, but Marcelle is resident in Argentina.
The trust owns a number of active businesses, one of which is an import business to the UK of products from Argentina, based in the UK, which I will call Larchwood Enterprises Limited.
The Trustee of his trust ABC Limited, has an excellent track record, and has over the last few years been very acquisitive; buying large and small fiduciary businesses mostly in offshore financial centres and introducing them to their way of doing business and looking after clients.
Joshua recently received a letter from ABC Limited to say that it was proud to announce the acquisition of a fiduciary business STU Limited, with offices in Singapore, BVI, Lugano and London. Joshua wrote to me to say how excited he was that he could now have meetings with his Trustees in London and would no longer have to travel to the Channel Islands!
I wrote back to him, which I copied to ABC Limited, who I had got to know quite well over the years, to say that it was unlikely that his visits to the Channel Islands would come to an end despite ABC Limited having acquired an office in London.
Under Section 69(2D) of the Taxation of Capital Gains Act 1992, and Section 475(6) Income Taxes Act a trustee, ABC Limited will be treated as UK resident and taxable in the UK, in relation to a trust, if it acts in the course of a business which it carries on through a ‘permanent establishment in the UK’.
I told Joshua that ABC Limited would no doubt have taken legal advice before acquiring STU Limited and would have put in place rigorous processes, but Joshua was inquisitive, he wanted to know the rules and the dangers.
I told Joshua that HMRC and the OECD Tax Model Convention provide helpful guidance on the meaning of permanent establishment which is at the heart of where a trust is resident, if it has a corporate trustee acting as a sole trustee.
If ABC Limited employees were to use the offices of STU Limited when they came to London, this would not necessarily mean that Larchwood Trust would become subject to UK capital gains tax or income tax. But it depends what these employees are doing while in the UK which matters, and this is governed by three tests.
The first is if ABC Limited employees are doing trust business in the UK. If they are merely coming to the UK to pitch for new business, that is ok, but they should not be doing trust business, while in the UK.
The second test is, are the employees of ABC Limited doing trust business in the offices of STU Limited in London?
Third test is, are the employees of ABC Limited carrying out the trust business of Larchwood Trust, in the offices of STU Limited in London?
The Guidelines make it very clear what trust business is, namely
· The general administration of the trust
· The over-arching investment strategy
· Monitoring the performance of those investments, and
· Decisions on how trust income will be dealt with and whether distributions should be made.
One off meetings are ok. To give an example, if ABC Limited met with Joshua at the offices of STU Limited to discuss the potential release of capital from the Larchwood Trust, this clearly falls within a core activity of the Larchwood Trust. Prima facie ABC Limited is acting as a trustee of the Larchwood Trust through a permanent establishment, the offices of STU Limited. However, HMRC will not make a decision based on a one-off meeting, it wants to know the whole history.
The trap to avoid, which crops up when a trust has appointed a professional trustee, is where meetings are held by employees of ABC Limited with Joshua in London, which ABC Limited then ratifies in the Channel Islands at a formal meeting of the Directors of ABC Limited.
In my opinion, as I told Joshua, he needs a structure, where it is clear who is taking the decisions and where they are taken. Although, in most cases, on balance, it is clear that the real decisions are being taken abroad, no-one wants to tempt fate with HMRC. Fighting HMRC is not like fighting anything or anyone else. It has been told it must go after every penny of potential tax, regardless of the time and expense it takes to go through all the files and papers of Larchwood Trust, since inception.
The inconvenience and cost of flying out to the Channel Islands to have real meetings where real decisions are taken is a small price to pay to avoid years of wrangling with HMRC.
If you would like to find out more, or buy my book, ‘When you are Super Rich who Can You Trust?’ please contact me on 020 3740 7422, or e mail me on firstname.lastname@example.org