Entrepreneurs who are worried by the direction of travel of the Government’s tax policies are increasingly thinking about whether to re-locate their business activities in companies outside the UK.
This shouldn’t be entered into lightly; there are all sorts of tax traps that can snare the unwary.
The international tax landscape has changed beyond recognition over the last 10-15 years, both with changes to UK tax rules and with multi-country agreements. Information exchange agreements mean that HMRC will know about overseas bank accounts and other transactions. Other treaties mean that HMRC can pursue UK Tax debts in 167 (and counting!) territories worldwide. These changes can mean that there is no escape from UK tax law.
It is very unusual for HMRC to agree that a UK-incorporated company could move to be tax-resident elsewhere. A new company which is set up overseas can still be UK tax-resident if decisions about its management are taken in the UK. It is therefore only feasible to set up a company which is tax-resident outside the UK if controlling decisions can be taken entirely outside the UK. In practical terms, this would typically mean relocation or at the very least regular travel abroad, as well as commitment and discipline. UK residence could be established by a handful of emails sent by a director while they are in the UK.
Having a non-resident company is only the first step. Non-resident companies are also taxed on UK activities where they have premises or “agents” in the UK. Rents and gains on UK property are always taxable in the UK, no matter where they are owned.
In general, businesses need to pay tax on their profits where those profits are earned; this means where the people who are earning those profits are located. Five years ago, the Government introduced rules to stop small and medium sized businesses from using artificial prices to move profits to low tax jurisdictions (for example, paying over-inflated “management fees”). Large companies are subject to stricter measures.
In practice, it is only possible to move profits of businesses overseas where the people, that earn those profits, earn them overseas. For businesses tied to UK premises or providing services in the UK, there will be limits on the ability to move these activities.
Transferring business activities overseas might also involve the transfer of an asset. A profitable business will have goodwill, even if this isn’t shown on the balance sheet. This goodwill is “attached” to the business activities and tax might be payable when they move. Transfer of any valuable plant or other IP, such as patents or trademarks could also give rise to a tax charge.
Finally, some payments to overseas companies can be subject to “withholding taxes” in the UK. Paying royalties or interest can result tax being payable by the company which makes the payment, on a quarterly basis.
None of this means that transferring businesses overseas is impossible. It does, however, require careful consideration of the tax implications in light of the recent changes. It also requires substantial, real activity outside the UK and commitment to maintain that activity. Timely, good quality tax advice should be an essential early step.
To discuss further and for tailored advice, please get in touch.
