United Kingdom (UK) Tax Issues: Taxing a business entity, not resident in UK

30 May

Resident corporations in UK, are generally taxed on their global profits. On the other hand, non-resident UK based corporations are taxed a corporation tax only on the profits that are attributable to a permanent establishment in UK, profits made from trading in UK or developing UK land, and a UK income tax on income obtained from any kind of source in UK.

The basic rule that need to be followed is that, any non-resident corporation in UK must pay a corporation tax, if it meets the following conditions:

  • In possession of a permanent establishment in United Kingdom.
  • The profitable business operations are carried in United Kingdom.

A permanent establishment is considered to be a place where a business entity has its presence or a fixed address through which trade is being carried out. There are 2 kinds of permanent establishments.

  • Fixed place of the business – majorly, fixed place of a business is considered to be a physical building or a site where company’s operations are carried out, for the non-resident company. An office, factory, or a shop are examples of fixed places of business.
  • Business activities through a dependent agent, who is an individual dependent on the foreign company and constantly conducts business for the corporation, usually by accomplishing contracts on behalf of non-resident business. Agency Principal Law is where a Principle in charge, authorizes an agent to exercise liabilities, rights etc. of certain contract on behalf of the Principal.

Location of Economic Activity

There are several factors that affect the economic activities of a multinational corporation, contributing towards its location. These factors generally include working staff, turnover, technology being employed, intellectual properties, physical and intangible assets. Tax authorities usually makes a calculation about which of these factors are developed or occur in a certain nation and how much profit do they earn. HMRC considers several other factors to determine the most feasible location of company’s economic activities.

Having clients in UK does not mean that a corporation is carrying out its economic activities in the state. It is because of the reason that having UK based clients is not equivalent to having a permanent UK establishment. This means that there exists a difference between foreign non-resident corporation that is trading offshore with UK clients and one that is actually executing trade operations within UK.

Business Website

If a non-resident company possesses a UK website, this does not mean that the company has a fixed business premises or have a dependent agent in the country. All the business operations must be occurring abroad.

Considerable Factors

  • Hosting corporation of the website.
  • Location of the website builder.
  • Location of the website developer who created the website.
  • Location of the computer systems.
  • Location of the managers of the computer systems.
  • Location of the server(s).
  • Location of the backup system(s).
  • If the servers are provided by some service providers, then location of the service providers matter.

Group of Companies

A large number of multinational companies generally operate in the form of a group. Only a number of such companies will trade in UK. For example, at times, an abroad corporation targets and sells to some UK clients online. At the same time, another company, which is not only situated in UK, but also offers warehousing, distribution and other customer services and support to the abroad corporation that is trading through internet.

Where this happens, the UK Support Company will be taxed only on the profits it earns from its own operations and the services it provides to the foreign corporation.

This is not considered to be tax avoidance, rather, it is the way in which corporation tax is derived; it applies to individual business set-ups.

International Trading UK based Companies

Most of the major economies conduct corporation tax, just as UK does; therefore, UK resident businesses have not to face any difficulty and receive similar treatment in foreign nations. It is meant to state that, UK resident business entities are not charged corporation tax on the profits they earn from selling in that nation, unless they trade through a permanent establishment in that particular nation. In spite of that, they are taxed with corporation tax on those profits back in UK.

In other words, a UK based company, involved in international trade through internet will be charged Corporation Tax in UK, and not in the nations, where clients are physically located.

The principle of how international companies are taxed in different nations and the principle of a permanent establishment has existed for some duration. In the past, back in 1920s, the League of Nations established some draft tax treaties to ensure that corporations were not taxed more than once on the same profit in different states. The draft treaties, then, eventually became part of today’s tax treaties.

A model created by Organization for Economic Co-operation and Development (OECD) is followed by Modern tax treaties.

The difference between the modern tax treaties and old drat treaties (dated back to 1920s) is the way which organizations opt to run their operations, especially their ability to sell their products/services via the internet in different places. Questions have been raised about whether tax regulations for permanent established set-ups have to be amended to address some of these important changes.

The OECD/G20 Base Erosion and profit Shifting (BEPS) project was developed to review and enhance the application of international tax regulations. The confusion on what makes up a permanent establishment was a part of this project and suggestions regarding tax rules updating were presented in 2015.

General Taxation Rates on Corporation Tax

 The normal corporation tax rate, as of 1st April, 2018, is 19%. This rate may vary and decline by 2% from 1st April, 2020. A reduced tax is enforced wherever, the taxable income is made from exploitation of patents. The rate was previously, 10%, as of 1st April, 2017.

Generally, all the corporations in different trade sectors are subjected to similar rule and a same amount of tax rates on corporation tax. However, some treatments and relieves vary depending upon the size, transfer, pricing, research and development credits and some specific anti-avoidance regulations.

Special Corporation Tax

For large scale business entities, there are some extra compliance conditions. Some concepts of Her Majesty’s Revenue and Custom’s (HMRC’s) institutional structure and tactic to avoidance and compliance are set according to the business type and its size.

  • Oil and Gas Companies
  • Profits of companies, that are attributable to the extraction of petroleum products or have rights to petroleum products in UK and the ring-fence profits are taxed in UK in compliance with the rules that has been set it 2006. Here, a rate of 30% and minor profits are taxed 19%. The business activities also have 100% capital allowances on most of its capital expenses. An additional tax of 10% is enforced to be adjust ring fence profits.
  • Life Insurance Businesses
  • Life Insurance Companies are also taxed specially. They have different corporation tax rates and special rules for calculating total profits.
  • Tonnage Tax
  • Businesses that are subjected to corporation tax and run qualifying ships that are managed and strategically based in UK, have the choice for Tonnage tax instead of corporate tax.
  • Tonnage tax is an alternative of qualifying corporation tax profits based on net tonnage of their running vessels. Tonnage tax profit is a replacement of tax-adjusted gain/loss on a shipping company and some other similar activities, and the chargeable profits/losses incurred on tonnage tax assets. Any extra gains are subjected to normal corporation tax.
  • Banking Setups
  • An additional tax applies to corporation in the banking industry at 8% on gains in excess of 25 million pounds sterling. Moreover, carried forward losses can be measured against 25% of gains in a specific period.

Corporate Tax Registration

After setting up a company, it is mandatory for you to register for corporate taxation within 3 months after the operations of your business begin. We at Stephen M.S. Lai & Co. CPA will go for your 10 digited Unique Taxpayer Reference (UTR) from HMRC, as we will help you in getting registered for a Corporate Tax.

During the registration process, we will inform HMRC of the company registration number, the exact date at which your business got operational and the date you will prepare your first financial statements.

  • Registration for PAYE
  • Employer of a corporate body is required to register with HMRC PAYE for conducting payroll including the appointment of company directors and payment of directors and forward the payroll statement to HMRC.
  • Stephen M.S. Lai & Co CPA Ltd. will help you in the registration process and will answer all the questions raised by HMRC during PAYE registration process. Normally, it takes 5 working days to receive the employer PAYE reference number and you will not be allowed to register 2 months before you start paying your staff.
  • Registration for National Insurance (NI) Number
  • Prior to being permitted to work in UK, it is a requirement that you must have a National Insurance (NI) Number, even if you are self-employed. To get an NI, you should appear for an interview in the job center. The public officer will conduct a strict interview with some preset standard questions. Stephen M.S. Lai & Co. CPA, will help you in getting an appointment in the job center, and help you practice on how you should answer the preset questions accurately.
  • Registration for UK VAT
  • If your business has a VAT taxable income of at least 85,000 EUR then it is mandatory for you to get registered for UK VAT at HMRC. It is voluntary to registered for Value Added Tax once you establish your enterprise.
  • After getting registered, you will get a VAT Registration Certificate with a unique VAT number for your profile. You will require this information whenever you present your VAT returns. The most effective registration date is when your company exceeded the threshold.
  • We, at Stephen M.S. Lai & Co. CPA will help you in getting a UK VAT registration certificate from HMRC, as well as, will answer all the questions that will be raised by the government institution, during the application process.
  • Quarterly VAT Filing to HMRC and reclaiming extra VAT
  • As From the date of registration, you are required to:
  • Change the amount of Value Added Tax (VAT).
  • Pay any VAT to HMRC.
  • File VAT returns.
  • Keep records of VAT.

Our accountants at Stephen M.S. Lai & Co CPA will help you making the correct payment of VAT to HMRC and do all the filing for you. The fee that will be charged from you, depends upon the workload we have; therefore, it will be beneficial for you to get in touch with us and provide us with the detailed Turnover transactions per month so that we can quote the corresponding amount of fee for you.

  • Renewals to Companies House and Tax filing services to HMRC for local companies, carrying out business in UK
  • At the end of each financial year, your company is required to prepare:
  • Annual Accounts in full
  • Company Tax Return and confirmation statement

These may be utilized to calculate the amount of Corporation Tax that you must pay. The deadlines for submitting documents to HMRC is:

  • File First Accounts with Companies House, within 21 months after the date you registered with Companies House.
  • File Annual Accounts with Companies Accounts within 9 months after the completion of company’s first financial year.
  • Payment of Corporation Tax or inform HMRC that your limited company does not owe anything, within 9 months and 1 day after your account period for Corporation Tax ends.
  •  File a Company Tax Return, within 12 months after your accounting period for Corporation Tax ends.

We, as your corporate secretaries and accountants will help you in submitting necessary filings and documents to the Companies House and HMRC.

  • Change of company name
  • For starters, to request for a name change, you are required to have a resolution approved in Board of Directors. Our firm will change a name from (NM01) and take it to Companies House for review. Once the name is successfully changed, we will inform the HMRC and bank, so that they can update their records accordingly.
  • Additional costs may apply, if clients want a new certificate of incorporation of Change of Name Certificate and any other certificates.
  • Change of Directors and Shareholders/Shares
  • Here, a Board of Directors’ (BoD) meeting should be held and must pass the resolution to change the company’s director. Afterwards, we will file changes regarding the director to Companies House. We will also deal with all kind of inquiries raised by the government body.
  • Also, a Board of Directors meeting should be held to pass resolution of transfer of shares. After getting approval, for transfer of shares, we can prepare for:
  • Share transfer forms
  • Bought and sold note forms

We will arrange for the parties involved to sign the forms and act as their witness. Once signed, the documents will be submitted to the Companies House for keeping record and updated in the minute books record.

  • Updating details of Directors and Shareholders
  • Changes in details include any change in name, address, nationality, marital status etc. that must be notified. We will submit the relevant changes to Companies House and HMRC.

Income Tax for Companies not resident in UK

Non-resident companies of UK are liable to UK Corporation Tax only on the profits that are attributable to a permanent establishment in UK, or the gains gotten from dealing in or development of a land in UK which is irrespective of whether there is a permanent establishment in the country.

Any other income which is sourced in UK by non-resident business entities is liable to UK tax at a current rate of 20%, without any allowances. This tax charge generally arises in accordance to rental incomes made by a non-resident landlord (NRL) and on the payments made on interests/royalties.

United Kingdom has an NRL scheme that requires the tenants of the non-resident landlord to not pay the appropriate tax at the sources, unless they have been told that the non-resident landlord has applied for and been granted permission to collect gross rents.

Diverted Profit Taxes

Diverted Profit Tax (DPT) is different from the normal Corporate Tax. It is currently charged at 25% on diverted profits or 55% in case of ring-fence profits in oil and gas industry. Since the rate of Corporation Tax is 19%, it is expected that corporations affected by DPT will try to restructure their business activities to pay more Corporation Tax, in place of paying DPT.

In general, DPT applies in following conditions:

  • In case of a group with a permanent UK establishment (or subsidiary) and there exists trading activities that have no economic substance, aimed at exploiting tax mismatches.
  • Cases, where foreign businesses have structured their activities to avoid a permanent UK establishment.

DPT is not applicable to SMEs. Companies are needed to tell HMRC if they are subjected to DPT within 3 months of conclusion of the related accounting period.

  • Corporations/Permanent Establishments that do not have an economic substance
  • In cases, where permanent resident companies lack economic substance, there are normally 2 tests that are considered:
  • Insufficient Economic Substance Condition – This condition applies, where the benefit of business transaction is more as compared to other financial benefits, and it is valid to assume, that the business activities were planned to achieve tax reduction. Alternatively, it is applicable if the individual is involved in more than one trading activities, and the contribution of financial value is lesser as compared to the tax benefit and it is correct to assume that the individual’s involvement was meant to reduce the tax rate.
  • Effective Tax Mismatch Condition – This applies if the transaction made, leads to a reduction of tax in favor of one of the involved parties and the tax payable by the remaining party to the business transaction is lower than 80% of the tax reduction received by the 1st party.
  • If any of these tests are met, DPT will be charged.
  • Avoidance of a UK taxable permanent establishment
  • Overall, where a business transaction is made in a way to ensure that a corporation is avoiding to have a taxable permanent UK establishment, a DPT charge may apply. Either both are lacking economic substance condition and the effective tax mismatch condition are met or the tax avoidance condition is met.
  • Tax avoidance condition is met, if there are arrangements set in relation to supply of products or services in UK, for which the major aim is to avoid or gain reduction of Corporation Tax in UK.
  • Shall UK companies possess a bank account in UK or outside UK without any fixed placed of business in UK?
  • At Stephen M.S. Lai & Co CPA, we can register clients with a UK corporation and we can offer a registered business address and also a principal business address. We can also arrange to open a company’s bank account in or outside UK, for our clients. We offer many supporting services which are listed below:
  • Registration for Corporate Tax, while registering company in UK.
  • Act as your tax representative to handle major issues from HMRC.
  • UK VATS registration.
  • Corporate Tax filing to HMRC.
  • Accounts filing to HMRC.
  • Secretarial Services
  • Accounting Services
  • Many other “UK” services.

The supporting services do not include certain principles of permanent establishment in UK. The result is that, people, who do not have a fixed place for their business in UK either possessing corporate bank accounts or foreign corporate bank accounts are not charged UK corporate tax because a non-resident company do no have a permanent establishment in the country and the economic activities of the business that lead to profit are conducted outside the UK.

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