Tax, Company Tax, Corporation Tax,

Tax Implications for Non-UK Resident Company Owners

Ryan Patrick

• 14 min read
Tax Implications for Non-UK Resident Company Owners

Exploring business opportunities in the UK as a non-resident is a good option if you plan to expand your business in the international market but it all comes with tax responsibilities. Although the UK is known for its business-friendly environment, simplified company formation process and favourable tax policies especially for non-residents, operating a business as a non-resident in the UK implies that you need to understand the UK's multiple taxing systems including Corporation Tax, VAT, and other tax liabilities.

It is important for non-residents to fully understand how each tax system works in the UK to ensure compliance with UK tax regulations, avoid unexpected tax bills, and ensure the smooth operation of their businesses. This article contains all information about the UK tax system, including tax payments and various tax obligations.

Tax Residency for UK-Based Companies

The tax residency of a company directly influences the company's tax obligations and potential liabilities. In the UK, the tax residency of a company is determined by two important factors; the location of incorporation of the company and the location of central management and control of the company.

Incorporation and Automatic Residency: If a company is incorporated in the UK, it is automatically considered a UK tax resident and is subject to 7o UK Corporation Tax on its worldwide profits. This rule aligns with the UK taxation system, which taxes companies based on their formal registration within the country. However, it is important to note that incorporation is not the sole factor determining the tax residency of a company.

Central Management and Control: Aside from incorporation, the UK government utilizes the "central management and control" test to determine a company's tax residency. This test is to determine where the company's important decisions are made and the location of operations of the board of directors. If the strategic decisions of the company are made in the UK, the company is considered a tax resident, regardless of the location of incorporation.

Dual Residency and Double Taxation Agreements: In cases where a company is considered a tax resident of both the UK and another country or is referred to as dual residency. To avoid the risk of double taxation of dual resident companies, UK Gas established an extensive network of Double Taxation Agreements (DTAs) between the UK and several countries. These agreements include a "tie-breaker" clause which determines the company's residency based on some factors such as location of effective management, location of incorporation and other relevant criteria. This agreement helps to ensure that companies are not taxed twice on a single income.

Controlled Foreign Company (CFC) Rules: In cases where a UK resident company has a subsidiary outside of the UK which is subjected to a lower tax rate, the profit made from the subsidiary may be taxed in the UK except in certain exemptions such as when the subsidiary engages in economic activities or meets certain tax threshold. These rules aim at protecting the UK tax base by discouraging artificial arrangements for tax avoidance.

Determining the tax residency of a company is important, although any company incorporated in the UK is considered a tax resident of the country. For non-residents, it is advisable to seek professional guidance and stay updated with the UK's legislative amendments that might affect you or your business.

Corporation Tax and Filing Obligations

To successfully operate a UK-based company as a non-resident entrepreneur, there is a need for a clear understanding of the Corporation Tax alongside its associated filing requirements. According to the UK taxation laws, a company that has an active business activity or has a taxable income must register for Corporation Tax and comply with all other associated filings.

A company is mandated to register for corporation tax if it meets one or more of the following criteria:

  • Sell off UK property or land, including investment vehicles bought in the name of the company.
  • Engage in any form of offshore property development that involves UK land or property.
  • Carry out business activities through a dependent agent permanent establishment (DAPE) within the UK.
  • Is a UK resident company.

Although Non UK incorporated companies that operate in the UK do not need to register with Companies House, they must still pay Corporation Tax if they meet any of the above conditions.

Accounting Period

A company's accounting period, which means the timeframe for the company's tax assessments begins when the company:

  • Begins business activities
  • Acquires a new source of income.
  • The end of an accounting period however is at the earliest of the following:
  • Twelve months from the start date of the accounting period.
  • Any accounting date chosen by the company
  • Cessation of trade/business activities or termination of UK residency.

Filing for Corporation Tax (Company Tax Return)

Companies are obligated to file a Company Tax Return, also known as the form CT600, to report all income, profits, losses and tax liabilities of the company. The filing deadline for a company tax return is typically 12 months after the end of the accounting period. Non-resident company owners should always submit this form on time to ensure compliance and avoid penalties or interest charges.

Note: Effective from 6 April 2020, non-resident companies, including those investing in UK property through collective investments, are mandated to pay Corporation Tax instead of income tax on all profits derived from the UK property.

Ensuring Compliance

Timely Registration: Non-resident company owners should promptly register their company for corporation tax immediately they need the criteria to avoid penalties.

Accurate Record-Keeping: Companies should maintain accurate and organized financial records to support tax computations and enhance accurate reporting.

Adherence to Deadlines: Be attentive about filing deadlines to prevent penalties and interest charges.

Professional Consultation: seek professional advice and guidance to help with understanding the UK tax system.

Understanding this corporation's tax obligations is important to help non-residents effectively manage their UK-based companies, ensuring compliance with the UK tax laws and also a smooth business operation.

VAT Obligations

VAT is a consumption tax levied on most goods and services in the UK. As a non-resident, you should understand the registration requirements, compliance obligations and also the potential penalties for non-compliance with VAT.

VAT Registration Requirements

UK-based companies are mandated to register for VAT with HMRC if their total taxable income exceeds the £90,000 VAT threshold in 12 months or If the company anticipates an income exceeding that threshold in 30 days. Taxable income includes any UK transactions that do not have VAT exemptions. Businesses that have a turnover of less than £90,000 can also voluntarily register for VAT. Also, non-established taxable persons (NETPs), who are those without an established business in the UK but make taxable sales in the UK are also required to register for VAT irrespective of their annual turnover.

A company is regarded as a UK establishment if:

  • The major management decision of the company and central administration is conducted in the UK.
  • The company has a permanent physical presence with the human and technical resources to make or receive taxable supplies in the UK.

If none of the above criteria is met by the company, then the company is classified as a NETP and is mandated to register for VAT if they make any taxable sales in the UK.

Exceptions to VAT

There are certain exceptions where an NETP may not require VAT registration in the UK:

  • All sales made in the UK are zero-rated (0% VAT)
  • The sales made in the UK are conducted through an online marketplace to non-business customers in the UK.
  • The sales are made exclusively to VAT-registered businesses in Great Britain, these VAT-registered businesses will handle the VAT through the reverse charge procedures.

If the business or company does not meet any of these exemption criteria, VAT registration must be made within 30 days of making taxable sales.

VAT Compliance Obligations

Once a company or business has successfully registered for VAT, they are obligated to:

  • Charge of applying the appropriate VAT rates to all their taxable sales
  • Issue VAT invoices to customers for sales that exceed £259.
  • Maintain accurate and organized records of all sales, purchases and all VAT charged and paid.
  • File and submit VAT returns to HMRC which is typically every quarter of the year with full details on VAT collected and paid.
  • Pay any VAT owed to HMRC by the specified deadline.

Non-resident company owners should comply with these VAT obligations to ensure full compliance with regulations and also to avoid potential liabilities that may result from non-compliance.

Penalties for Non-Compliance

Failure to register for VAT when due can result in automatic registration of the company by HMRC with added penalties. However, the penalty for failure to register depends on the percentage of the net VAT due, which varies based on the lateness of registration:

  • Less than 9 months late
  • 9-18 months late
  • More than 18 months late.

Also, HMRC may charge interest on late VAT payments and impose enforcement action if non-compliance continues.

Recommendations for Non-Resident Company Owners

  • Non-residents should consult with UK-based tax professionals to understand the specific VAT requirements and obligations to ensure compliance.
  • Company owners should regularly review HMRC guidelines and updates on VAT regulations.
  • Implementing effective accounting systems to track VAT on sales and purchases.

Dividend Taxation for Non-Residents

It is essential to understand that the United Kingdom does not impose a withholding tax on dividends paid by UK companies to both resident and non-resident shareholders. This policy ensures that shareholders receive full dividends as declared by the company without immediate tax deductions at the source.

Although the UK does not withhold tax on dividends, non-resident shareholders should always consider the tax laws in their country of residence. The taxing of UK source dividends depends solely on the tax laws and obligations of the shareholder's home country and also the existence of any double taxation agreement between the UK and the country.

Double Taxation Agreements (DTAs)

The UK has an established system of double taxation agreements with several countries aiming to prevent the issue of double taxation of income including dividends paid to shareholders. These agreements allocated taxing rights between the UK and the shareholder's country of residence with primary tax rights usually granted to the home country.

The UK operates on a dividend imputation system which allows a shareholder to receive a tax credit reflecting the corporation tax paid by their company on its profits. The major aim of the dividend imputation system is to avoid double taxation by crediting shareholders for tax already paid at the corporate level. However, it is important to note that this system was abolished in 1999 allowing dividends to be taxed separately at the shareholder's level without any imputation credits.

Practical Implications for Non-Residents

Non-resident shareholders are not liable to withhold tax deductions from dividends received from UK companies.

Non-resident shareholders must report and pay taxes on dividends received from UK companies according to the tax regulations of their residence country.

Shareholders should consult the specific DTA between the UK and their country to understand the taxing system as well as any available reliefs or credits to avoid double taxation.

Income Tax Obligations for Non-Residents

The UK tax system regulates tax responsibilities and obligations based on three factors: residency status, nature of income and the existence of a double taxation agreement between the UK and the country of residence.

Taxation Based on Residency and Nature of Income

Considering the source of income and the residency status of non-resident company owners in the UK, the key considerations include:

UK Source Income: Non-residents are mandated to pay UK income tax on income that arises from UK sources. These sources include profits achieved from a trade or profession conducted through a permanent establishment in the UK and rental income from UK real estate.

Worldwide Income: Individuals who are both residents and domiciled in the UK are subject to taxation on their income or profits from any part of the world. However, non-residents are typically taxed on the only income from UK sources.

Double Taxation Agreements

Aiks to prevent double taxation by providing taxing rights and reliefs or exemptions which all depend on the specific agreement between the UK and the company's owner's country of residence.

Non Domiciled Status:

Non-domiciled individuals who reside in the UK may be subjected to specific tax benefits especially concerning foreign income and profits. Previously, such individuals could opt for a remittance basis of taxation which allows only their income and profits that are remitted to the UK to be taxed. However, recent legislative changes introduced changes and conditions for long-term residents wishing to retain this basis.

Controlled Foreign Company (CFC)

The UK's Controlled Foreign Company (CFC) rules are made to prevent UK-based companies from diverting profits to low-tax jurisdictions. These rules however have a significant impact on non-resident entrepreneurs who operate UK-based companies, especially when they have subsidiaries or related entities in countries with more favourable tax regimes.

UK's Controlled Foreign Company (CFC) Rules

A Controlled Foreign Company is typically referred to as any foreign company controlled by UK residents but with fewer tax payments compared to if the company was based in the UK. The rules of the UK's CFC are aimed at taxing the profits of these foreign entities to prevent artificial profit shifting and erosion of the UK tax base. Below are the key aspects of the UK's CFC rules:

Control Definition: The control is determined by the ability of the individual to exercise significant influence over the company's decision-making and management and not specifically by shareholding percentages. Generally, if a UK resident or UK-based company holds more than 50% of the shares or voting rights of a company, the foreign company may be considered controlled.

Low-Taxed Foreign Company: A foreign company is considered low-taxed if its tax liability is 75% less than what it would have been if it is under UK taxation.

Exemptions

There are several exemptions provided by the UK's CFC scheme to ensure that entities engaging in artificial profiting are the only ones targeted. These exemptions include:

Exempt Territories: Companies that are located in jurisdictions listed on the UK's "white list" are considered exempt from CFC charges. This list includes countries with tax systems that are regarded as comparable to that of the UK.

Low-Profit Margin Exemption: If a foreign company's accounting profits are below a threshold of £500,000 (with not more than £50,000 of those profits acquired from investment income), the company may qualify for this exemption.

Low Accounting Profit Exemption: companies with an accounting profit of £50,000 or less are generally considered exempt.

Excluded Territories Exemption: Companies in locations that are regarded by HMRC as having a low risk of profit shifting may be exempt.

Non-UK resident company owners should always pay attention to the CFC rules especially if their business has subsidiaries in low-tax jurisdictions. Important considerations include:

  • Ensure that all foreign subsidiaries meet one or more of the exemptions to avoid CFC charges.
  • Companies should maintain accurate and organized documentation to showcase that foreign businesses qualify for CFC exemptions or are not engaged in any form of profit shifting.

Understanding the implications of international structures on tax to avoid potential CFC charges.

Transfer Pricing Regulations

Transfer pricing is referred to as the rules and methods associated with pricing transactions within and between entities under common ownership or control. These transfer pricing regulations are important to ensure transactions between related enterprises are charged at arm's length meaning the prices charged are consistent with those that would be agreed upon by unrelated parties. These regulations are important to non-UK residents who operate UK-based companies to avoid potential tax adjustments and penalties.

The UK's transfer pricing regulations are made to stop the shifting of profits by business owners to low-tax jurisdictions through the manipulation of intra-group transactions. The key components of the UK's transfer pricing system include:

Arm's Length Principle: All pricing for transactions carried out between related entities are mandated to be carried out at arm's length (pricing should be the same as those charges by unrelated entities). If a transaction is not carried out at arm's length, HMRC has the power to adjust the taxable profits accordingly.

Documentation Requirements: Companies should always ensure to maintain the appropriate documentation to bank up their transfer pricing policies. This documentation includes a detailed analysis that demonstrates that intra-group transactions are in accordance with the arm's length principles.

Penalties for Non-Compliance: Failure to comply with the transfer pricing rules can lead to significant business penalties which may include fines and interest charges in underpaid taxes which can result in incorrect transfer pricing.

Implications for Non-Entrepreneurs

Non-resident company owners of UK-based companies must take note of the transfer pricing policies when having related activities to ensure full compliance with UK regulations. The following are considerations:

Cross Border Transactions: Intra-group transactions between UK-based businesses and foreign affiliates must be investigated to ensure that they meet all the standards of the arm's length. This includes various forms of transactions such as the sales of goods, provision of services, and licensing of intellectual properties.

Alignment with OECD Guidelines: The transfer pricing regulations of the UK all align with the transfer pricing guidelines of the OECD. Non-residents should be familiarized with these guidelines to ensure global compliance.

Advanced Pricing Agreements (APAs): To reduce the risk of future disputes, most companies enter into APAs with HMRC. An APA is an agreement that allows a company to agree in advance on the appropriate transfer pricing methodology for specific transactions, providing certainty and reducing the likelihood of adults.

Compliance with the pricing transfer regulations is important to non-resident company owners to reduce tax risks and ensure the smooth operation of UK based companies in the international tax system.

Tax Incentives for Non-Resident Entrepreneurs

The United Kingdom has a variety of tax incentives that are designed to specifically enhance investments, innovation and economic growth. Non-resident company owners of UK-based companies can benefit from these incentives if they meet the specific eligibility criteria. These opportunities help to optimize tax efficiency and also enhance business development.

Patent Box Regime

The UK's patent Box Regime which was introduced in 2013, is specifically aiming to encourage companies to commercialize their parents by offering reduced corporation tax rates on profits obtained from intellectual properties. Under the patent box scheme, profits achieved from UK or European parents are taxed at the rate of 10% which is lower than the standard corporation tax rate. This benefit is of great importance to companies in research and development (R&D) activities enhancing their post-tax returns on innovative products and services.

Enterprise Investment Schemes (EIS)

This scheme is designed to encourage investments in small businesses carrying out qualifying trades in the UK. Although the primary beneficiaries of this incentive are individual investors who receive tax relief, UK-based companies can also utilize EIS to attract equity investors. Features of the EIS include:

Income Tax Relief: Investors in the UK can claim up to 30% tax relief on investments of up to £1 million per financial year or up to £2 million if investing in knowledge-intensive industries or companies.

Capital Gains Tax (CGT) Deferral: If an investor invests in an EIS-qualifying company with the gain derived from selling an asset, then the capital gains tax on that asset can be deferred.

Tax-Free Gains: Gains on EIS investments are considered tax-free if the shares are held for at least three years.

Structuring a UK-based company to qualify for EIS can enhance its credibility with potential Investors, facilitating capital-raising efforts.

Research and Development (R&D) Tax Relief

The UK government offers R&D tax relief to companies in innovative sectors to encourage innovation in the UK. Companies that engage in innovations and qualify for R&D tax relief can claim enhanced deductions on their R&D expenditures, thereby reducing their overall tax liability. There are basically two types of R&D schemes:

Small or Medium-sized Enterprise (SME) R&D Relief: This scheme is directed towards SMEs allowing them to deduct an extra 130% of their qualifying R&D costs from their annual profits in addition to the normal 100% deductions, making the total deductions 230%.

Research and Development Expenditure Credit (RDEC): This scheme is directed towards larger companies offering them a tax credit worth 13% of the qualifying R&D expenditure.

Non-residents should check to access their companies to meet the eligibility criteria for these schemes to utilize the opportunities this incentive provides.

Freeports

The UK government has established several special economic zones available with different customs rules which are referred to as freeports. The purpose of this establishment is to boost trade and investment. Freeports present many benefits to businesses including:

  • Stamp duty land tax relief is available on land purchased within the freeport tax sites.
  • Engaging structures and building allowance by allowing companies to successfully reduce their taxable profits by up to 10% of the cost of qualifying investments in structures and buildings for ten years.
  • Enhanced capital allowances to companies providing up to 100% tax relief for businesses in plant and machinery.

Non-UK resident company owners should ensure to explore these tax relief opportunities. These company owners should ensure to access the eligibility criteria, consult professionals and plan long-term for these incentives.

Conclusion

Understanding the UK's tax system is important for non-resident entrepreneurs in the UK, although it might be a bit challenging. Compliance with these regulations such as income tax obligations, CFC rules, and transfer pricing. Also utilizing government incentives such as R&D incentives, patent Box Regime and the freeport benefits can be beneficial in enhancing the profitability of companies.

To successfully understand the system, company owners are advised to stay informed and updated, seek professional guidance and optimize various taxing strategies thereby maximizing their financial advantage while also maintaining compliance with the UK tax laws. With the right approach to this system, businesses can enhance their profitability and grow in the UK's regulatory system.