Non-Resident Director - UK Tax Position?

Non-Resident Director - UK Tax Position?

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UK co been trading for 5 years or so following incorporation of directors sole trader business.

Sole director owns all the shares and is broadly making around £500K profit after tax per annum.

He now wishes to sell personal residence, leave the UK and travel/settle somewhere overseas. The company will continue to trade from UK office (has a few staff/managers) and director will obviously want to draw either salary plus dividends or just dividends.

From what I have read it appears that his UK tax return would limit his UK liability to the amount of tax deducted at source? So even if taking £100K net dividend, there would be no tax to pay in the UK?

Is it just a case that he would then need to consider the tax treatment of the receipt of that dividend in his chosen country of new residence and have regard to the Controlled Foreign Companies rules that may apply there also?

Didnt quite understand what HMRC helpsheet 300 was saying "with the exception of income from property in the UK and investment income connected to a trade in the UK through a permanent establishment, the tax charge for non-residents on investment income arising in the UK is restricted to the amount of tax, if any, deducted at source. If the tax charge is limited in this way, personal allowances will not be given against other income. This restriction does not apply in the overseas part of a split year."

Does the fact that he controls the UK company mean that the restriction would not apply to the £100K net dividend?

And assuming the dividend taken is such that it allows the amount of tax to be restricted, then a nominal directors salary in addition is a bad idea as this would be liable to tax as no UK personal allowance able to be claimed?

As always may be muddling different aspects here so if anyone has a shining light in this area then your assistance would be welcomed

Replies (11)

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By david5541
23rd Apr 2014 13:47

MUDDLING

yes you are "muddling" and "meddling"

whwere does your director live?

 

how long for?

 

where is he domiciled?(i.e born and of origin from)?

 

get his residencet sorted then start thinking about how he is taking this whacky number of 500k out of his uk company.

 

the rules state that non domiciled uk residents can escape any capital gains tax.

income tax(i.e. paye) is paid in the origin of his workplace employer(the uk company)

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By david5541
23rd Apr 2014 13:49

more info

you need to know his movements and status first so more info needed.

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By Death
24th Apr 2014 10:09

Attempting to Plan Ahead/Review Options

Director is UK domicile

There will remain office in UK and has reasonably well paid manager in place.

Director will still have some involvement with overall running of business remotely/outside of UK via phone and email.

At present he is travelling overseas (no fixed abode) and has plans to refit boat and sail. Not sure where this boat is at present.

Appreciate issue of residence needs sorting but my question was more towards the situation for established non-resident director and tax consequence/obligations in UK relating to his extraction of funds from company.

The example of £100K dividend would obviously be subject to higher rate tax if he was still in UK but I thought I'd read that for non-resident his UK liability would be limited to amount of tax deducted at source - so just the notional 10% tax credit? albeit there may be additional tax to pay in new country of residence etc.

And then back to my opening post re that if such a restriction is applied then no UK personal allowance is given which would mean better to have all monies in dividend form rather than part as nominal directors salary to use UK personal allowance and get tax deduction in company accounts.

Appreciated your replies though! Sounds sarcastic but meant genuinely!!

 

 

 

 

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By Finest
24th Apr 2014 22:42

Not just personal tax

- This doesn't cover everything, but hopefully will give you a good start:

You need to advise your client on the potential impact for their company, as well as for their personal tax issues.

As the individual will be involved with the "running of business remotely", you need to think about whether they will create a permanent establishment, or similar, of the business in the location that they settle and so create a tax liability there.

The final answer will depend on whether they settle in a jurisdiction that has a double tax treaty with the UK and the jurisdictions domestic rules. Assuming that the jurisdiction runs OECD style rules, then working from home will likely create a 'fixed place of business'. You will need to consider precisely what type of work is conducted.

As the sole director / owner, you also need to think about whether the local jurisdiction has central management and control, or place of effective management rules domestically and in any relevant treaties. Your client could potentially re-domicile the company accidentally making it taxable in the new jurisdiction (this could have significant UK tax consequences as well).

Residence

Your main issue is going to be substantiating that your client has really broken their UK residence if they want to avoid UK tax. You need to consider the new statutory residence rules and their ties to the UK. Certainly business interests would be a significant tie, indicating the retention of residence. Other things to consider are the number of return trips to the UK, residence of family including children, owning property in the UK and general social ties.

Once you are comfortable that they have broken their residence, careful monitoring will be required to ensure that residence isn't reaquired.

You should check the treaty of the new place of residence, as the will be a treaty tie-breaker for the place of residence.

Salary

GT have a good flyer covering these points. Essentially directors' fees are going to be subject to PAYE / NI, although there may be an exemption where services are performed entirely outside of the UK (but see risks of this above!). You are going to need to consider the treaty in the new place of residence, but the OECD Model says taxing rights are in the place where the company is located.

http://www.grant-thornton.co.uk/PageFiles/12572/Taxation_of_Directors_Fees.pdf

Salary may be subject to tax in the new place of residence.

Dividends

Dividends from UK companies are not subject to withholding taxes.

You have the right bit of HMRC guidance there, so if they are definitely non-resident there will be no additional tax as it is restricted to the tax credit.

Dividends may be subject to tax in the new place of residence.

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By Death
26th Apr 2014 14:24

Many Thanks Indeed, Finest!!

on the face of it this looks a great answer, will read through properly on Monday. Much appreciated re time taken, extent of coverage and direct relation to my original question, thanks again!!

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By Finest
29th Apr 2014 18:02

Other resources:

When considering the corporate aspects, I recommend EY's excellent worldwide corporate tax guide as a place to start.

http://www.ey.com/GL/en/Services/Tax/Worldwide-Corporate-Tax-Guide---Country-list

Good luck!

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By david5541
30th Apr 2014 13:38

thks finest of grant thornon

sadly he will be uk domiciled and could only claim residence elswhere(as u say in a double tax treaty location) if it is reasonably permanent anf fulfills the residence test.

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By Death
30th Apr 2014 17:56

Likely to be in UK less than 16 days in tax year

Looking at new statutory residence test and the first Automatic Overseas Test, it seems that as he does not intend to be in UK for more than 16 days in tax year, he would automatically be deemed non-resident irrespective of whether he retained a house here.

If he spends more than 16 days in UK then would need to consider Automatic Residence Tests which refers to having home in UK and spending "sufficient amount of time" in? May need to look further at exact meaning of that but his intention is to sell UK property anyway.

Moving onto ties, he is divorced and lives alone. Does have children living with the ex so not sure if deemed to be a tie as such. But if no house in UK and spending more days in another country than UK then thats at least two ties which dont apply so could spend up to 45 days in UK in tax year.

Family and working days might stretch this even further. So all in all I'm not seeing any real problem in establishing non-residence personally.

However, the subject of whether or not his UK company's deemed place of residence might be affected does give rise for concern but who/how would anyone question this? Maybe he does all he needs to do during the time he returns to the UK? There is no new office or visual presence of the company abroad, its just him using a laptop and email. All physical signs of the business, staff, registered office, telephone numbers etc remain in the UK

 

 

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By Finest
30th Apr 2014 22:31

Yes, if your client meets one of the automatically non-resident tests, then there is no need to consider links to the UK. However, it would be worth considering the other tests as people are notorious for allowing their number of days in the UK to creep (birthdays, weddings, funerals, business opportunities etc!). It looks like you are on top of that aspect. KPMG have a decision flow chart that is helpful: http://www.kpmg.com/UK/en/IssuesAndInsights/ArticlesPublications/Documents/PDF/Tax/220515_SRT_Flowchart_FB_21May_acc.pdf

Re the offshore company, first I should note that you need to consider professional ethics here. Whether detection risk is high or not, your advice to clients should always be that all taxes should be paid according to local law - just a thought in case he doesn't like what you have to say / wants to chance it.

Local tax authorities  (particularly of countries with no money) might seek to increase their tax take by challenging any position your client takes. Obvious starting points for questions will come once your client has filed their first return in the new place of residence, especially if they are not showing other local income which would be sufficient to meet life lifestyle needs. Information pertaining to the fact that your client is the sole director of the company can be easily acquired from Companies House etc etc. In the event of future enquiry, the local jurisdiction may have powers to seize records (including your client's laptop). As noted before, it really depends on where your client settles.

For central management and control issues, you could think about safeguards, such as having your client run his board meetings in the UK and make all strategic decisions in the UK. He could take board minutes in the UK, noting his location and retain plane receipts / hotel bookings etc. He should avoid making any strategic decisions whilst in the new place of residence. He may wish to consider appointing a UK person to act as director also, however, there are obvious corporate law concerns with this. You will need to think about how he operates the business in practice.

For permanent establishment issues, again, you can discuss and agree restrictions to the activity carried out abroad. How much of an issue this is will really depend on how involved he is with the day-to-day running of the business. If, as you note, his manager does most of the work, the risk will be reduced. However, if he is actively involved in the running of the business, there is a real risk that he will create a taxable footprint. Once you know where he will settle, look up the local rules in the EY guide above.

 

 

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By Death
01st May 2014 10:42

Many thanks again!!

Excellent comprehensive reply again and feel the mist has cleared somewhat so have a sense of direction now. Won't impose further with more questions and the decision flowchart is very good also. Much gratitude Finest!

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By Finest
02nd May 2014 14:33

Excellent, glad to be of help. International moves for people involved with small / medium sized businesses are always tricky, as it is difficult from a practical perspective to bundle up tasks to one location.

One last thought, if your client does end up creating a PE or looks like they may do, it would be a good idea to think about the impact for them vs the tax cost. The UK's DTA network should mitigate much double tax risk in the UK (consider unilateral credit relief vs S18A CTA 2009), but there could be additional tax in the local country if the prevailing corporate rate is higher. Obviously there is a time, cost and effort issue with local filing too, but ultimately the lifestyle benefits of living abroad and ability to run the company as he likes might be worth it for your client.  Sometimes I can get so caught up in a tax puzzle, that taking a step back and considering the commercial / practical reality is best!

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