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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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)
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.
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!
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.
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.
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!