CorpnTax & formation costs of overseas operations

I'd like guidance on tax position on incorporation costs of "sort of" associated overseas business

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I am well aware that the cost of incorporating a UK company is not allowable for Corporation Tax. However, my situation may not be that crystal clear. We have paid an agent to 1) incorporate a company overseas to be used exclusively for our operations, but we have not subscribed capital - he has, and 2) to open bank accounts to be used again exclusively for those operations. The two separate costs are itemised on his invoice. Normally I would classify incorporation costs as legal expenses and disallow them for Corporation Tax, but I believe there is a case here to classify them all as consultancy expenses and as such be allowable. Our involvement is simple : we pay the agent's bill and we charge third parties a fee for what passes across the bank accounts as a result of them using our software. Do you agree that the whole amount of the set-up costs should be allowable?

Replies (14)

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By David Ex
18th Aug 2021 12:38

HGW wrote:

Do you agree that the whole amount of the set-up costs should be allowable?

No

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By DKB-Sheffield
18th Aug 2021 13:01

Hmmm, interesting question!

Facts as I have them are:

- NewCo is incorporated in overseas territory.
- NewCo is not owned by you, or UKCo.
- NewCo is owned by overseas 3rd Party Agent (subscriber)

If the above is true, I don't see how incorporation costs are relevant to UKCo, or that they can be shown as a cost in the accounts (let alone whether they are allowable or disallowable expenditure).

Surely any costs will lie with the Agent/ subscriber, or NewCo (I am of the camp that generally prefers to see incorporation costs rest entirely with the subscriber). This may differ based on the overseas territory (as may potential tax relief).

Feel free to correct my understanding!

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Replying to DKB-Sheffield:
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By HGW
18th Aug 2021 13:52

In our contract we agree to meet his costs.

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By Bobbo
18th Aug 2021 13:03

so you have arranged for the setting up an overseas company to be used exclusively for your operations but you don't own that company, some random bloke 'agent' owns it.

Sounds like a brilliant idea.

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Replying to Bobbo:
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By DKB-Sheffield
18th Aug 2021 13:49

Actually it's not unusual of to use an agent (may be the best option in many cases - dependent upon jurisdiction). Nor would it be unheard of for that agent to set up on overseas company SPV to be used for the purpose. That agent would the charge fees to the UK company for their involvement.

Such an arrangement will be contractual, and I'm assuming the OP has considered all options. Given, what I take to be the nature of the business (from the OP), as that of money service (I may be wrong), I suspect the choice of corporate structure would have been governed by the relevant non-accounting regulations, not the other way around.

However, whether the cost of the incorporation is actually an expense of UKCo at all, is my nagging doubt. I would suggest this should lie with the overseas Agent or NewCo. Clearly however, this would likely be recouped at a later date through the agent's fees.

Therefore, my suggestion is... "no" IMO this is likely to be disallowed for CT and, I would actually question whether it should actually be reported as an expense in the UKCo accounts at all.

Clearly, further advice should be taken as without sight of the invoice, the agreement with the agent, and any underlying agreements between UKCo and NewCo, much of the above is based on supposition.

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Replying to DKB-Sheffield:
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By HGW
18th Aug 2021 13:57

We have agreed to meet those costs so that we have lucrative operations in the territory. I struggle to go along with any doubt that it is an expense of the UK Co at all.

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Replying to HGW:
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By David Ex
18th Aug 2021 14:22

HGW wrote:

I struggle to go along with any doubt that it is an expense of the UK Co at all.

Well I’m a qualified accountant and I say it isn’t. Are you an accountant or tax adviser?

You asked for advice and were given it. What’s the point if you then say you don’t believe it??!

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Replying to HGW:
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By DKB-Sheffield
18th Aug 2021 14:29

I think you may have misinterpreted my intended post.

The incorporation fee for NewCo (a company not owned by UKCo) is not an expense of the UK company. How could it be?

I haven't mentionned the bank account opening but, if that is for an account opened in the name of NewCo and is not linked to UKCo, I'd offer the same sentiment.

Any "disbursements" reimbursed to the agent by UKCo (in this regard) are not true disbursements as the contractual obligation to pay lies with the agent or NewCo.

Any agent's fees (for setup and provision of services/ commissions) would be a UKCo expense, assuming they are charged directly to UKCo (not NewCo).

As it stands per your OP, the direct recharge of incorporation costs and bank setup costs would almost certainly be disallowed because these costs are incurred by, and the contractual obligations lie with, another company or person. UKCo has, on the face of it, no link to NewCo, other than through a supply contract.

Finally, had you received an invoice saying something along the lines of "consultancy advice for setup of online payment service provision in Awebland", we could be having a very different discussion!

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Replying to Bobbo:
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By HGW
18th Aug 2021 13:53

"random bloke"? I didn't say that. He is well known to our CEO.

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Replying to HGW:
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By AndyC555
18th Aug 2021 14:02

Bernie Madoff was well known to many of his clients.

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Replying to HGW:
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By Bobbo
18th Aug 2021 14:27

HGW wrote:

He is well known to our CEO.

You didn't say that either.

Your original post simply said you had paid an agent to set up the company and open bank accounts.

While DKB's post explained the likely commercial reasoning behind the arrangement and how this would be part of an overall contractual arrangement to operate OverseasCo, you did not suggest such contractual arrangements were in place for the overall running of the company and so by agent my assumption was you meant some sort of company formation advisor of whom you had no prior knowledge of or connection to.

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By Duggimon
18th Aug 2021 14:01

The expense of setting up a company are expenses of the company itself or of the owner of the company. As you are neither, they are not your costs and not only not deductible for corporation tax, should not appear in your accounting records, at least not as formation costs.

You may find what you are actually paying is a fee to this person, or to his company, in order to secure their cooperation in your future ventures together, this may be allowable for corporation tax but is absolutely not formation costs.

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Replying to Duggimon:
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By David Ex
18th Aug 2021 14:24

Duggimon wrote:

You may find what you are actually paying is a fee to this person, or to his company, in order to secure their cooperation in your future ventures together,

But that sounds capital in nature, subject obviously to knowing the full facts.

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Replying to Duggimon:
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By DJKL
18th Aug 2021 14:40

I tend to concur with the second paragraph, it appears the OP is paying a fee that just happens to be what the other party expended to set up their entity. Whether that fee is capital or revenue expenditure of the payer depends upon what the payer gets for it.

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