United Kingdom company regulation and tax law are broad subjects covering many complex issues for which detailed specialist advice must be sought for particular circumstances. This article is primarily for the benefit of busy European lawyers and business executives wishing to get a quick overview of the UK company and tax regulatory scene. In that regard, it is not meant to constitute legal advice, or to be a compelling guide.
The article is extracted from our book: English & Slovak Business Law – a guide for legal practitioners and law student. Slovkonsult Law Publications (2004). Lestrade et al (Eds.) which was written for UK and Slovak lawyers wishing for a comparative view of their respective business law scenarios.
Whilst every effort has been made to ensure the materials reflect the current regulatory scene and it is not anticipated that the law will change significantly beyond what is stated here in 2003/04, this is a fast-moving area and it is likely that some changes to the law will have taken place since then.
UNITED KINGDOM BUSINESS ENTITIES
Similar to the Slovak model, an English company is statutory legal entity whose existence and conduct is mainly regulated by statute — the Companies Act 1985 as amended.
It is different from a Partnership, which has no separate legal personality. For example, acts of the Partnership bind all the partners, or in the case of a LLP (limited liability partner) one, or more of the partners. Furthermore a partnership is taxed under the individual tax liability of the partners, whereas a company is taxed as an entity.
The company is a separate person in law. It can own property, employ people, act as a director, or secretary of another company, enter into contracts, take legal action against others and also be the subject of legal action. Its existence as a legal person is totally separate from that of its shareholders, or directors.
Companies can be created in any one of three ways:-
- Grant of Royal Charter – this is possible under common law rules and companies so established tend to be those regulating the professions (e.g., Royal College or Surgeons), involved in education (e.g., United Kingdom universities) and some charitable enterprises. This method of creation is not used for business enterprises in the main.
- By Special Act of Parliament — such Statutory Corporations used to be the format for the establishment of most public utility companies (e.g., BBC, British Gas, British Telecom, etc.). These days, many of these companies have been "privatised" and this mode in of creation more, or less not used now.
- By Registration under the Companies Acts — the majority of trading enterprises in the United Kingdom are set up by way of submitting to the regulation of the United Kingdom Companies Acts and other relevant general Acts of Parliament. This chapter therefore is mainly concerned with concerned with the creation and legal management and regulation of such companies
GENERAL CHARACTERISTICS OF UNITED KINGDOM COMPANIES
The majority of them endure as limited companies established under the Companies Act.
They are able to act through decisions of the majority of their members (shareholders).
Additionally, a company has a separate legal personality from its members. It can sue and be sued in its own right and in that respect is not dependent on damage suffered by its members to bring a matter before the courts. Where it is affected by a breach of its rights, etc., it can act independently of its members by decision of the majority of its members. It has legal permanence, in that it continues to exist irrespective of any change in its membership.
There are some exceptions to the rule of "corporate separate personality":-
- Under Section 24 of the Companies Act 1985, where a company is trading illegally (e.g. if a Public Limited Company trades with fewer than 2 members) then the members will incur personal liability for its acts.
- The courts by the application of the common law will not allow the company to be used for a blatantly dishonest purpose, or to evade a legal duty.
- Section 229 of the Act provides for group accounts where companies are related.
- In times of war, the separate personality of the company can be ignored by the courts especially where the shareholders are "enemy aliens".
- The Insolvency Act 1986 (as amended) provides for personal liability of the members in relation to fraudulent/wrongful trading.
- Where groups of companies are engaged in fraudulent activities, the courts will normally ignore their separate personality.
To summarise, the key differences between public and private limited companies are:-
- Public limited companies must have at least two directors, Private limited companies need to have only one
- Public limited companies must have a minimum paid up share capital
- Private limited companies have a shorter accounting period
- Public limited companies have stricter rules for the distributions of dividends
- Public limited companies may not purchase their own shares, whereas Private limited companies may
- Public limited companies may not give financial assistance for the purchase of their own shares, Private limited companies may
- Ltd’s Directors are under less scrutiny with regard to their financial relationship with the company
- To be able to sell its shares to the public a company must be a plc. Then, it would require to achieve permission from the London Stock Exchange to advertise its securities for sale (under the Financial Services Act 1986 and its Rules as amended). This is normally achieved by the joining of one of the approved securities markets (such as the Alternative Investment Market – AIM).
There are considerable rules and specialist expertise relating to the above and a plc wishing to sell its shares to the public in this way should consult an appropriate specialist lawyer, or accountant.
UNITED KINGDOM BUSINESS ENTITIES
United Kingdom businesses may be established in any of the following forms:
- United Kingdom branch of an overseas company
- Limited and unlimited companies
- Sole trader
United Kingdom Branch Of An Overseas Company
As in Slovakia, it is probably more usual for a non-United Kingdom company to organize its United Kingdom corporate representative entity as a separate limited company instead of a "branch". If a "branch" is established, the following will apply:-
Under the United Kingdom Companies Act 1985 (as amended) the branch establishment formalities must be complied with (similar to those for the incorporation of a new company). These formalities are summarized on the Companies House website (www.companieshouse.gov.uk). As such, the "branch" would need to observe the following rules:-
- It would need to have a permanent place of business in the United Kingdom
- Certain information about it and its officers will need to be presented to the Registrar of Companies (Slovak Companies Registry equivalent). Changes to the above information will be required to be notified to Companies House within 14 — 28 days.
- Copies of annual accounts including group accounts where applicable must be submitted to Companies House within 13 months of the end of its accounting period. It is not sufficient to submit the accounts of the United Kingdom branch only. The accounts must comply with general requirements of the Companies Act 1985 although certain exemptions may be given.
- An overseas company is required to display in each place of business in the United Kingdom its name, the country under the laws of which it is organized, and state if it is incorporated with limited liability. Invoices, letterheads and all notices published by the company must contain the same information.
Acquisitions and Take-Over Bids
When considering a major acquisition or take-over it is necessary to comply with the requirements of the City Code on Takeovers and Mergers which is designed to protect the shareholding public. The City Code is only applicable to listed companies and unlisted Public limited companies (not privately-owned companies).
Related Employment Regulations
Nationals of other European Union member states are not required to obtain work permits and are allowed access to employment on equal terms with United Kingdom nationals. Foreign companies setting up operations in the United Kingdom and United Kingdom companies requiring non European Union personnel usually have no difficulty in obtaining work permits for senior executives. Employers should obtain work permits from the Department of Employment for prospective employees before they enter the United Kingdom.
Limited And Unlimited Companies
Unlimited companies are those companies whose members’ liability is unlimited. They have all the advantages of incorporation except "limited" liability. They are exempt from certain disclosure requirements but one or more members of the company must be personally liable for the debts of the business.
This means that they are not a popular way to trade, most companies being limited.
Limited companies may be either private companies which do not invite the public to subscribe for shares or public companies which may invite the public to subscribe and may apply to be listed on the Stock Exchange. Public companies are subject to stricter legal and reporting requirements.
A company may be limited by guarantee of an agreed amount which is requested when the company cannot pay its debts. This is normally the form used for charities, professional and educational bodies.
Companies Limited by Shares
The majority of United Kingdom companies tend to be those which are limited (by shares). Their main characteristics can be summarized as follows:
A private limited company has no minimum share capital. However it is required to have 2 shares. Public companies need to have an authorized share capital of £50,000 of which at least 25 per cent must be paid up. Capital may be subscribed in a non cash form, e.g. machinery, know-how or patents. However, there are tax implications in this kind of capitalization and those interested should consult a tax specialist.
All public companies must have at least two shareholders but there are no nationality or residence requirements. Private companies need only have one member. The liability of the members (shareholders) are limited to the extent of their unpaid investment in the company.
A public company must include the words Public Limited Company or PLC in the company name and must use this name on all official documents, stationery and nameplates.
Board of Directors
Only one director is required for a private company and two for a public company. There are no nationality or residence requirements and any director may be chairman. An overseas, or other United Kingdom Company may be a director.
Managers need not be shareholders or directors but every company must have a Company Secretary who performs certain legal duties. The secretary may be a director if there is more than one director.
There is no requirement that employees be represented on the board or in management.
Public Disclosure of Companies’ Trading Activities
Limited liability companies must file annual accounts (some are exempted by application where they are classified as "small companies") whereas unlimited companies do not have to do so.
An independent auditor, who must be qualified under the Companies Act (normally he/she will need to be a member of one of the Chartered accountancy professional bodies, e.g., Chartered Institute of Accountants (CA)) must generally be appointed. Annual accounts together with an annual return of company information must be filed with the Registrar of Companies.
This information is available to the general public. Smaller limited companies have the option to file abbreviated accounts and to do away with an audit if their turnover is under £350,000 per annum subject to certain other stipulations.
Types of Shares
Ordinary (may, or may not have voting rights); preference (carry a fixed rate of dividend and have preference over ordinary shares for payments of dividend and repayment) and cumulative preference shares are commonly issued. Redeemable shares are offered on the basis that the may be bought back by the company. The company can buy its own shares.
Over 50 per cent of the votes are required to pass an ordinary resolution but some decisions such as changes in the articles of association require 75 per cent of the shareholders voting in favour.
Distributions of Company Income
The amount over accumulated actual profits minus accumulated actual losses over an accounting period is available for distribution. In a public limited company net assets before and after a distribution must be higher than the total of share capital and undistributable reserves.
Company Incorporation and Cost
The same procedural rules apply to foreign and United Kingdom investors wishing to form a United Kingdom company. Any investor, wherever located, can establish a United Kingdom company, or buy it, or buy securities and/or land without any special licence or state authority. There are no exchange control regulations and there are no restrictions on overseas investors. But rules for the control of monopolies and mergers will apply to overseas investors as well as United Kingdom investors.
A company with standard memorandum and articles of association can be purchased "off the shelf" without delay. A company with memorandum and articles of association specifically drawn may take longer. A ready-made company will cost about £150 and a company specifically drawn up will cost several hundred pounds. The annual cost of filing accounts and annual return is £15.
Registration of Companies
A limited company is registered/incorporated when registration documents are delivered to the Registrar of Companies (Companies House)and approved for registration. For detailed instruction in that regard, please go to the Companies House website (www.companieshouse.gov.uk). Upon registration of these documents, the Registrar issues a Certificate of Incorporation. In that regard, a limited company can commence trading as soon as the Certificate of Registration is issued, a PLC has to obtain a Certificate from the Registrar which confirms that it is allowed to commence trading (as its share capital requirements have been met — Section 117 of the Companies Act).
Under Section 10 of the Companies Act, the following documents are required:-
- Memorandum of Association — (jointly with the Articles of Association below, designated 'M&A's') — schedule of the company's relationship with the outside world.
- Articles of Association — schedule of regulation of the internal affairs of the company — contract between the company and itself and the members and between the members and each other
- A statement of the first directors and secretary of the compan y, their consent in writing to be so and the registered address of the company
- A declaration that the statutory requirements of the Companies Act have been followed.
- Constitution of the Company
The M&As comprise the constitution of the company. The Memorandum of Association prevails if there is any conflict between the 2 documents. Memorandum of Association – constituents: -
- Name clause — name of company plus 'Limited', or' Ltd', or 'plc'
- Registered Office Clause — contains the company's legal address
- Objects Clause — the scope of the company's activities. A company can now register as a 'general commercial company' which will empower it to carry on 'any trade or business whatsoever '(Section 3A)
- Limited Liability Clause — stating that the liability of the members is limited.
- Authorised Share Capital Clause — the maximum amount of share capital that the company is allowed to issue.
- Association Clause — states that the members wish to form a company. Public companies must have a clause stating that they are public companies.
Articles of Association
In addition to the aforementioned purposes, the Articles regulate the allotment and transfer of shares, rights attaching to various shares, the rules relating to meetings and also the rights of the directors. Companies can use Table A specified in the Companies Act as model articles. If Articles are not presented, then Table A applies by default.
Articles may be changed by the passing of a special resolution of the members as long as it is done 'bona fide in the interests of the company as a whole' — a leading case is: Greenalgh v. Arderne Cinemas Ltd 1951.
Capitalisation of Companies
A company may be capitalised by loan, or share capital. Share capital is the interest in the company of a member represented by a sum of money for the purpose of liability and interest the conditions of which are specified by mutual covenants between the members.
Types of Shares
- Ordinary — general shares
- Preference — these have priority over ordinary shares for dividend and repayment and carry a fixed rate of dividend.
- Redeemable shares — these are issued on the basis that they may be brought back later from the company. Companies can now buy their own shares. Loan capital may be achieved in various ways:
- Debenture — this refers to a document which acknowledges that a debt is owned by the company. It is not a share. It usually provides for security for the amount borrowed by way of a "charge" clause:
- fixed charge – the debt is secured upon a specific aspect of the company’s property. The company cannot dispose of it without permission of the debenture holder who can sell it, as well, if the company fails to honour the debt.
- floating charge – here the debt attaches to a specific aspect of the company’s property when it becomes due, or is called. Therefore, the company may dispose of its property without the need to obtain permission. All charges have to be registered with Companies House within 21 days of their creation. It they are not registered they are ineffective against other creditors, a liquidator, but are still valid against the company. Companies must keep a register of charges.
Charges have date of creation priority and a fixed charge takes precedence over a floating charge.
The board of directors is the executive agent of the company. However, individual directors, or those with apparent authority may bind the company. The first directors are usually named in the Memorandum, or Articles of the company when it is formed and others are appointed by the procedure stated in the Articles. An ordinary resolution of the company (Section 303 of the Companies Act) is required for the removal of a director. The company requires to give the members 28 days notice of such an intention. However, The Companies Act provide for the removal of a director for reason of: bankruptcy, mental illness, or irregular or extended absence from board meetings.
Persons may also be disqualified from being directors for up to 15 years under the Company Directors Disqualification Act 1986 for: breaches of companies law; fraudulent trading and being generally unfit.
Article 7 of Table A of the Companies Act allows for the directors of the company as a board to have all the powers of a company. However, this power may be delegated to one, or more directors by:
- Express Authority – here a director is given specific authority to bind the company in a certain way;
- Implied Authority – here a person’s appointment as "Managing Director", or "Chief Executive" will give that person implied authority to bind the company in the same way the board can;
- Apparent Authority – in this instance a director is held out by the board by having the authority to bind it. If a person acts on that belief, the board is estopped from denying its truth.
Duties of Directors
Directors must act in the interests of the company at all times whether this is actual, or perceived. They cannot use their position to make a personal gain and as such they must always prevent related conflicts of their interest and their duty to the company. The law is strict in that regard.
They have a duty of care and skill as would be expected reasonably of a person of their skill and experience. However, they may leave the day to day running of the company in the hands of managers and are not required to give continuous attendance.
By Section 214 of the Insolvency Act 1986, where a company is being cancelled (wound up), and is appears that the director/s knew that the company would be unable to pay its debts arising shortly before the cancellation, or in a similar circumstance, then the directors may be personally liable for the company’s debts so incurred as the court thinks fit.
The company secretary is an officer of the company required to be appointed under Section 744 of the Companies Act. He/she is responsible for the statutory compliance of the company.
He/she may not normally bind the company, however, in practice the company secretary is regarded as having such powers within the scope of his/her duties as statutory compliance officer. Company secretaries do not have to be professionally. However, due to the increasing complexity of statutory regulation in practice, they are either accountants, chartered company secretaries, barristers, or solicitors. Public limited companies must have professionally qualified (or similar) secretaries (Section 286 (2) Companies Act).
Three types of meetings may be held in companies:
- Annual General Meeting – each company must hold one each calendar year (up to a maximum of 15 months). Private limited companies may by unanimous vote of the members, do away with this requirement.
- Extraordinary General Meeting – that is any meeting other than an AGM. They may be called by members holding 10 per cent or more of voting shares, or by the directors.
- Class Meeting – where a holder of a particular class of share may call for such a meeting.
Resolutions/Decisions From Meetings
- Ordinary resolution – here the votes of those attending which form a majority authorise the decision. For AGMs – 21 days notice is required, for EGMs – 14; for the removal of a director – 28 days.
- Extraordinary resolutions – requires a majority of ¾ of those voting. 14 days notice is required for other than an AGM where 21 days is required.
- Special resolution – ¾ majority of those voting carry the decision and 21 days notice is required. Note: Private limited companies can do away with certain procedures for AGMs (e.g., presentation of accounts) and also holding the AGM – this requires a unanimous approval of the members.
Protection of Shareholders
The general rule is that the majority of the shareholders decide on the actions of the company. However, there is built in protection for shareholders according to the law:-
- Where the majority act to perpetrate a fraud on the minority, the minority can have legal redress;
- A court can wind up a company for just and equitable reasons;330
- Any member may ask the court to intervene to provide justice where they feel that the affairs of the company are being carried out in a way that damages the interests of some of the members;331
- In addition, the government may appoint inspectors to investigate the company.332
Winding Up of Companies and Cancellation of Companies
A company be liquidated compulsorily where the court orders so normally on the basis of an insolvency application by a creditor. It may also be wound up voluntarily by an application of the members to the court. It may also be cancelled (‘struck off"), by an application by the directors to the Registrar of Companies stating that it is no longer required at a cost of around UKP10.00.
It may also be wound up voluntarily by the application of all of the creditors. A company may also be subject to an Administration Order. Here upon an application of the members, the court appoints an administrator who tries to save the company. Once the administrator is appointed, then the company is protected by the court from most legal proceedings.
Under Pt. v. of the Criminal Justice Act 1993, Section 52 – an individual who has information about a company as an insider and uses it for his own benefit or that of others in relation to securities commits an offence. Maximum penalties are: unlimited fine and/or 7 years in prison.
A partnership is a business relationship between two or more persons or corporations carrying on a common business for profit. Partners are normally governed by a partnership agreement between them.
The following factors should be considered:-
- Individual partners normally take on unlimited liability for debts and obligations achieved in the name of the partnership.
- Accounts do not have to be filed with the Registrar of Companies.
- There is no audit requirement. Partners are personally liable, both jointly and severally for the liabilities of the partnership.
- A limited liability company may be a partner with other companies or individuals.
- "Limited" partnerships are permitted where are least one partner retains unlimited liability but others may limit their liability to the amount of their contributed to the partnership. Limited partners cannot participate in the management of the partnership.
- With certain exceptions the number of persons or corporations in a partnership is restricted to 20.
A sole trader is an individual carrying out a business or profession for himself and is subject to registration requirements common to all forms of business. The accounts of a sole trader do not have to be audited or disclosed to the public.
COMPANY TAXATION AND THE FINANCIAL SERVICES ACT 1986
The main rate for corporation tax is 30 per cent. Small companies pay tax at the rate of 19 per cent — applies to companies’ profits that are taxable of between £50,000 and £300,000. For companies with taxable profits of, or below £10,000, the starting rate is zero.
Marginal tax relief is available for companies with taxable profits between £10,000 and £50,000. It is calculated using the fraction 19/400. Companies with taxable profits between £300,000 and £1,500,000 will also attract marginal relief – the fraction applied is: 11/400.
Profit limits in relation to the above may be lowered for group, or associated companies. However, lower tax rates and marginal reliefs do not apply to certain investment holding companies. A United Kingdom company is taxable on its income world-wide at the rates indicated above.
A United Kingdom incorporated company may be classified as non-resident for United Kingdom tax purposes if it is managed and controlled from a country with which the United Kingdom has signed a double taxation treaty which has a recognised "tie-breaker clause".
It is therefore possible to create a non-taxable United Kingdom company.
The Financial Services Act has a very wide application and companies doing conducting investment business in the United Kingdom may need to register under the Act and should consult a specialist. United Kingdom taxes are applied by central government save for local taxes on property. The government’s Inland Revenue department collects the main direct taxes which are made up of:
- Corporation Tax
- Income Tax
- Capital Gains Tax
The United Kingdom’s government department, Customs and Excise collects the principal indirect taxes: Value Added Tax and Customs and Excise Duty. The general tax (fiscal) year runs 5 April to 4 April. The corporation tax year is from 1 April to 31 March.
United Kingdom companies making dividend payments must account for advanced corporation tax (ACT). United Kingdom residents receiving dividend payments from United Kingdom companies will obtain tax credit which may be applied against their personal tax liability. Most of the United Kingdom’s double taxation agreements give to non-residents the same advantages as for United Kingdom residents. For example, the ACT calculation could be included in the amount as an additional sum representing the tax credit. In some instances, a company paying a dividend to a non-resident shareholder would be able to arrange for the payment to reckon for the tax credit of the payee. The Inspector of Foreign Dividends at the Inland Revenue should be consulted with regard to such arrangements.
Withholding Tax And Associated Reliefs
Where a United Kingdom parent company is in receipt of a dividend from a foreign subsidiary and withholding tax was deducted on the payment and the foreign company has paid corporate tax on profits from which the dividend is paid – in general, relief is available for the withholding tax.
In addition, if the necessary conditions obtaining above are satisfied, relief is also available for the foreign tax on the overseas profits (underlying tax).
The general rule is that companies pay tax on profits before dividends but pay dividends without deducting withholding tax. However, most countries impose a withholding tax on dividend payments made to non-residents. The rate of tax varies according to domestic law and in most cases, will be reduced (sometimes to zero) by double taxation treaties. The claim for reduced tax has to be made to the receiver of the dividend and is applicable once the relevant formalities and clearance have been effected with the tax authorities involved.
A United Kingdom company receiving a dividend must include it in its taxable income and where withholding tax has been deducted, the amount before the deduction is taxable in the United Kingdom. Double taxation relief will be normally applied by crediting the foreign withholding tax against the United Kingdom company tax on the dividend. Double taxation relief applied to each separate source of foreign income. Where withholding tax paid on the dividend is more that the United Kingdom tax due on the relevant income, the excess is lost. It cannot be offset against any other tax liability, or paid back.
In some circumstances, it may be better for the United Kingdom company not to claim tax credit relief as then the withholding tax will be deducted from the amount of the foreign income and only the net income will be applied to United Kingdom tax.
Underlying Tax Relief
Underlying tax relief may be available where, in addition to any tax withheld from the dividends when they are paid, the foreign subsidiary may have paid local tax on the profits out of which the dividends were paid. Here, in certain circumstances the United Kingdom Inland Revenue would give relief for taxable income underlying the dividend payments. This would result in the amount of the taxable income increasing by the amount of the underlying tax concerned.
Conditions For Underlying Tax Relief
These are presented here in summary and those wishing to avail themselves of this kind of relief are strongly advised to consult an appropriate specialist. Detailed rules are set out in double taxation agreements and the United Kingdom law concerning the circumstances where a United Kingdom company receiving a foreign dividend can claim underlying tax relief. Relief is mostly available where the United Kingdom company controls either directly or indirectly (or is a subsidiary of a company which directly or indirectly controls) not less than 10 per cent of the votes dividend-paying company.
The United Kingdom company receiving the dividend is availed of underlying tax relief as a credit for double taxation relief, gets a proportion of the approved foreign tax on the relevant profits of the overseas company paying the dividend. Relevant profits generally mean, the distributable (after tax) profits shown up in the accounts of the company. What are relevant profits could also depend on local company tax law.
GROUPS OF COMPANIES
Trading losses can be set against profits within a United Kingdom group. In general, a United Kingdom group is a United Kingdom resident parent company together with those United Kingdom resident subsidiaries which are at least 75 per cent owned.
Corporation Tax — Branches Of Non-Resident Companies Profits
Corporation tax is charged on profits attributable to trading carried on in the United Kingdom as a general rule. A company making contracts and profits from United Kingdom activities is generally regarded as trading in the United Kingdom. However, if it is only a "sales" office that only takes orders and completes contracts outside the United Kingdom, it may not be considered to be trading in the United Kingdom and will not be liable to United Kingdom tax. Every situation depends on the circumstances and tax treaties normally give guidance.
United Kingdom Companies and Tax Management for Overseas Companies International Headquarters Companies
Under Section 246 of The Taxes Act 1988 (as inserted by Schedule 16 of The Finance Act 1994) it is possible to create a United Kingdom International Headquarters Company ("IHC").
IHCs are ordinary United Kingdom companies which are at least 80 per cent beneficially owned by non-residents. An IHC is an extremely tool for the collection of foreign dividend income. Generally, full credit is given against United Kingdom tax for any tax paid on the paid profits before their arrival in the United Kingdom. Therefore, as long as the dividend income has already suffered tax at a rate higher than or equal to the applicable United Kingdom rate (33 per cent/24 per cent) no United Kingdom tax will be payable on that income either on arrival or on distribution. Sale of IHC shares attract capital gains tax but there are a number of methods which can be used to reduce or avoid this tax. Those interested should consult at United Kingdom tax specialist. IHCs must declare to the United Kingdom government’s tax department – The Inland Revenue — details of the ultimate beneficial ownership of the IHC.
To summarise, the main advantages of establishing an IHC in the United Kingdom are:
- The company can pay a dividend out of foreign income dividends, without paying advance corporation tax.
- There is no capital tax on the issue of shares in the IHC.
- Over 100 double taxation agreements exist between the United Kingdom and the significant trading countries in the world.
- No minimum percentage of dividend income is required to be taxed.
- The United Kingdom IHC does not need to be active in the business of its subsidiary companies, nor does it need to have any significant presence in the United Kingdom.
Note — the United Kingdom legislation on IHC has not yet developed to a complete tax-free zone. The IHC may be liable to United Kingdom corporation tax in the following circumstances:
- The IHC may be subject to capital gains tax on the disposal of shares in its subsidiaries or if a restructuring takes place which triggers a capital gains tax charge.
- When the foreign income dividend paid to the United Kingdom IHC carries a lower tax credit than the United Kingdom corporation tax rate, when a liability will arise on the difference. Conversely, if the overseas rate of withholding tax is greater than the United Kingdom corporation tax rate, the difference cannot be reclaimed. Care must therefore be exercised when considering the foreign income dividends to be paid to the United Kingdom IHC.
- The United Kingdom Controlled Foreign Company legislation (which is similar to the US sub part F Legislation) may apply in certain circumstances which could negate the benefit of accumulating profits in low tax jurisdictions abroad.
UNITED KINGDOM COMPANY FIDUCIARY FOR OFFSHORE COMPANY
A United Kingdom company is incorporated and enters into an agreement with the offshore company whereby the United Kingdom company agrees that it will trade on behalf of the offshore company as its agent. All contracts of purchase and sale, all the invoicing and all the general correspondence will be made in the name of the United Kingdom company. The agreement should state that all monies received are received as nominee or trustee for the principal save insofar as there will be an agreed fee which will be retained by the United Kingdom company. That fee may either be expressed as a flat fee for all the trading done on an annual basis or, more usually, expressed as a percentage of the gross revenues received, usually 5 per cent or more.
The practice of the United Kingdom revenue is to accept, subject to certain conditions, that all non-United Kingdom source monies which are passed over to the offshore company are received as agent and are not therefore subject to tax in the United Kingdom. On the basis that 5 per cent of profit is retained the effective rate of United Kingdom taxation on the gross receipts is 1.2 per cent (5 per cent of the normal 24 per cent rate).
In order to protect the trading profits from United Kingdom taxation it is essential that no trading activity must occur within the United Kingdom. What constitutes United Kingdom trading activity would be construed by reference to the normal criteria, such as the place where the contracts of sale are performed and the location of the acceptance of an offer made ex-United Kingdom.
The offshore company must be non-resident in the United Kingdom for tax purposes itself. That is to say, is must be managed and controlled outside the United Kingdom.
UNITED KINGDOM/OFFSHORE TRADING CO-OPERATION
Here a United Kingdom resident company develops a co-operative, or collaborative trading arrangement with an offshore company. The United Kingdom company is stipulated as the supporting partner carrying out the paperwork with the offshore company being the principal in the trading activities. The co-operative agreement would specify that the United Kingdom company receives 5 per cent-10 per cent of partnership profits on which it is taxable at normal United Kingdom rates, but the majority of those profits that accrue to the offshore company would not be taxable. The existence of the partnership agreement can be secret and would not have to be disclosed by the United Kingdom company. It is possible for the Inland Revenue to give an advance ruling on the acceptability of the scheme.
TAX EFFICIENT LICENSING STRUCTURES
A typical structure would involve the end user of intellectual property paying a royalty to a United Kingdom company utilising the United Kingdom tax treaty to obtain reduced withholding tax on that payment. The United Kingdom company would in turn pay royalties to an offshore company located in a jurisdiction which had a suitable tax treaty with the United Kingdom e.g. Cyprus and that company may hold and reinvest the profit or pay profit on to an offshore company.
United Kingdom Nominee Companies - Asset Management
A United Kingdom company may hold assets as nominee for an anonymous beneficial owner. The United Kingdom company would have the title in the asset, but at the same time would enter in to a nominee declaration which states that the asset is beneficially owned by the investor, or by an offshore company controlled by the investor.
Here, the relative profits achieved by the United Kingdom company would be outside the scope of United Kingdom taxation because the United Kingdom law applies taxes according to beneficial and not legal ownership.
Payments by United Kingdom resident companies to overseas companies are made after withholding tax at the basic rate of 23 per cent. There are certain exceptions:
- within United Kingdom groups of companies, by election
- to non-residents if allowed by the terms of a double tax treaty
- payments to United Kingdom banks
- payments of short interest (broadly, interest on loans for a fixed term of less than one year).
Rental payments by United Kingdom residents to non-resident landlords are subject to withholding tax at the basic rate of 23 per cent.
Patent royalties and some other royalties are also paid after withholding tax at the basic rate of 23 per cent. Payments to non-residents are excepted if allowed by the terms of a double tax treaty.
Payments excepted from withholding tax under the terms of a double tax treaty must be cleared by the Inland Revenue's Inspector of Foreign Dividends. The United Kingdom has over one hundred double taxation treaties.
Value Added Tax (VAT) refers to the supply of certain goods and services in the United Kingdom in the course of business dealings as well as imports. Goods and services are either exempt, zero-rated or standard-rated.
The standard rate is 17.5 per cent. VAT is reclaimable by non-exempt traders and is therefore only paid by the ultimate consumer. Business with a certain level of turnover must be registered for VAT and collect the tax as agents for Customs and Excise.
National Insurance Contributions must be paid by employees, employers and the self-employed at set rates (10 per cent to 20 per cent). Reduced contributions may be paid in certain situations – e.g., a company setting up a pension scheme.
Inheritance Tax is payable on the value of property inherited on the death of the benefactor. It is charged at the standard rate of 40 per cent.
Stamp Duty and Stamp Duty Reserve Tax - certain documents need to be stamped to be legally effective (e.g., certain share allocations (bearer shares). The rate is 1/2 per cent to 1 per cent depending upon the document.
Local Taxes - business tax rates at a standard national rate are payable on the value of any business property occupied.
Useful Sources of Information www.inlandrevenue.gov.uk www.companieshouse.gov.uk
1. Ch.10.English & Slovak Business Law – a guide for legal practitioners and law students. Slovkonsult Law Publications (2004)). Lestrade et al (Eds.)
330. Section 122(g) of the Insolvency Act 1986.
331. Section 459 of the Companies Act.
332. Section 431 Companies Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.