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TAX CONSULTING SERVICES

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Introduction The UK Legal System United Kingdom Law of Domicile Leaving the UK - Reducing the UK Tax Burden Establishing a Business/Company in the UK Branch or Representative Offices of Foreign Companies

INTRODUCTION

OCRA's London based in-house tax team provides, in conjunction with our extensive worldwide network of offices and, in cases where we have not established our own office, by working closely with prestigious and respected firms of lawyers and accountants in other countries, advice on all aspects of United Kingdom and international tax issues which include:

  • United Kingdom companies or businesses investing outside the United Kingdom
  • Non-UK corporations or businesses investing into the United Kingdom
  • Consultants and senior executives with overseas contracts taking employment outside, or returning to, the United Kingdom
  • Non-UK nationals coming to the United Kingdom in order to minimise income or capital gains taxes they would otherwise pay in their country of tax residence
  • Establishment of tax efficient trusts for the benefit of families or dependants of high tax payers
  • Property investment in the UK

If you are interested in any of these services or have other tax issues which concern you and would appreciate an informal chat on how OCRA may be able to assist you then please contact our London office and ask to speak with one of our tax advisers.

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THE UK LEGAL SYSTEM

The UK enjoys the benefits of a common law legal system which is proven and internationally recognised as innovative and fast moving; it is a fact that most international banking, insurance, shipping and aviation contracts are to a significant extent based upon UK law.

The taxation of UK companies (corporation tax) is charged at the rate of only 20% where the net profits before tax (that is after the deduction of allowable  costs and expenses incurred by the company in its financial year) do not exceed £300,000. Thereafter the rate of corporation tax payable rises incrementally until the net profit before tax exceeds £1.5 million where the effective top rate of tax, charged at 24%, is reached. This will be reduced to 23% from 1st April 2013. It should be noted that rules exist which effectively prevent group or associated companies each applying for lower rate taxation.

The United Kingdom is a signatory to a larger number of double taxation treaties than any other country and is, accordingly, ideally placed to enable internationally based companies and businesses to develop trading structures which can, to a significant extent, reduce the burden of withholding taxes charged against royalties, interest payments, dividends and the like. There is no withholding tax payable when UK companies pay dividends to non-UK shareholders. The UK International Headquarters Company, subject to conditions, permits UK companies which are owned to a minimum of 80% by non-UK tax residents and who have subsidiaries incorporated either within the European Union or in counties with whom the UK is a signatory to an appropriate double taxation treaty, to receive dividends from those subsidiaries and pay those dividends to its shareholders free of any liability to UK tax.

It should be noted, however, that the view of the UK H.M Revenue & Customs (the statutory taxation authority) is based largely on what might be described as "substance over form" particularly where issues such as the obtaining of certificates of tax residence are concerned and it is the Revenue's practice not to issue certificates of tax residence on behalf of UK companies or businesses unless, at the very least, the seat of management and control of the UK company can demonstrably seen to be within the UK.

For natural persons the United Kingdom offers significant benefits to foreign businessmen who, for example, seek entirely legally to reduce the burden of personal taxation or of capital gains by taking residence in the UK.

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THE UNITED KINGDOM LAW OF DOMICILE

The United Kingdom is one of the few countries where the law of domicile can have a substantial effect upon the tax liabilities of a resident in the UK.

If an individual can establish that he is not UK domiciled, although he may be resident, and in some cases regarded as ordinarily resident, that person can achieve considerable tax savings. This somewhat unusual benefit arises based upon the fact, as the law presently stands, that the Revenue seek only to tax income and capital gains of those who are non-UK domiciled on income arising in the UK, whereas income arising or generated outside the United Kingdom will only attract a liability to UK taxation if those profits are remitted to the United Kingdom. The concept of domicile is viewed in a particular manner by the UK law which distinguishes it significantly from the interpretation placed by the statutory taxation authorities of most other countries.

Under UK law, the concept of domicile is intended to show where an individual originated from (arguably his place of birth). There are no strict rules which determine an individual's domicile but what is certain is that an individual can have only one domicile. A domicile of origin is acquired at birth and is the domicile of the father (or the mother if the father is unknown). During infancy the domicile of an individual remains that of the father unless the father's domicile changes and, upon acquiring the age of majority an individual retains that domicile of origin. To give up the domicile of origin an individual must prove that he has no tangible ties with that original place of domicile and that he does not realistically intend to return to that country.

As matters presently stand those individuals who are not UK domiciled but who take up residence in the UK (subject to questions of timing and time spent in the UK) can bring capital into the UK free of any liability to UK tax. There are further special rules in relation to inheritance tax (the UK taxation on the estate of a deceased) for individuals who are not domiciled in the UK. Considerable care must be taken in relation to this issue and detailed advice must be taken. The UK, unlike many of its European neighbours, does not operate a system of forced heirship on death.

Example

X, a resident of the European Union or otherwise in a country where the obtaining of permission to become resident in the UK is permitted, has, over a number of years, developed a successful business (or company) which he intends to sell. Unfortunately the income tax and/or capital gains tax rules in his country of domicile or tax residence are high such that the benefits he might otherwise receive upon selling his business would be significantly reduced by the charge to local taxation. He asks for advice as to the route by which he might, legally, be able to mitigate the charge to capital gains tax. It should be noted that these principles can also apply to reduce income tax although obviously the emphasis will be different.

The UK offers an ideal solution to that problem based, principally, upon the approach of UK law to the concept of domicile (see above).

Taking the advice of lawyers and accountants in his country of tax residence, X structures his affairs so that he ceases to be resident in that country. This will usually mean physically leaving the country and taking residence elsewhere; for the purposes of this example, the UK. While in the UK, X can take employment or continue to run his foreign businesses paying tax in the UK only on income which he receives while in the UK for work undertaken in or which he remits to the UK. Working in close and detailed collaboration with X's foreign advisers OCRA ensures that X's affairs are structured in such a manner that he becomes "resident but not ordinarily resident" in the UK. While that status applies he triggers the sale of his non-UK business. Properly structured X may pay no or possibly only minimal tax anywhere provided, at least from a UK perspective, that he does not remit to the UK those monies while he remains UK resident.

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LEAVING THE UK - REDUCING THE UK TAX BURDEN

Within the United Kingdom income tax, capital gains tax and inheritance tax are based upon residence, ordinary residence and domicile and it is generally the case that only by physically ceasing to be resident in the UK that the liability to those taxes can truly be avoided. However a UK tax resident when considering leaving the UK  must remember that in order, legally, to avoid capital gains tax he must remain outside the UK for a minimum of five full tax years. Income tax can be avoided by spending a full tax year outside the UK on a full time contract of employment overseas but the contract must be carefully worded to ensure that that individual is regarded by the Inland Revenue as not continuing to be resident in the UK for income tax purposes.

By contrast UK inheritance tax is dependent upon an individual's domicile and, therefore, an individual of UK domicile who has moved to live abroad and who has, accordingly, ceased to be resident or ordinarily resident in the UK will still be liable to UK inheritance tax on his worldwide assets. Clearly double taxation treaties may reduce that burden of tax but this is a question which must be very carefully examined if an individual is planning to live abroad.

Planning techniques for those who intend, short term, to emigrate from the UK for capital gains or income tax purposes are relatively straight forward and the greatest attention to detail comes with potential contracts of employment or sales of assets or businesses in the UK.

It is also the case that while avoiding UK tax may, to the UK taxpayer, be the principal reason for leaving the UK at the time of his departure there is little benefit to be gained if in leaving the UK he becomes tax resident in a country which has equivalent or, in some cases, higher rates of tax than those applicable in the UK. In the current climate of global communication and transport it is, of course, not impossible for an individual to remain not resident in any country. However great care must be exercised to ensure that a country looking to identify a centre of vital economic interest (which may be based upon the number of days resident in that particular country) is not able to prove tax-residency.

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ESTABLISHING A BUSINESS/COMPANY IN THE UK

Any person or any company which is not otherwise the subject of one form or another of international trade sanctions imposed by, for example, the United Nations or, within the UK, the UK Government, can establish a business in the UK. That business may be undertaken through various legal vehicles which include the businessman operating as a sole trader or in partnership with others. An individual(s) may incorporate a limited liability company, while foreign limited liability  or their equivalent, may incorporate subsidiary companies or establish branch or representative offices.

The capacity of an individual to become resident, or otherwise to visit the UK for the purposes of business may be the subject of any UK immigration laws current at the time of the visit and, in that regard, the advice of specialist immigration lawyers should be obtained.

The establishment of a limited liability company in the UK is a straightforward procedure and those seeking to incorporate UK companies are, for an outline of the general obligations and rules, directed to the jurisdiction information page on this website.

OCRA has, over a period of more than 30 years, established a significant expertise and reputation in the incorporation of UK companies and is able to advise in respect of all aspects of the incorporation procedure. In particular, those intending to incorporate a UK company should consider, in detail, the provisions to be included in the Memorandum and Articles of Association of the company, particularly where the intention is that two or more persons are to be engaged in the day to day operation and, indeed, ownership of that company.

The Memorandum and Articles of Association are essentially the constitution of the UK company and lay down the rules under which the company undertakes its business. This constitution comprises two distinct sections; the first being the Memorandum of Association which sets out the activities the company can undertake while the second section, the Articles of Association, determine the legal framework by which the business is to be conducted by the directors and lays down regulations in relation to the shares issued by the company and such like. It was previously the case that the Memorandum was required to set out each and every activity which the promoters of the company intended it to undertake although, since the passing of the Companies Act 1985, the company's Memorandum is only required to state that the company intends to carry on any business which can be legally undertaken.

The Articles of Association are the section of the constitution which sets out the manner by which the business is undertaken. This refers not to the day to day trading business, but regulates the rules which must be applied to directors and shareholder meetings by laying down any particular conditions which must be followed at such meetings such as a quorum and any other qualifications. The Articles also set out the rules attaching to any shares which the company may issue by classifying the rights to dividend, voting powers and whether any priority is attached to one class of shares in precedence to another class. The right to transfer shares may be restricted as may be the regulations for determining disputes between shareholders. Thus, and by way of example only, it is possible under English law, to create shares which are cumulative as to dividends payable, they may be redeemable and may have preferential rights attached to them in relation to voting or dividend receipts. Rights attaching to the shareholders in connection with the appointment of directors and so on are also contained within the Articles.

Both the Memorandum and Articles of Association are documents of public record and the information contained therein is freely available for inspection, upon payment of the requisite fee, from the Registrar of Companies. Where the shareholders and promoters to a company do not wish the conduct of board meetings and the like to become matters of public record, the English common law allows those persons to enter into an agreement which operates as a form of private contract, made as a partnership deed, and the information contained in such a shareholders agreement is not, by law, required to be filed at the Public Registry and, accordingly, remains a private matter between the shareholders.

Under the English common law system, there is no obligation for the documents to be notarised or, in any manner, approved by any third party or the Court. OCRA is able to assist clients in all aspects of the incorporation procedure and in relation to the drafting of both the corporate and commercial documents. Where OCRA cannot, or does not, retain the appropriate skills in-house, it is able to introduce clients to lawyers, accountants and other professional advisers with whom it works closely.

In relation to the financial information attaching to a company, UK law demands that all companies, whether they are dormant or trading, file accounts with both the Registrar of Companies and the H. M. Revenue & Customs, the UK statutory taxation authority. Failure to do so can result in financial penalties being imposed upon the company and, in some cases, criminal proceedings may be brought against those directors who fail to procure the preparation and filing of the accounts in accordance with law. The accounts must be prepared and filed in statutory form, but the obligation to have those accounts audited by a registered auditor only arises when the annual turnover of the UK company exceeds £6,500,000 and its balance sheet total is less than £3,260,000. A UK company's financial year is not a calendar year, unlike many other legal systems, but is usually the 12 months which runs from the end of the month during which the company was incorporated. Subject to conditions, the financial year end of the company may be changed by the shareholders.

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BRANCH OR REPRESENTATIVE OFFICE OF FOREIGN COMPANIES

Foreign companies are free to establish branch or representative offices of the parent in the UK and, in so doing, there is no legal obligation, as in the case of UK companies generally, that UK citizens must be officers. The taxation of a UK branch or representative office may be strictly controlled by the non UK parent and, accordingly, where appropriate, the corporation tax payable by that branch or representative office may be limited only to bank interest earned on monies held by that branch or representative office, however, certain details relating to the foreign company including certified (translated if necessary) copies of its Memorandum and Articles of Association must be lodged with the Registrar of Companies together with an address for service of any statutory or legal document, together with details of the representative of the foreign corporation. Immigration issues may also apply when specialist advice is required.

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Michael Clifford, FInstAM MIoD (Managing Director)
LONDON OFFICE
Tel: 
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+44 0 20 7317 0600
+44 0 77 6522 3353
Email: mclifford@ocra.co.uk
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