Typical UK Structures
The UK Government has taken steps such as lower corporate tax rates and simplifying rules and regulations in order to attract investment into the UK financial sector. The usual three choices when it comes to setting up a UK company are as follows;
- Sole Trade
- Business Partnership
- Limited Company
- Each have their own various advantages and disadvantages.
This generally means that you are running your business as an individual, although you are allowed to hire staff. The advantages of this are that you can keep all the business profits after the tax has been paid on them and any decisions will be instant. However, a distinct disadvantage of Sole Trader companies is that there is no limited liability, this means that you will be responsible for any losses that the company makes, also the business will discontinue in the event of the owners retirement or death.
From a tax point of view a sole trader will initially qualify for tax benefits such as a write off of expenses. However profits on Sole Traders are taxed as income so on £35,000 you may be paying 40% and this may increase to 50% when this becomes above £150,000.
The business partners share responsibility for the company. Profits are shared between the partners and each partner must pay the tax on their share of the profits. Again this does not have limited liability and therefore you will be responsible for any losses and debts of the company. Perhaps more importantly you will also be responsible for any debts that have incurred due to your partner(s) and so it is important that you have financially sound partners and that you have trust in the person(s) that you are doing business with. Again profit will be taxed as income and there are various other aspects to consider such as National Insurance.
A limited company is run by the directors. There are numerous legal and accounting responsibilities and paperwork involved in being a director of a UK company which can be off putting, but Chesterfield will be able to completely take care of this for you. The main advantage to a Limited company is that it does have limited liability, this means that the wealth of the company is separate from the wealth of the owner and they will not be accountable for the company’s debts unless any wrong doing can be proven. Limited companies are liable for corporation tax in the UK which in a recent announcement is planned to be reduced to just 21% by April 2014 which is the lowest rate of any major western economy and significantly lower than the US, France and Germany. Income tax is only paid if the company pays you a salary so this has much more attractive tax appeal than Sole
Traders or Partnerships.
Limited Companies can be used for specific purposes such as the following;
– UK Holding Company
This is where a UK Holding Company is established to hold shares in one of more other companies. The Holding company will then receive dividends paid by those subsidiaries.
Advantages to setting up your holding company in the UK are
- that the UK is a full EU member with an impeccable reputation and excellent business infrastructure
- it has a low corporation tax when compared to other reputable EU jurisdictions of between 20% – 26%
- It has the widest network of double taxation treaties with over 120 currently in force and others under negotiation
- It has no restrictions on the movement of capital
- If the subsidiary is incorporated in an EU country and, if the EU parent subsidiary directive applies then dividends paid to a UK holding company will not have any deduction for withholding tax in the country from which the dividend is paid. Where this directive does not apply the dividend may qualify for a reduced or nil rate of withholding tax under one of the UK’s double taxation treaties
- UK law provides relief for foreign tax suffered, either through EU directive or under the terms of one of its treaties or unilaterally. This may result in no corporation tax by the holding company being due
- Dividends received by a UK company from another UK company are exempt from corporation tax
- There is no withholding tax on dividends paid by the holding company
- There is exemption from capital gains tax on the disposal of the shares in the subsidiary by the holding company
– UK Royalty Company
The UK belongs to the EU Interest and Royalties Directive. This directive specifies that if a UK company holds at least 25% of the share capital of a royalty paying company then there will be no withholding tax as long as the Royalties are paid from another EU company. If this directive is not applicable then withholding tax may still be reduced or eliminated through one of the numerous double taxation treaties that the UK holds. Over forty of these treaties reduce withholding tax on royalties to zero. The UK also has generous research and development relief. In addition to this in the 2012 budget the UK government announced the Patent Box which will come into effect April 2013. This initiative means that corporation will be much lower on profits earned from Patents, you can expect to pay only 10% come April 2017.
– UK Agent Company
The concept for this is that a UK company may be used as a nominee or agent for an undisclosed principal often being an offshore company or a company in a low tax jurisdiction. Often there will be an agreement in place with the offshore company as the principal and the UK Agency company representing the principal who will adhere to the terms of this agreement. The undisclosed offshore company may then conduct business, but the UK agency company name and details may appear as the face of the enterprise. This structure can be very useful for confidentiality.
For this reason the UK is a popular choice for establishing an Agency Company as the UK has a respectable and professional reputation throughout Europe.
The UK company may deal with all the invoicing and the larger share of profit would belong to the principal offshore company with the UK company taking a commission. The taxable profits in the UK would be on this aspect. Annual accounts must be filed and these may need audited. Care needs to be taken to comply with the laws and regulations in all jurisdictions
The UK government has certainly made many moves in order to make the UK a more popular destination for company incorporation and it would seem that this is already working with an increase in UK company registrations. Please note however, that the rules concerning many aspects of the above UK taxation when it comes to structuring a UK Offshore Company are very complex, but as you can see there are many advantages to this when the UK tax system is used correctly. Chesterfield are on hand to give expert structural advice prior to registering a UK offshore company in order that you may use your company to its full advantage regardless of the jurisdiction or complexity of set-up.