Key tax considerations when investing in the UK

The UK is still a very attractive option for foreign investment and has a number of factors that make it very appealing for companies when looking to set up in another country. This insight outlines what a business investing in the UK needs to think about from a tax perspective. 

Is the client a UK resident and/ or domiciled? 

It is obvious that a considerable part of international tax matters comes down to territorial issues. Where is someone doing something and who has the right to tax the income generated from that activity? The starting point is therefore the question of tax residency and domicile. 

Where a client is thinking of moving to the UK it will be necessary to consider the basis on which they are entitled to enter the country.  Our immigration team can assist with visa requirements and applications.

Clients seeking to move to the UK should take advice from our international private client team who will assist with advising them of the UK tax implications of moving to the UK and, where necessary, assist with pre-arrival planning and structuring.  This advice is also sensible for clients who are returning to the UK after a period of absence to ensure that they are aware of the UK’s various clawback provisions and temporary non-residence rules.

Our advice will consider both the immediate tax needs of the client as well as looking at longer-term requirements.  For example, will the client need to complete a UK tax return, file any forms with HMRC or claim the remittance basis of taxation?  These are all matters that a client should be aware of before they seek to establish a UK based company.

Will the company’s tax residence be in the UK?

If the client sets up a UK company incorporated in England and Wales (UKCo), that company is tax resident in the UK. Its directors  may be living in a country outside the UK and therefore the directors meetings might be held outside the UK. Assuming that is the case UKCo may be treated as having its “central management and control” outside the UK. This means that under English law it is potentially resident within and without the UK for tax purposes. 

This is important when considering which jurisdiction has the relevant taxing rights. The client will need to be advised on the terms of the relevant Double Taxation Treaty. Not all such treaties are comprehensive however. There is for instance no comprehensive Double Taxation Treaty between the UK and Lebanon: the one that exists looks at the tax treatment only of shipping and freight. But a comprehensive treaty will contain a tie-breaker clause and this should lead to a conclusion on which jurisdiction has the right to tax the profits and gains of the taxpaying entity

On all occasions the relevant non-UK tax advice should be taken to check whether under the law of the relevant non-UK jurisdiction any part of the profits and gains would be taxed also in that other jurisdiction. That will in part depend upon whether there is a similar rule in that jurisdiction as to the “central management and control” rule that exists in UK law. 

In short the research will check how the two jurisdictions interact in (a) deciding on the dominant jurisdiction and (b) how credit is given in one jurisdiction for tax paid in the other jurisdiction. It is not always the case that credit is given which can lead to double taxation.  

Is the UK company liable to pay UK corporation tax?

As UKCo is incorporated in the UK it will be resident there and therefore will, in theory, be subject to UK corporation tax on its worldwide profits and gains. That will be tempered by the impact of the various Double Tax Treaties of the territories outside the UK and in which UKCo operates. Territories with comprehensive treaties will have detailed rules setting out (a) what constitutes a permanent or other establishment (b) how much of the profits and gains should be attributed to that establishment and therefore taxed in that other jurisdiction and (c) whether tax paid in one jurisdiction should be credited against the tax liability in the other jurisdiction.  

In the UK it is likely that UKCo will start to be a small company but as it grows it will need to consider how the “large” company rules apply to it and in particular to the payment of CT on an estimated instalment basis. This impacts cashflow and if estimates are inaccurate, the total tax bill. 

How to extract profits from a company in the UK?

There are several methods of extracting profits from UKCo during the ownership period.  Such methods include salary payments, dividends and shareholder loan repayments.  Each of these methods will have different UK tax implications depending on the residency of the company and the residency and domicile status of the recipient of the payment.  As such, we would, again, recommend that anyone who will either fund or receive funds from the company takes advice as to their personal tax position.   

As well as personal tax obligations, if a salary is paid to a person the PAYE rules may require the salary to be paid subject to deduction of income tax and employee national insurance contributions (NICs). Employers’ NICs may also have to be accounted for by UKCo. But UK PAYE and NICs are not always payable in respect of employees: it depends on where the employee is resident and where he or she carries out the work. If duties are carried on abroad, advice would need to be obtained as to how the local employment tax legislation would apply in the jurisdiction in which that shareholder is carrying out his or her duties.

Post tax profits can be extracted by dividends. If the shareholders are not UK resident they should not be liable to UK income tax on that dividend income but again local income tax treatment will need to be considered.

Other extraction methods might need to be considered such as longer term loans, purchase of own shares and or the disposal of the shares in UKCo itself, either to trade buyers or on liquidation. We can of course advise on these if the need arises.  

In addition to direct remuneration (e.g. a salary or a dividend payment), employees and directors may often receive indirect benefits from a company.  These can range from a travel allowance to use of company assets such as a car or a house.  The UK may seek to tax the recipients of these benefits and is important to be aware of the these tax issues before benefits are granted.  In particular, if a director receives a loan from the company, the rules on the taxation of that loan are particularly complex and we would strongly recommend taking advice before any loans are made.

If the UK company has employees they will need pay PAYE and NICs

To the extent that UKCo has employees it will need to register and account for the income tax payable by the employees. This tax is collected through a regime known as PAYE. Under PAYE UKCo will deduct the income tax and the National Insurance contributions payable by the employee (effectively the employing company acts as the UK Government’s tax collecting agent).

UKCo will as the employer also have to pay National Insurance Contributions itself in respect of each employee. And Apprenticeship Levy may also be payable. 

In practice it is likely to be more efficient to use a payroll agent to carry out the day to day administration. We can source one for UKCo if required.

Care will need to be taken where UKCo employs consultants or advisers who operate through personal services companies or other third party entities like partnerships, umbrella companies and agencies. The PAYE rules around this area are complex. Currently there is a big push by UK Government to ensure that the use of these structures does not lead to tax avoidance and consequently there is additional pressure to ensure that employers apply the legislation correctly. In particular new rules – the Off-payroll Working regime – will impact UKCo as from April 2021. 

Should the UK company register for VAT?

UKCo will need to consider whether it should register for VAT in the UK and possibly in the EU. If the goods and or services it supplies in the UK are above the relevant threshold (currently £85,000) it will need to register. But it might choose to do so in any event if its customer base is likely to be able to recover the VAT, as this will enable it to recover all of the VAT input tax it is charged by its own suppliers. 

If there are customers in the EU it will need to consider whether it is liable to register in the EU. 

If acquiring property the they will need to consider Stamp Duty Land Tax 

If there is a plan to acquire a freehold or leasehold property then SDLT will need to be considered. This is both an absolute cost but as it must be paid within 14 days of the relevant event, it has cashflow  implications. We can advise on all aspects of SDLT. 

Options when financing LCL and the withholding tax obligations from interest payments

Assuming UKCo is to take on loan finance it needs to consider whether it will be required to deduct basic rate income tax from the interest payable. This will depend upon the length of the loan, the type of lender and the residency of that lender. A term loan of greater than a year from a UK bank would not require UKCo to withhold any tax from any interest. But a non-UK lender may trigger withholding obligations. Often such loans include a gross up clause in the event the lender is receiving less net because of such deduction. This greatly increases the cost of borrowing and needs to be carefully considered in advance.

What Tax incentives and allowances are available in the UK? 

Even before UKCo is trading it should be thinking about maximising its use of the various tax incentives given by the UK Government to those who invest in the UK. There are a considerable number of tax reliefs on offer – the two main ones being Research and Development Tax Credits and Capital Allowances. More details on this will follow shortly.

Will the organisation be carrying out charitable works?

Some clients wish to set up UKCo as a means of expanding their philanthropic endeavours.  Such companies may wish to undertake specific charitable works themselves while others act as a quasi-fund to make payments to existing charitable bodies.  Our team can assist with applying for charitable status from the Charity Commission and advising on the various consequences of having a UK based charity.

Guidance on registrations and assistance when setting up a UK company

We can assist your client with its on-line links to the relevant Government tax and registration services via the government Gateway Portal. We can also help with the application to register for VAT and if required PAYE. VAT returns and CT returns would usually be carried out by the relevant tax accountant.