IN056 - Tax Efficient Use of UK Companies for International Trading Purposes

It is possible to arrange for an enterprise in a low or nil tax jurisdiction (the “principal”) to make use of a UK company for cross border trading purposes. The main benefit of such a structure is that the participation of the principal in the transactions does not need to be directly disclosed in the trading documentation.

The Structure

This document explores the use of a UK incorporated and tax resident company transacting business on behalf of an undisclosed principal in relation to the supply of goods.

Trading Arrangements

Trading operations will be entered into by the UK company on instruction from and on behalf of the principal, with a representation agreement in place between the two parties. The agreement should be in writing and would provide for a fee to be paid by the principal for the services that the UK company will perform on its behalf. All selling and purchasing transactions will be performed by the UK company on behalf of the undisclosed principal.

Fee

It is recommended that the fee payable to the UK company is at a rate commensurate with the work and responsibility assumed by the UK company. This fee will be retained within the UK company to meet its operating costs and professional management fees. After these costs, the balance of monies remaining in the UK company will be subject to normal UK corporation tax.

The appropriate fee depends very much on the value of the invoices being raised. Individual discussion between the UK company and the overseas principal would need to take place. On large low-profit contracts a smaller percentage remuneration might be appropriate, but in general a rate of 5% may well be the applicable remuneration to recognise the value of the services being provided by the UK company.

Taxation

Receipts from the trading activities will be received into the bank account of the UK company and the net amount after the agreed fee will be remitted to the principal. The UK company will be subject to UK corporation tax on its profit, being the fee for services provided less any expenses of the company.

Non-UK companies are subject to UK tax only on their UK source income, broadly defined as:

• dividends from UK companies
• interest from loans made to UK resident borrowers
• royalties from the grant of intellectual property for use in the UK
• income from a trade or business carried on by the company within the UK

As long as the income does not fall into one of the above categories, the principal will not be subject to UK tax on their share of the income, notwithstanding the fact that it has chosen to trade through the medium of a UK tax resident company.

To help ensure that the overseas principal is not liable to UK tax it is important that the agreement between the two companies, together with all trading contracts, are executed outside of the UK. The purpose of this is to be able to confirm that no trading is conducted in the UK either by the principal or the UK company and that there is no UK source income.

Control

It is also essential that the UK company is not connected by ownership or management control to the principal and that both companies are independent in ownership and management and are seen to be so.

Formation and Operation

In order for there to be no trading activity within the UK, the directors of the UK company must be resident outside of the UK and all transactions carried out outside the UK. Dixcart can organise for the UK company to be established by persons not connected to the principal, with directors resident in the Isle of Man.

If desired, the bank account of the UK company could be established within the UK with authority and confirmation on the operation of the account at all times coming from the directors outside of the UK.

Invoices will be issued to customers by the UK company upon receipt of formal instructions from the principal. Invoice payments will be directed into the bank account of the UK company which, after retaining its agency fee, will arrange to remit the balance to the principal.

Care must be taken to ensure that the principal is not carrying on a trade or business in the Isle of Man. Consideration must also be given to the tax position of the principal in its own jurisdiction or in any jurisdiction where it is taxable.

VAT Registration

A UK company must register for VAT if its taxable turnover is more than £61,000 per annum. It can voluntarily register even if its turnover is below £61,000 per annum.

In the case of the UK company, the taxable turnover will be both its fee and invoices raised in its own name on behalf of its principal.

If the company is registered for VAT and supplies to VAT registered customers outside of the UK it will not have to charge VAT. If the customers are inside the EU, but not VAT registered, it will have to charge VAT.

Where goods are supplied to customers outside of the EU the supply will not be subject to VAT, since the goods will not be physically present in the UK and will have never entered the UK.

The VAT position on the supply of services is different and needs separate advice for particular circumstances.

Advantages

The main advantage of this concept is that a structure incorporating an overseas principal can be established with an arrangement for the use of a UK company for trading purposes without the participation of the principal being disclosed in the trading documentation.

The above is a brief outline of the legal and tax position of the structure and is of a general nature. Professional advice should be sought for each particular set of circumstances.

Please contact Laurence Binge at our Esher office or Simon Kelly at our Isle of Man office for advice on any specific case and for an indication of the likely agency fees.