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IN084 - Using UK Entities for International Trading - A Case Study
Mr Jones lives in Dubai and uses a Nevis company for the purchase and sale of handbags. He buys the handbags from Italy and sells them to department stores in France, Germany and Portugal.
His supplier and customers increasingly feel uncomfortable in trading with companies from no or low tax jurisdictions.
Mr Jones has heard that it may be possible to use a UK entity for trade, but without exposure to UK tax. He would like to know the available alternatives and their respective merits.
He also wants to know if it is possible to obtain a Certificate of Residence from the Her Majesty’s Revenue and Customs for any entity set up to achieve his objectives.
Alternatives
There are two types of UK entity that could be used for international trade without exposure to UK taxation:
- UK Agency Company
The trade could be conducted using the services of a UK Agent (see Dixcart information note, Tax Efficient use of UK Companies for International Trading Purposes). Under these arrangements, a company from a low tax jurisdiction (the Principal) enters into a contract with a UK company (the Agent) where the Agent, on instructions of the Principal, enters into trading operations.
The Agent will pay UK tax on the fee it receives from the Principal. The Principal would be subject to UK tax on its UK source income. In this instance, as there is no UK source income, no UK taxation arises on the Principal.
- UK Limited Liability Partnership (UK LLP)
Mr Jones could use his existing Nevis company and a new Nevis company to be the sole members (partners) in a UK LLP (see Dixcart information note, The United Kingdom Limited Liability Partnership – A Tax-Efficient Vehicle for International Trade). If the UK LLP is set up to carry out a trade or profession with a view to profit, it will be tax transparent. This means that the income and gains of the LLP will be treated as the income and gains of the Nevis companies and not the LLP.
Income and gains from a non-UK source will not be taxable in the UK on the Nevis companies as they are not resident in the UK.
In deciding whether to use a UK LLP or an agency company, there are a number of other factors to consider, including VAT and control.
VAT
In our example, Mr Jones’ customers are VAT registered businesses in France, Germany and Portugal and the supplier is a VAT registered business in Italy.
If the UK entity being used for this purpose was registered for VAT in the UK, the VAT simplification procedure could be used.
Under this procedure, the UK entity supplies its VAT number to the supplier, which enables the supplier to zero rate the transaction. As the customers are VAT registered, an invoice can be issued to them, endorsed with the wording “VAT EC Article 28 Simplification Invoice”. The end customer then pays VAT in its own country under the reverse charge procedure.
Can a UK Agent and/or a UK LLP Register for VAT in the UK?
In order to become VAT registered in the UK, you need to be able to demonstrate that you have a fixed establishment in the UK and intend to make supplies that would have been taxable supplies, had they been made in the UK.
Under the UK LLP alternative, the two Nevis companies as the members of the LLP are carrying out the business from Dubai, with no fixed establishment in the UK. In these circumstances UK VAT registration would not be possible.
Generally, a UK Agent would meet the requirements for a UK VAT registration. Where the Principal is based outside the EU, as in our example, Customs will ignore the Principal for VAT purposes and substitute the Agent in its place, thus removing any VAT obligations from the Principal.
Under these circumstances Mr Jones would be advised to opt for the UK agency solution.
Control
If Mr Jones uses a UK company owned by himself or a connected party, he would need to take care to ensure that the fee payable for the agency service was sufficiently high so as to be seen to be at a full arms-length rate. Otherwise, transfer pricing legislation would apply.
Our advice would be for Mr Jones to use an independent Agent. Such an Agent can be introduced by Dixcart.
If Mr Jones is not comfortable with the lack of day to day control that he would experience when using an independent Agent, he should consider the LLP alternative. Here the members would control the business from Dubai, but would need to register for VAT in one of France, Germany or Portugal and deal with all the compliance that this entails.
Certificates of Residence
A UK LLP is tax transparent and therefore its tax residence is where its members are resident and where it has a permanent establishment. In our example, the members are in Dubai and therefore a UK Tax Residence Certificate would not be issued.
Tax Bulletin 62 sets out the matters that the Revenue consider before issuing a Tax Residence Certificate. They state that the company must be incorporated or managed and controlled from the UK. When asked to verify the status of a company under a Double Tax Treaty, they will seek further information as Residency Certificates will not be given where the income or profits are not those of a UK company. In the case of an Agent acting for a Principal in a low tax jurisdiction, the profits of the Principal are not the profits of the Agent and therefore a Tax Residence Certificate will not be issued.
Conclusion
Both UK Agency Companies and UK LLPs can be used for international trade without incurring UK taxation on non-UK source income. The choice of which type of entity should be used will be governed by other issues, such as effective control and VAT.
The Dixcart information notes referred to in this note can be found on our website or, alternatively, you can use the attached fax-back form to request copies.
This case study has purposely been kept short. Professional advice should be taken before entering into such arrangements as particular circumstances may require differing solutions.
Contact
For further information, please speak to Laurence Binge at Dixcart International Limited in the UK, or your usual Dixcart contact.