company overseas issues

Question 1

company is UK resident

Answer 1

UK tax on worldwide income

Question 2

company is non UK resident

Answer 2

UK tax on UK income only

Question 3

how is company residency determined?

Answer 3

subjective matter, it is decided after considering following factors:
1- registration place of company
2- head office location
3- major customer base
4- location of main operations
5- residency of directors

Question 4

double tax relief

Answer 4

if a company is UK resident, double tax on overseas income may be paid if no double tax treaty exists

in this case double tax relief will be given at lower of=
1) overseas tax
2) UK tax on foreign income

Question 5

2 ways in which UK resident company can operate an overseas business

Answer 5

-overseas branch/ permanent establishment
-overseas subsidary

Question 6

overseas branch/ permanent establishment tax implications

Answer 6

not incorporated as a separate entity, ir is considered part of UK resident company

in this case, normal
-UK tax payable on profits
-UK loss relief available on losses
-UK capital allowance available

an ELECTION is allowed in which ALL overseas branches will get exempted (no tax, loss, capital allowance)

Question 7

is the above election adviseable?

Answer 7

no because it applies on ALL overseas branches of now and future, and this election is IRREVOKABLE for lifetime.

Question 8

overseas subsidary tax implication

Answer 8

-registered as a separate company
-it will be a non UK resident company.
-It will not have to pay UK tax.

no tax on overseas profit
no loss relief on sub losses (75% group may apply, however not relevant for losses after 2020 as UK left EU) before, the rule was that losses can be surrendered if company is part of EU.
- capital allowance on sub assets
no UK tax on dividends

Question 9

which option is better, overseas branch or overseas subsidary?

Answer 9

if business is in loss, then use branch model as loss relief will be available
if business is in profit, then SUB model is better, no UK tax on overseas profit
-normally, it is advised that initially operate branch model, and then convert to SUB model when established and profitable

Question 10

why is branch model advisable in early phase of overseas operations

Answer 10

-losses occur initially, will be surrendable to UK
-capital assets purchased initially, capital allowance can be claimed
-branch is easy to manage legally. beneficial in start of operations

Question 11

what is a controlled foreign company CFC

Answer 11

it is a non UK resident company which is controlled by UK residents (shares > 50%)

Question 12

what is the tax implication of CFC?

Answer 12

all UK residents controlling a foreign company (individually or collectively) will be asked the reason. if legitimate reason, then no tax implication.

if reason is not considered legitimate, then UK tax will apply in form of a CFC charge.

if CFC is operated to divert UK profit and in order to avoid tax, then as per tax avoidance rules, UK will tax its profits

Question 13

what is consdiered a legitimate reason for CFC

Answer 13

major customer base in that country
cheap raw material
access to any resource not available in UK

not legit reason: Tax rates are lower. mazay UK ke lerahe, tax nahi dena?

Question 14

what is the CFC charge

Answer 14

-payable according to a company’s holding % in non UK resident company

calculated as=
non UK resident co. profit *holding% * UK tax rate

double tax relief is available if any overseas tax is already paid on the profits

no CFC charge if SH is less than 25%

CFC charge is always calculated at main rate (25%)

-CFC not payable by individuals as they will be taxed on dividends

-CFC charge only applies on overseas trading income which is diverted from UK (jiska legit reason nahi hai)

Question 15

exemptions of CFC charge

Answer 15

-treaty of NO CFC charge with country
-company is subject to CFC charge for first time in any accounting year but will not be subject to CFC charge in next year (prove k ab nahi hoga, galti se hogaya)
-overseas tax is 75% or more of UK taxes (means maqsad is not tax chori)
-profit margin of OS company is less than 10% (low profit margin exemption)
-total taxable profits are less than 500k (non trading profits are no more than 50k)

Question 16

what is a close company/ friends and family company

Answer 16

one that is controlled (50% owned) by
1) 5 or fewer shareholders
2) any number of directors

additional tax implications for such company (SETHYA COMPANY)

Question 17

associates shares in close family

Answer 17

Shareholding of a person’s associates (spouse, kids, grandkids, parents, siblings, business partners) are also considered when evaluating close family holding

Question 18

how is close company evaluation done for a sub company?

Answer 18

if parent is close company, then whole group is close company

if parent is not close co., then whole group is not close co.

Question 19

tax consequences for close company

Answer 19

1- benefit given to a shareholder
2- loan given to shareholder
3- qualifying loan interest expense

Question 20

Benefit given to SH

Answer 20

if SH is also employee:
-employment income (income tax and NIC)
-for co. allowed expense from trading PnL

if SH is not employee
-value of benefit will be treated as dividend distribution on which income tax will arise
-not allowed expense for co.

normal dividend is not included in this implication

if benefits given are non cash benefit then valuation rules of employment income are followed

Question 21

Loan given to shareholder-

tax implication?
NIC?
if loan is provided at less than official rate of interest?

Answer 21

TAX IMPLICATION:
if loan is given to SH then company has to pay 33.75% charge on the amount of OUTSTANDING LOAN at tax PAYMENT DATE (9 months after yr end)

-if loan gets repaid before that date, no charge!!
-this charge is payable one time on amount of outstanding loan

charge will be returned if:
-SH repays loan to company
-Loan is written off by company (then dividend income tax will be charged on SH irrespective of employment status)

NIC:
class 1 employee NIC will be payable by individual on amount of loan written off irrespective of employment status
class 1 employer NIC will be payable if individual is also an employee

if loan is provided at less than official rate of interest then non cash benefit implication will also arise

Question 22

When is loan to SH charge waived?

Answer 22

-loan is less than 15,000
-SH is also an employee
-Shareholding is less than 5%

this shows tax chori is not the intention, genuine loan

Question 23

Qualifyinng loan interest expense

Answer 23

if SH takes loan to invest in close company, then the interest expense will be deductable from total income

for this, SH should be an employee of close company OR should own 5% or more shares

Question 24

close investment company (CIC)

Answer 24

if a close company is an investment entity only which means if it has no trading activity of its own then it will be CIC.

tax implications are:
1) corporation tax will be at main rate only
2) shares will not be considered as business asset for CGT and IHT
3) qualifying loan interest expense relief will not be available

Question 25

a SH who is also a director can extract profits from a company in two ways

Answer 25

employment bonus
dividend

Question 26

income tax consequences of extracting profit in form of bonus vs dividend

Answer 26

employment bonus:
-tax will be paid under employment income head as a non saving income

dividend:
tax chargeable under dividend head. dividend rates will apply

Question 27

NIC consequences of extracting profit in form of bonus vs dividend

Answer 27

bonus:
Cash benefit NIC will be payable (class 1 NIC employee and employer)

dividend:
NO NIC

Question 28

Allowed expense for company: bonus vs dividend

Answer 28

bonus:
allowed expense for company. reduce profit and save tax

dividend: no allowed expense

Question 29

bonus vs dividend, relevant earning for pension contribution?

Answer 29

bonus: yes
dividend: no

Question 30

3 ways to extract investment from COMPANY (in close company)

Answer 30

sell shares (normal)
liquidate company
repurchase of shares by company

Question 31

sell shares implication

Answer 31

normal cgt implication will arise (dp less cost= gain)

Question 32

liquidate the company - implication

Answer 32

-any fund distribution before appointing liquidator- treat as dividend
-after appointment - treat under CGT head

Question 33

repurchase of shares by company - when is it considered dividend income?

Answer 33

shares repurchased will be cancelled by company, other SH holding will increase

this transaction is normally treated as a dividend distribution, income tax will be charged on it

DP less par value of shares = dividend (this dividend is taxable)

Question 34

when is repurchase of shares considered CGT?

Answer 34

transaction may qualify for CGT if all of the following conditions are satisfied:

-unquoted company
-SH is UK resident
-holding period 5 yrs. if shares inherited then 3 yrs (combined for donor and donee)
-after repurchase shareholding should reduce to 30% or less in company (influence khatam)
-shareholding should reduce BY 25% or more
-reason of repurchase should be genuine

Question 35

what is a genuine reason for repurchase

Answer 35

retirement
dispute
grieved
unaligned with company goals

Question 36

how will gain be calculated if cgt conditions met

Answer 36

repurchase price
less cost of share
=
chargeable gain

Question 37

what is a personal service company

Answer 37

a PSC is a tax avoidance technique.
an individual can make a PSC and provide services to their employer in a self employed contract. rather than getting salary from employer on which they had to pay NIC and income tax, they will now get fees.

they can distribute the profit of this company as dividend and enjoy lower tax rate, and save tax and NIC.

however corporation tax will have to be paid

Question 38

IR 35 regulation

Answer 38

introduced to cover this tax avoidance in order to avoid income tax and NIC

Question 39

factors that the tax department uses to determine if company is legitimate or just a tax avoidance tool

Answer 39

company should have its own:
-policies
-timings
-uniform
-substitute workers
-helpers
-premises
-equipment
-management
-financial risk

Question 40

what happens if tax dept determines that company is not legit and just a tax avoidance tool

Answer 40

-IR 35/ personal service company rule will now apply

under this rule, amount received by new company will be considered as employment income rather than fees for services

Question 41

if PSC is providing service to medium sized or large enterprise …

Answer 41

the CLIENT will be responsible to DETERMINE STATUS of individual providing service through PSC.

A status determination statement will be sent to the individual.

if deemed employee, then the client will determine deemed salary

Question 42

how will DEEMED SALARY be calculated by the client?

Answer 42

Payment in respect of services xxx
Less: Direct cost of material incurred by PSC
Less: Deductable employment expenses incurred through PSC

= Deemed direct payment

On this DDP, Client will pay Class 1 ER NIC
and employee will pay Income tax + Class 1 EE NIC

Question 43

If PSC is rendering services to a small sized client…

Answer 43

then the PSC itself will have to determine deemed salary

Question 44

how will the PSC determine its own deemed salary

Answer 44

it will be calculated in the following manner:

-fees received xxx
-less: actual employment income paid (salary expenses)
-less: employer NIC on actual salary (usually allowance of 5k not available cuz only 1 EE in co.)
-less: pension contribution done for its employee
-less: any other expenses done for employee
-less: statutory deduction: 5% of fees received

= deemed employment income
less: Employer NIC on deemed employment income
(deemed emp income *13.8%/113.8%)

=notional salary

on this notional salary amount, income tax and class 1 EE nic will be paid

Question 45

if question is silent the client will be considered…small or large?

Answer 45

SMALL and the above working will have to be made