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:

R: Registered place
H: Head office location
O: Operations (location of main operations)
P: Primary customer base
E: Executive (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, it is considered part of UK resident company

B: Branch of UK entity

A: Allowances (UK capital allowances available for overseas branches)

R: Reliefs: normal loss reliefs on losses

E: Election can be made to exempt it from UK tax. ALL overseas branches will get exempted (no tax, loss, capital allowance)

Question 7

is the election to exempt overseas branch from UK tax advisable?

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

S: Separate company (overseas subsidiary is registered separately, It will be a non UK resident company)

T: Tax (no UK tax on overseas profits or dividends)

A: Allowances (capital allowances on subsidiary assets N/A!)

R: Relief (no loss relief for subsidiary losses, 75% group rule (losses could be surrendered if company was part of EU ) Before 2020)

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, (due to initial losses, capital allowances due to investment in assets) 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

-UK residents controlling a foreign company must have a legitimate reason.
-If the reason is legitimate, no tax.
-If not legitimate, CFC charge applies.
-If the foreign company diverts UK profits to avoid tax, UK taxes its profits.

Question 13

what is consdiered a legitimate reason for CFC

Answer 13

major customer base
cheap raw material
access to resources 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

SLICD

S- shareholding: No CFC charge if shareholding < 25%.

L- legitimate : CFC charge applies only on diverted trading income without a legitimate reason

I-individuals: No CFC for individuals, only for companies.

C: Charge is calculated as:
Profit × Holding % × UK Tax Rate (25%). (always taxed at main rate)

D: Double tax relief available if overseas tax paid.

Question 15

exemptions of CFC charge

Answer 15

T: Treaty (no charge)
R: Reversal (first time CFC charge, not expecting in future)
E: Exemption (overseas tax 75%+ of UK tax)
N: No large profits (profit margin <10%)
D: Diminished income (<£500k, non-trading <£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 SH

2) any number of directors

additional tax implications for such company (SETHYA COMPANY)

when assessing each shareholder’s ownership, ownership of associates (family and business partners) will also be seen.

Question 17

how is close company evaluation done for a sub company?

Answer 17

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 18

Benefit given to Shareholder in a close company

Answer 18

Employee = Treated like a salary/benefit (taxed and deductible for the company).

Non-employee = Treated like a dividend (not deductible for the company).

Normal dividends are not involved, and non-cash benefits use standard valuation rules.

Question 19

Q1- Loan given to shareholder, implications?

Q2- And what if loan is provided at less than official rate of interest?

Answer 19

CROWN - B

C-Charge: charge of 33.75% on outstanding loan at tax payment date (9 months post year-end).

R: Repaid then no charge, or charge is returned

O: outstanding amount at tax payment date.

W: Written off: no charge/ chargee returned. dividend income tax will be triggered

N: NIC: class 1 NIC will be paid irrespective of employment status. ER will pay if employee.

If loan is given at less than official rate of interest

non cash benefit implication will also arise

Question 20

When is loan to SH charge waived?

Answer 20

When SH is an employee and:

-loan is less than 15,000
-Shareholding is less than 5%

this shows tax chori is not the intention, genuine loan

Question 21

if shareholder takes a loan to invest in a close company or give loan to a close company

Answer 21

Qualifying loan interest expense:

this 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 22

close investment company (CIC)

Answer 22

if a close company is an investment entity only, no trading

tax implications are:
C – Corporation tax is at the main rate only.
I – Investment assets: Shares are not considered business assets for CGT/IHT reliefs.
C– Ch** is pe No Borrowing relief (qualifying loan interest relief not available).

Question 23

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

Answer 23

employment bonus
dividend

Question 24

profit extraction in form of bonus vs dividend: factors to consider.

Answer 24

RANT

relevant earnings for pension: bonus yes, dividend no

allowed exp: bonus yes, dividend no

NIC: bonus: class 1 NIC, dividend , no NIC

T: Taxx rates for SH. Bonus N/S rate, dividend rate.

Question 25

3 ways to extract investment from close company

Answer 25

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

Question 26

sell shares implication

Answer 26

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

Question 27

liquidate the company - implication

Answer 27

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

Question 28

repurchase of shares by company

Answer 28

normally treated as dividend, income tax will be charged on it.

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

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

however may be assessed in CGT head if conditions met.

Question 29

when is repurchase of shares considered CGT?

Answer 29

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

“RUINSS”

R – Reason of repurchase must be genuine.
U – Unquoted company.
I – Influence ends: shareholding falls to 30% or less.
N – Noteworthy reduction: shareholding decreases by 25% or more.
S – Shares held long enough: 5 years (or 3 years if inherited, plus donor donee holding combined)
S – SH must be a UK resident.

Question 30

what is a genuine reason for repurchase

Answer 30

sad, phadda, retirement, SH sucks

Question 31

how will gain be calculated if cgt conditions met, and will BADR be available?

Answer 31

repurchase price
less cost of share
=
chargeable gain

yes BADR may be available

Question 32

what is a personal service company

Answer 32

An individual creates a PSC (Personal Service Company) to get paid as fees, avoiding salary (which incurs NIC + income tax).

How they save:
Profits are distributed as dividends, taxed at a lower rate than salary.

Catch:
They still pay corporation tax on company profits.

Question 33

IR 35 regulation

Answer 33

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

Question 34

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

Answer 34

company should have its own: SMART PET

S: Substitute workers
M: Management
A: Activities (policies)
R: Risk (financial)
T: Timings
P: Premises
E: Employees (helpers)
T: Tools (equipment)

Question 35

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

Answer 35

-IR 35/ personal service company rule will now apply
-company is seen as providing employment services
-Deemed salary is calculated on the income received.
Income tax and NIC apply to the deemed salary.

Question 36

who determines the deemed salary?

Answer 36

If large or medium business:

-Client is required to issue status determination statement to the individual providing service.

-if deemed employee, then the client will determine deemed salary in the same statement

if small business:
the individual will do the calculation of deemed salary, not the business.

Question 37

how will DEEMED SALARY be calculated by the client/ large medium sized entity?

Answer 37

Payment in respect of services xxx
Less: Direct cost of material incurred by PSC
Less: Deductable employment expenses done by 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 38

If PSC is rendering services to a small sized client…

Answer 38

then the PSC itself will have to determine deemed salary

Question 39

how will the PSC determine its own deemed salary

Answer 39

it will be calculated in the following manner:

FAST PED

+F: fees received xxx
-Actual employment income paid (salary expenses)
-Statutory deduction: 5% of fees received
-Taxable expenses: any other expenses done for employee
-Pension contribution done for its employee
-Employer NIC on actual salary (usually allowance of 5k not available cuz only 1 EE in co.)
=
=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 40

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

Answer 40

SMALL and the above working will have to be made

Question 41

is tax paid on deemed salary or profits

Answer 41

Deemed salary: Taxed as employment income (paid by the individual).

Profit after expenses: Taxed as corporation tax (paid by the company).

Question 42

sale of patent

Answer 42

Profit earned from patenting activities eg. royalty income will be shown in patent box. It will be charged at 10% instead of 19%.