Tax structuring - Using a UK company as an agent for an offshore company
UK businesses are popular for many reasons, but one of the main advantages, especially for individuals abroad, is the degree of respectability and professionalism it conveys. This is especially the case because clients may not wish to contract directly with an offshore company. It may also be mandatory for some UK service providers to use a UK company.
A UK company would pay UK tax on 19% profits.
There are no special forms of UK company targeting non-residents and so if you were a non-resident for example and wanted to use a UK company without incurring the corporation tax charges, you might consider a agency contract.
How it works
The UK company acts as an agent for an offshore company. This is governed by agency law, with the UK company being the agent and the offshore company being the principal.
If you are the agent of another party, it means that you are authorized to transact on their behalf and that you can receive rental income and hold assets, on your behalf but in circumstances where the entire benefits ensue for the other party and for any company The UK company is conducting is solely on behalf of the offshore company.
So in layman's terms you are running your business through an offshore company but using a UK company as a form of agent with most of the income going to the 'principal' (which would be an offshore company).
This is popular when you have any form of export.
For example, the UK company is incorporated as a sales agent for an offshore company. The british company manages invoicing / receipts etc. and deducts a commission at the market rate (eg 5, 10 or 20%) as defined in the agency contract.
The rest of the profit goes back to the offshore company and the UK taxable profits would only be the commission of 5, 10 or 20%.
In this case, the offshore company is the “principal” and the UK company the agent.
The British company would sign a contractually binding agency contract with the offshore company which explains the terms of the agency's operation.
The main UK tax issues are securing commercial agency fees and avoiding any permanent establishment issues. You should ensure that the fees collected by the UK company are set at a commercial rate for the services provided as defined in the agency contract.
Amounts received and paid by the UK company are not for its own account and are for the account of the offshore company (i.e. it is not UK company money). Therefore, it usually transfers the funds to the offshore company with a reconciliation statement showing the amounts received, paid and the commission withheld. There would also be an invoice for the commission fee of 5%.
Uses of agency contracts
There are many occasions where an agency contract could be useful: -
The UK company can be used for billing purposes, where it could, for example, deliver goods on behalf of an offshore company, receive payment into a bank account on its behalf and account for the money to the offshore company. This is probably the primary use as it avoids any permanent establishment issues for the offshore company. The UK company is simply collecting money on behalf of the offshore company.
The UK company could be used to provide services to clients on behalf of an offshore company where the clients would not want to deal directly with the offshore company.
Property management in UK
The UK company could act as a managing agent for collecting rental income on behalf of an offshore company (which would own the property) and the offshore company would charge trading fees. Tenants would not know that they are dealing with an offshore company, capital gains and rental income should be exempt from tax in the hands of the offshore company.
Ownership of Applicants in UK
The UK company could be used to own the property (on paper) on behalf of an offshore company, with the offshore company still entitled to all uses and benefits of the property, including rents and the proceeds of the time sale. desired. The UK company is the agent and the offshore company is the beneficiary. Commercial fees should be charged to the offshore company as defined in the agency contract.
The Isle of Man is popular, as are traditional tax havens like BVI, Panama and Seychelles. Any tax exempt jurisdiction could be used. Establishing the offshore company in a jurisdiction that had a tax treaty with the United Kingdom would in most cases result in no tax benefit.
Market rate commission
It is essential that the UK and the offshore company operate at arm's length. This means that the rate the UK company charges the offshore company should be based on the market rate for the services provided.
There are strict transfer pricing regulations that can impact this.
Therefore, you need to assess in the agency contract the services provided by the UK company and see the rate that an independent third party company would charge for these services. In the case of a simple chargeback company, this could represent 5% of revenue. If the UK company undertakes additional activities, then this would be increased.
Care should be taken to ensure that you can support the fact that there is a true agency relationship. Therefore, make sure that a legally binding agency contract is drafted by a lawyer.
You will generally want to ensure that the beneficial title to the goods purchased is overseas so that the UK company is not treated as making a profit in its own name. The UK company can hold legal title as long as the offshore company clearly owns the beneficial interest.
In most cases, there will be no overseas tax burden for the offshore company, as it will be classified as a trading company outside of the jurisdiction of incorporation.
Avoiding a UK tax burden
It would be essential to ensure that the UK company does not constitute a permanent establishment of the offshore company and therefore to conduct a trade in UK. If this were the case, the profits of this permanent establishment could be taxed in the United Kingdom.
You must therefore be able to establish that the actual trading was carried out by the offshore company overseas and that the activities of the UK company did not constitute UK business activities on its behalf. One of the issues will be where the contracts are signed. However, even when contracts are made overseas, this fact is inconclusive against UK trade by UK company. The trade will be carried on in the United Kingdom if there is significant economic activity there that contributes to generating profits.
In practice, there would only be a UK tax burden if there is a permanent establishment in the UK by the UK company.
There are two main circumstances in which there could be a permanent establishment. These are:
- When there is a fixed establishment through which the activities of an enterprise are carried out in whole or in part
- Where an agent, other than an independent agent, acting on behalf of the company has entered into and usually exercises contracts on behalf of the company
The main concern will be whether there is a 'dependent' agent in the UK, as this may constitute a permanent establishment in certain circumstances.
The OECD notes that one of the means by which a permanent establishment of a business could be established is where an agent acting on behalf of the business has, and usually exercises, in the UK the power to enter into contracts in the name of the company defined in the agency contract.
Anyone who can establish a permanent establishment for the business is known as a dependent agent and can be an employee or a self-employed person (and a natural or legal person). The OECD notes that only those authorized to conclude contracts can lead to a permanent establishment for the company.
If there was a permanent establishment, UK income attributable to the permanent establishment would be subject to UK tax.
It would therefore be important to establish that British society was not not in able to enter into contracts on behalf of the UK company, particularly in relation to commercial transactions. If this were the case, the income could be taxed on the offshore company in the UK.
If the offshore company is not a subsidiary of a UK company, the rules on controlled foreign companies would not apply. However, if the offshore company was directly owned by a person resident in the UK or if that person had the power to profit from the income of that company, the UK anti-avoidance income tax rules should be taken into account (see “Establishment of central management and overseas control”). )
Treatment of income received in statutory accounts
One of the great advantages of using an agency structure is that the UK company would not be taxed on all of the income it received on behalf of an offshore principal, but would not would be taxed only on his commission receipts.
As regards the accounts of the UK company, it would be essential to determine whether, for accounting purposes, it acted as principal or agent.
This would then have an impact on whether only commission was reported as turnover, or whether total income and expenses were reported in the accounts. In the latter case, the risk of an HMRevenueCustoms investigation is clearly higher.
UK reporting standards state that for a business to be considered a principal, it should normally be exposed to all of the material benefits and risks associated with at least one of the following:
- Selling price: the ability, under economic constraints, to establish the selling price with the customer, either directly or when the selling price of an item is fixed, indirectly by providing additional goods or services or by adjusting the terms of a related transaction; or
- Stock: exposure to the risks of deterioration, slower movements and obsolescence and changes in supplier prices.
Where the seller has not disclosed that he is acting as agent, there is a rebuttable presumption that he is acting as principal.
Other factors that indicate that a seller may act as a principal include:
- performance of part of the services or modification of the goods supplied;
- assumption of credit risk; and
- discretion in the selection of suppliers.
In contrast, when a seller acts as an agent, they will not normally be exposed to the majority of the benefits and risks associated with the transaction. The arrangements made by the agency generally include the following characteristics:
- the seller has disclosed that he is acting as an agent;
- once the seller has confirmed his customer's order with a third party, the seller will normally have no further involvement in the performance of the final supplier's contractual obligations;
- the amount the seller earns is predetermined, either a fixed amount per transaction or a stated percentage of the amount invoiced to the customer; and
- the seller does not bear any stock or credit risk, except in cases where he receives additional consideration from the final supplier in return for his assumption of this risk.
As stated above, the distinction between agent and principal in the accounts is crucial because when the substance of a transaction is that the company acts as an agent, it must report as revenue in the accounts. the commission received in exchange for his performance under the agency agreement.
Any amount received payable to the foreign principal would not be included in the agent's turnover.
You therefore need to determine whether the UK company can be classified as an agent for the purposes of the accounts.
As stated above, you will need to examine the merits of the transaction and there is a rebuttable presumption that if there is no disclosure of the principal, the UK company would be the principal (and therefore report the full figure of offshore business and subsequent payments). business).
If you were to use the UK company as a form of front for the offshore company, there would likely be no disclosure of the agency deal. In this case, however, if you can argue that, based on the other factors, the nature of the deal is that the UK company is an agent, that should be enough.
Using a Limited Liability Partnership (LLP)
The alternative option would be to use an LLP. This is a flow-through entity for UK tax purposes and therefore the income would be attributed to you personally.
Provided the profits are not profits from a UK trade and you are not a UK resident there would be no UK income tax charge on the profits. This therefore has an advantage over the above UK Ltd company in that it can avoid all UK taxes while still maintaining the professionalism and credibility of a UK entity.
Regarding disclosure, the notes to the limited partnership report state that “… Where all the partners are not resident in the UK, the partnership income tax return should only show profits from operations. United Kingdom…".
Therefore, if the partnership had no commercial benefit in the UK, the return on the partnership would in fact be pristine.
The downside of an LLP is that it would have to file accounts with the business house showing its profit and loss account and balance sheet, even though it can operate overseas.