Major Tax Systems » The United Kingdom

THE UNITED KINGDOM

The UK Tax System

SYNOPSIS: For non-domiciled individuals (i.e. those not of British decent), the United Kingdom can prove to be one of the most attractive 'tax havens' in Europe. The reason for this derives from its anachronistic distinction between a person’s physical 'residence' and his or her 'domicile'. For tax purposes, this means that a resident, even technically from birth, but non-domiciled person will not be taxed on his or her worldwide income but only those sums earned in or remitted to the country. Therefore, it is technically possible for a 'foreigner' to move to Britain and save considerable sums whilst also having the benefit of many favourable treaty provisions. Further, the fact that Britain is a major country will often mitigate the effectiveness of any anti-avoidance provisions that may apply* 1 The simple fact that Britain is still one of the most important business jurisdictions in Europe and has many cultural and scenic attractions makes such claims, even where there is a reverse burden of proof, difficult to sustain for investigating tax authorities. In certain circumstances, high net worth individuals may even be able to reside in the United Kingdom completely free of tax. The 'trick1, if that is the correct term, is to differentiate between capital and income. For non-domiciled residents, capital held in the UK before taking up residence will not be taxed on its remittance to Britain. Thus, by creating two bank accounts, one for capital and the other for income, it may be possible to live in the country free of even the normal tax on remitted income. In respect to property acquisitions, non-domiciled individuals can often circumvent British capital gains tax by inserting an offshore company to hold property. Apart from the benefits afforded to non-domiciled persons, the United Kingdom also has some of the lowest individual and corporate tax rates in Europe, rates that attract more foreign investment to Britain than any other than any other EU country*2 , especially given the significant financial incentives provided by the 'poorer' Northern, Scottish and particularity Welsh regions*3.

*l   THE INVESTIGATING AUTHORITIES NORMALLY EMANATE FROM EITHER THE LAST PLACE OF PERMANENT RESIDENCE OR, IF DIFFERENT, FROM HIS OR HER COUNTRY OF ORIGIN.
*2 IN ABSOLUTE TERMS. IN PROPORTIONAL TERMS, THE REPUBLIC OF IRELAND ATTRACTS MORE FOREIGN CAPITAL THAN ANY OTHER EU MEMBER STATE.
•3 IF INDEPENDENT: WALES WOULD QUALIFY AS A COHESION STATE WITH SPAIN, PORTUGAL AND GREECE.

COUNTRY FACTS

Location: France lies across the English Channel to the south; the Republic of Ireland across the Irish Sea to the west; Belgium, the Netherlands, Germany, Denmark and Norway across the North Sea to the east. Most of the United Kingdom is flat or rolling lowland. Landmass, 86,495 sq. miles or 228,346.8 sq. kilometres  (includes England, Scotland and Wales). Approximately the size of the 'old' West Germany

Population: The combined population of the three mainland countries of the United Kingdom (England, Scotland, Wales and Northern Ireland) is 60,270,000

Development: In the mid to late Eighteenth century, the British began the Industrial Revolution and made the United Kingdom the world's richest manufacturing country. The British ruled the seas and were the world's greatest traders. By 1900, although significantly threatened by the growing economic might of Germany and the United States, the UK had an empire that covered about a fourth of the world's landmass. London was the centre of the world's banking and insurance industries, together with being the greatest port in the United Kingdom. However, as a result of the two world wars, the break-up of the Empire and the inevitable realisation of the latent potential of countries such as Germany and Japan, the United Kingdom went into rapid decline. Today, the economic position of the country has stabilized and in fact is showing many positive signs, including low inflation, relatively strong economic growth and a rapidly expanding tourist industry. However, the ability of Britain to play a major role as an industrial power is severely limited by the fact that most of the great manufacturing companies are now in foreign hands/control, including Jaguar, now owned by Ford of America, and the Rover Group, now owned by BMW of Germany. Britain no longer has any significant indigenous producers of televisions, computer hardware or motorcycles but is still a world leader in aerospace, armaments and pharmaceuticals. In the next century, the country is expected to remain a significant economic power possibly on a level with Italy and India.

Capital city: London, population approximately 7,200,000. Europe's principal banking and insurance centre. The wealthiest city in the United Kingdom with more resident millionaires than Paris, Berlin and Rome combined. It is also the home to more multi-national companies than any other city in the world bar New York. World famous for it's architecture, culture and theatres. The greatest threat to London as a financial centre is the growing influence of Frankfurt, combined with the continuing decline of the UK as a major manufacturing power something that has not happened to Germany or the other great European

Currency: The British Pound. At the time of writing, the exchange rate was UK£1.00 = €1.60 or US$1.90. Unlike the other three major western European powers, Germany, France and Italy, the United Kingdom is not a member of the Euro Zone 

Education level: Britain has some of the world's most prestigious and accomplished centres of learning, including Oxford and Cambridge universities, the Inns of Court and many of the world's leading schools including Eton and Harrow. However, despite such excellence, the country's state school system, which educates 95% of the population, has been in turmoil since the 1960's when comprehensive schools were introduced. In fact, the general level of education in Britain is now the same as the least developed EU countries, Portugal and Greece, and considerably below that of it's traditional peer group, Germany and France. Both major political parties recognise that state education must now be deemed a priority if future prosperity is to be ensured

Language: The principal language throughout the United Kingdom is English, although native gaelic languages are still spoken in the remoter parts of Scotland, Wales and in the English county of Cornwall. English is the world's most widely used language and certainly the dominant language in international commerce

Legal system : England & Wales (considered one jurisdiction for legal purposes) and Northern Ireland are established common law jurisdictions. However, the Scottish system is quite separate and greatly influenced by 'Continental' civil law. Common law is one of the world's most important legal systems and is employed by all the major English speaking countries, including the United States, Canada, Australia, Ireland and New Zealand 

Trade Bloc' membership: The United Kingdom joined the European Union in 1973, with the Republic of Ireland and Denmark. It is one of the four major EU countries, but has not been able to exercise it's full potential because of the Franco-German Axis and pro-American foreign policies 

Exchange controls: None 

 

MAJOR LEGAL ENTITIES

The principal legal entities in the United Kingdom are limited and public limited companies, companies limited by guarantee, partnerships, limited liability partnerships (LLPs) and trusts. For the purposes of this book, companies limited by guarantee are not relevant as they are non-profit making and are generally used by charities and various associations

A LIMITED LIABILITY COMPANIES

A British resident company is one both registered and managed and controlled in the United Kingdom. Non-resident companies have not existed since 1988 but Limited Liability Partnerships (LLPs) can be structured as non-resident entities and are very popular with those seeking British prestige without exposure to British taxes . The Companies Act of 2006 governs all British companies although in Northern Ireland are covered by a local 'Companies Ordinance'. As in most other European countries the liability of a shareholder is strictly limited to his or her initial investment. However, a director or secretary may find himself or herself personally liable if they have acted 'ultra vires' to the company's stated objectives, have breached their fiduciary duty and/or, in very simple terms, have acted in a reckless or fraudulent manner as adjudged, normally, by objective standards

FORMATION PROCEDURE: Most British companies and annual submissions are now formed electronically at Companies House in Cardiff or Edinburgh. SCF Legal & Corporate Management Services Limited is an authorized electronic company formation agent for Great Britain and a member of the Fe Phrainn Scheme in the Republic of Ireland

DIRECTORS: Under British law, every company must have at least one director, which may be either an individual or a corporate body. There are no nationality requirements and a director need not be resident in the United Kingdom

THE SECRETARY: either an individual or a corporate body can hold the post of company secretary. Under British law, a company secretary need not be of British nationality or residence. However, for obvious reasons an indigenous body will especially where the directors are foreign, normally hold this post. Company secretaries owe a fiduciary duty to the shareholders/subscribers

SUBSCRIBERS: Current UK law allows full equity ownership to rest with one legal entity. However, it is still quite common to have two initial subscribers. Subscribers to a British company can be individuals or corporate bodies of British or foreign nationality. Theoretically, a British company can be capitalized with as little as UK£1.00. However, generally the initial agent will have issued two fully paid up shares. The balance or nominal share capital, will normally be between 1,000 to 100,000 shares with a nominal value of UK£1.00 each. It should be noted, that on the allotment of a company's shares it is not necessary that they be fully paid up. However, any outstanding balance can be called upon by a creditor should the company go into liquidation. Further, it is the real and not the nominal value of the shares that must be paid. Therefore, if person 'A' agreed to pay UK£10,000.00 to the company for 1,000 shares with a nominal value of UK£1.00 each, a creditor would be entitled to demand, on liquidation, that 'A1 paid any outstanding proportion of the UK£10,000.00

THE COMPANY'S OBJECTS: In the Memorandum of Association a long list of the company's objects is normally listed. In most cases, it is the first few objects that will be given greatest emphasis. However, in recent years there has been a growing tendency to have  'independent main objects clauses'. The purpose is to give each stated object equal weight, whether it appears as the first or last object in the Memorandum. Notwithstanding the above, there is still a tendency to ascribe extra weight to the first object, especially if it is of a specific nature. Whilst it is common to use standard general trading objects, it is normally wiser to clearly state the modis operandi of the company, especially if future finance may be required and/or if the type of business is of a technical or unusual nature

REGISTERED OFFICE: All British companies must at all times maintain a registered office within the jurisdiction of the United Kingdom. At such an office, a combined register must be kept outlining all current directors, the secretary, subscribers and charges/debentures registered against the entity. The registered office, which does not have to equate with the  business office, is that for service of process and receipt of official government and court  papers. It is customary to use a solicitor, accountant or registration agent to act on behalf of a company

THE COMPANY'S SEAL: Under S.130 (3) of the Companies Act, 1989, it is no longer necessary for British companies to adopt an official company seal. However, most companies still use this device to give added emphasis to particular transactions

TAXABLE BASE: A British resident company is taxed on its worldwide income whether or not such income arises from activities in or outside of the United Kingdom

COMPANY ACCOUNTS: All British companies are required to maintain full and proper accounts. The detailed requirements being as follows:

Accounting records

(i) Under S.221 of the Companies Act, 1985, every company must keep accounting records sufficient to: disclose with reasonable accuracy, at any time, the financial position of the company at
that time and enable the directors to ensure that any balance sheet and profit and loss account prepared complies with the requirements of this Act

(ii) The accounting records must contain: a day to day record of all sums of money received and expended and, a record of assets and liabilities and, where the company's business involves dealing in goods, a statement of stock held at the end of each financial year and all statements from which it is derived, with details of buyers and sellers, except for retail trade

(iii) A parent company with a subsidiary undertaking shall take reasonable steps to ensure that it keeps accounting records to enable a balance sheet and profit and loss account to be prepared

(iv) The accounting records are to be kept at the registered office or such place as the directors’ think fit

(v) The accounting records of a private company must be retained for 3 years from the date they are made

 

A PUBLIC LIMITED LIABILITY COMPANY

A British public limited company is structured in an almost identical manner to it's private counterpart (see above) and subject to most of the same rules and regulations outlined in the Companies Acts'. The principal distinction, of course, is the theoretical ability to be listed on the London Stock Exchange. However, it should be noted that very few PLC's are actually listed and that should this be desired the complex rules of the 'Council of the Stock Exchange', known as the 'Yellow Book' Rules, must be adhered to. The expense of appointing stockbrokers, lawyers and accountants restricts this possibility to medium sized and large undertakings. The main differences between a non-listed public as opposed to a private limited company are as follows:

FORMATION PROCEDURE: Identical, save that a special memorandum and articles of association must be used suitable for a public company

DIRECTORS: A public company must have at least two initial directors, rather than the one required for a private company

THE SECRETARY: The company secretary must be a qualified barrister, solicitor, chartered or certified accountant

SUBSCRIBERS: There must be a minimum of two initial subscribers. In addition, the minimum initial authorized capital is £50,000.00, of which at least 25% must be fully paid up. Therefore, the minimum capital required to establish such a company is £12,500.00, with the balance to be paid at a later date

THE COMPANY'S OBJECTS: In legal terms there are no additional requirements in respect to a PLC's objects. However, the greater size of such companies and the likelihood of additional members, normally results in a 'specially drafted main objects clause' to clearly define the company's modis operandi. It is also more likely that there will be both 'ordinary1 and 'preference' shares, the latter normally ascribing a preference in respect to dividend distributions. Further, the Articles of Association will be more complex and significantly different to those of a private company although 'Table A' is still normally used

REGISTERED OFFICE:  As for a private company.

THE COMPANY'S SEAL: A PLC must have a Company Seal

TAXABLE BASE: As for a private company

COMPANY ACCOUNTS: In general, all public companies are required, whether listed or not, to submit annual audited accounts. In addition, it should be noted that such companies are liable to significantly greater penalties for non-compliance

TAXATION OF BRITISH COMPANIES

BASIC FACTS: In synopsis, the corporate tax rate in the United Kingdom is as follows:

STANDARD COMPANY RATES OF TAX:

(From 1st April, 2007)

20 % for companies with taxable profits up to £300,000.00

For companies with taxable profits between £300,000.00 and £1,500,000.00 the principal rate is 30%. The Marginal relief rate is 1/40th

Companies with a turnover above £1,500,000.00 have a 30% corporate tax rate without marginal relief

ADVANCE CORPORATION TAX & THE BRITISH IMPUTATION SYSTEM

UK resident companies are liable to corporation tax on worldwide profits and gains after deduction for business expenses

Companies incorporated in the United Kingdom are treated as being resident in the UK However, since the 30th of November 1993, (see S.788 of the Taxes Act, 1988) it is possible for a UK incorporated company to be treated as non-resident under a double tax agreement with another country

A company incorporated overseas will be treated as resident in the UK if it is managed and controlled in the UK whether or not there has been an official registration of the feet

Non-resident companies carrying on a trade in the UK through a branch or agency will be liable to corporation tax on the profits of the branch or agency in the UK They will also be liable to tax on capital gains arising from assets in the UK used in the trade

CAPITAL GAINS TAX

In the United Kingdom, capital gains realized by companies are subject to the aforementioned progressive rates applicable to income. Capital losses and exempted gains are deductible. Most importantly, assets can be transferred from one corporate member of a group of companies to another provided there is at least a 75% cross-interest. In addition, 'roll-over1 relief may be granted for qualifying business assets. Further, there may also be exemption from certain 'corporate bonds', simple debts and gains realized on the disposition of a motor car. Finally, as in Ireland, capital gains realized by a shareholder on selling his or her interest may not necessarily be subject to individual capital gains tax if such a person is non-domiciled. In cases where a non-domiciled individual is resident in the United Kingdom it should still be possible to circumvent CGT by having such shares held by an offshore vehicle. The reason for this is that shares are generally considered movable property under international law. Therefore, if a non-domiciled British resident sells his interest in a foreign holding vehicle (normally a simple West Indian company) and not directly, there will be no British capital gains tax liability - A non-domiciled British person currently only being taxed on a remittance basis. If the non-domiciled individual was not resident in the UK but in another country which imposes tax on world-wide income, it may be necessary to insert a further holding vehicle to prevent direct repatriation. Therefore, if A was a non-domiciled individual resident in a country where income is taxed on a world-wide basis then, accepting that there are no pertinent anti-avoidance provisions, A would probably have to establish two offshore companies B and C. C would own B which in turn would own A's investment in the British company X. When a purchaser P wishes to purchase the shares in X he would purchase B and pay C the agreed sum for the shares. As the said sum has been paid to C, which would be a tax free company and that C is, of course, a separate legal entity to A, A will have received no capital gain and hence no tax responsibility in his or her home country.

VALUE ADDED TAX

As with all other European Union member states, the United Kingdom employs a value added tax system. In simple terms, VAT is a tax levied upon consumer expenditure. It does not, at least for VAT registered undertakings; apply to transactions carried out in the course of business. However, to ensure the extraction of the tax, all suppliers of applicable goods and/or services must charge VAT which can then be reclaimed by the receiving VAT registered entity. If further sales are made, then the process is simply extrapolated until, if appropriate, an end consumer is found. Unlike many other countries the UK only has a standard rate of 17.5% together with a large number of zero rated goods. VAT on fuel and power is 8%. In addition, there are also exempted items which are totally outside the ambit of the tax. The point being that the latter do not, on the assumption that all the goods and/or services dealt with are exempt, require the establishment of a VAT input and output system. On the one hand, this circumvents unnecessary bureaucracy but on the other it means that VAT cannot be reclaimed on purchases. In the case of zero-rated goods however it is necessary to establish such a VAT input and output system but of course the VAT will be reclaimable on purchases. Thus, it is quite possible that a firm selling zero rated goods will, on the basis that some of it's purchases are subject to the normal 17.5% rate, receive rebates from the appropriate Customs & Excise office (the administrating body for VAT). Of course, in reality most firms will find that they will have exempted, zero and full rate inputs and outputs requiring the creation of two different recording methods* Finally, it should be noted that VAT is not chargeable on goods exported outside of the European Union and that, under the current provisions, VAT need not be charged where the recipient of the good and/or service is another VAT registered entity located in one of the 15 member states of the EU. All that is required is that there is an exchange of VAT numbers

EXAMPLE EXEMPTED ITEMS

(i) Most domestic land & building transactions.
(ii) Most banking services
(iii) Government duty on registering a limited company.
(iv) Most direct and indirect insurance related services.
(v) Most form of betting including the national lottery.
(vi) Services provided by the Post Office

THE FIRST BEING FOR EXEMPTED AND THE SECOND FOR ZERO AND STANDARD RATE GOODS AND/OR SERVICES

EXAMPLE ZERO RATED ITEMS

(i) Most food items save those sold through catering establishments except ice cream and confectionery.
(ii) Most domestic water and sewerage supplies.
(iii) All books, periodicals, magazines and newspapers.
(iv) Prescription drugs.
(v) Children's clothing, and shoes
(vi) Charities.

OTHER TAXES: Apart from corporation tax, VAT and social welfare contributions, the only other major outgoings to be faced by a British undertaking would be commercial rates which are generally quite reasonable and under the direct control of the Central Government and certain stamp duties. These normally relating to property acquisition and the registration of securities

INDIVIDUAL TAXATION

The direct taxes imposed in the United Kingdom are at national level and consist of income tax, capital gains tax, inheritance tax and national insurance contributions. Generally the amount of income and capital gains tax, which an individual has to pay, depends on whether they are resident and ordinarily resident and whether they are domiciled in the UK.  An individual who is domiciled, resident and ordinarily resident in the UK is liable to income and capital gains tax on his or her worldwide income and gains. However, someone resident in the UK but who is not domiciled will only pay tax on overseas income and capital gains remitted to the UK. Further, it may be possible for a non-domiciled person to structure his other affairs in such a manner that he or she could live off capital, but not interest, accumulated before the decision to reside in the UK If this was done, accepting that the capital was converted into Sterling before the change of residence, it may even be possible for a non-domiciled resident to live in the UK on an effectively tax free basis. Non-UK residents are only liable to UK income tax on income arising in the UK. If an individual is not a UK resident he or she is only liable to capital gains tax on assets disposed of in the UK if he or she is carrying on a trade in the UK through a branch or agency and the asset was used in the branch or agency. However, as already intimated, such problems can very often be avoided, quite legally, be the imposition of an offshore vehicle - The UK asset   being sold indirectly by the non-resident individual by selling the shares in the said foreign company (Such a disposition not generally being a taxable event). Inheritance tax is mainly a death tax imposed on an individual's wealth on death. It applies to an individual's world-wide property if he or she is UK domiciled, or to UK property, only, if the individual is domiciled outside the UK National insurance contributions (NICs) are payable by UK employees and employers (Class 1) and the self employed (Class 2 & 4). New residents in the UK who are employees do not normally have to pay Class 1 NIC's for the first 12 months but there are some exceptions to this depending on which country the individual is coming from. Self-employed individuals arriving in the UK normally only have to pay Class 2 NIC's if they are ordinarily resident or if they have been in the UK for, at least, 26 out of the last 52 weeks.

 

INCOME TAX RATES (After the 1st. April, 2007):

The UK Tax Free allowance is £5,225.00

On income above £5,225.00 to £7,455.00 the income tax rate is 10%

From £7,455.00 to £34,600.00 the income tax rate is 22%

For those earning more than £34,601.00 the rate is 40%

CAPITAL GAINS TAX

Capital gains tax has been substantially overhauled in respect to individuals and personal representatives but is virtually unchanged for companies, which pay corporation tax on chargeable capital gains at the rate of 40% minus various time related capital write off’s

INHERITANCE TAX

0% for inherited sums up to £300,000.00 with this sum being exempt - The rate for sums over £300,000.00 is 40%

Lifetime gifts are usually exempt if made over 7 years before the donor's death. Gifts, subject to certain exemptions, made less than 7 years before the donor's death are taxed as follows:

Years before death	0-3	3-4	4-5	5-6	6-7
% of rate applicable	100	80	60	40	20

 

Rates and Allowances - National Insurance Contributions

National Insurance - Rates and Allowances
£ per week	2006-07	2007-08
Lower earnings limit, primary Class 1	£84	£87
Upper earnings limit, primary Class 1	£645	£670
Primary threshold	£97	£100
Secondary threshold	£97	£100
Employees’ primary Class 1 rate between primary threshold and upper earnings limit	11%	11%
Employees’ primary Class 1 rate above upper earnings limit	1%	1%
Employees’ contracted-out rebate	1.6%	1.6%
Married women’s reduced rate between primary threshold and upper earnings limit	4.85%	4.85%
Married women’s rate above upper earnings limit	1%	1%
Employers’ secondary Class 1 rate above secondary threshold	12.8%	12.8%
Employers’ contracted-out rebate, salary-related schemes	3.5%	3.7%
Employers’ contracted-out rebate, money-purchase schemes	1%	1.4%
Class 2 rate	£2.10	£2.20
Class 2 small earnings exception	£4,465 per year	£4,635 per year
Special Class 2 rate for share fishermen	£2.75	£2.85
Special Class 2 rate for volunteer development workers	£4.20	£4.35
Class 3 rate	£7.55	£7.80
Class 4 lower profits limit	£5, 035 per year	£5, 225 per year
Class 4 upper profits limit	£33, 540 per year	£34, 840 per year
Class 4 rate between lower profits limit and upper profits limit	8%	8%
Class 4 rate above upper profits limit	1%	1%

ANTI-AVOIDANCE PROVISIONS

♦ GENERAL ANTI-AVOIDANCE LEGISLATION: To curb the abuse of UK tax legislation, there is a vast array of anti-avoidance legislation. There are also a number of tax cases decided in the courts, which restrict the use of "artificial" schemes. Some of the anti-avoidance measures of particular interest are as follows:

CONTROLLED FOREIGN COMPANIES (CFCs):

S.747 - 756 & Schedules 24 - 26 of the Taxes Act, 1988

If a foreign company is deemed to be under the control of a UK company and the foreign company pays less then 75% of the tax which a UK company would pay, subject to double taxation treaties, and the UK company owns at least 10% of the foreign company, the Inland Revenue can direct that the UK company pays tax in respect of the foreign profits. However, the revenue will not make this direction if the company’s profits were less than £20,000.00 for 12 months, or it meets certain other criteria such as it has an acceptable distribution policy, or was engaged in exempt activities or it satisfies the “Motive” Test. In respect to the latter, it should be noted that bona fide investments made in fiscally beneficial jurisdictions, such as the Republic of Ireland or Portugal (especially Madeira), are very unlikely to be subject to this legislation. In addition, it should be remembered that certain other jurisdictions, such as Malta, can be subject to very similar taxation but nevertheless on distribution of dividends, benefit from very significant rebates. Therefore, provided one is careful to choose a “respectable” jurisdiction protected by treaties the CFC legislation should not apply

SALES AT “OVER” OR “UNDERVALUE”:

S.770 - 773 of the Taxes Act, 1988

This is designed to catch transfer pricing between connected persons in the UK and overseas. For example, "X" a resident company makes a sale of goods for £50,000.00 to company "Z" in Cyprus. Companies "X" and "Z" are under common control and the true market value of the goods was £100,000.00. When calculating the tax liability of "X" the Inland Revenue may if known substitute the market value of £100,000.00 and thereby increasing the taxable profit by £50,0000.00.

TRANSFER OF ASSETS OVERSEAS:

S.739 & S.740 of the Taxes Act, 1988

An individual who is ordinarily resident in the UK is prevented from avoiding income tax by transferring assets to non-UK residents. However, exemption is available from these provisions if the individual can demonstrate that the assets transferred and any associated operations were for bona fide commercial reasons and were not for the purpose of avoiding tax

♦INVESTMENT IN THE UK: Non-UK residents investing in the UK may wish to consider doing so through a non-resident UK company, i.e. a foreign company not legally deemed to have a permanent establishment, because of the inheritance tax implications. Such a company is not liable to capital gains tax on investments unless they are assets of a UK business. It is therefore essential to demonstrate that the company is not managed and controlled in the UK. There is one circumstance where a capital gain could arise (See S.13 taxation of Chargeable Gains Act, 1992). This allows a gain to be apportioned to a shareholder who is resident and ordinarily resident and domiciled in the UK. However, this could only arise if the non-resident company would come under the definition of a 'close' company if it was resident in the UK. The definition of a UK resident 'close' company being afforded by S.414 of the Taxes Act, 1988 - In simple terms, it is basically a company where the tax circumstances of the shareholders will or could influence the dividend distribution policy of the company. Therefore, companies with few shareholders (normally, though not necessarily, less than 5), some possibly holding company directorships in the undertaking, could find themselves unable to avoid capital gains tax

♦MANAGEMENT & CONTROL: There are a number of tax cases which are relevant (De Beers Consolidated Mines v. Howe, Bullock v. The Unit Construction Company, Noble (BW) v. Mitchell and The American Thread Company v. Joyce). Broadly, the central management and control is situated where a company is actually operated from i.e., where board and operational decisions are really made. It is not necessarily sufficient to assume that central management and control is where the directors hold board meetings. It is possible that hoard meetings are used to formalize decisions already made elsewhere and even by other individuals. Very often the directors do not actually exercise control. The Inland Revenue now looks very carefully at non-resident companies, particularly those established in known tax havens and at where decisions are made and how the company is operated. It is for this reason that professionally qualified tax advisers in the United Kingdom, and most other European countries, emphasize the need for genuine management and control. For active companies it is rarely sufficient that the 'real' owners do not have some physical and ongoing presence in the claimed place of management and control.

TAXMAN TACTICS

As in most developed countries, the fiscal authorities in the United Kingdom are aware of all the common, and in particular tax haven anti-avoidance and evasion schemes. In addition, the almost ubiquitous reverse burden of proof enjoyed by the Inland Revenue make it inadvisable not to try and secure a degree of confidentiality so as not to raise the proverbial 'red flag1. In no circumstance should the power and influence of the Revenue be under-estimated. Remember without tax revenue, no government can operate and for this reason tax enforcement legislation can often be more draconian than for many serious criminal offences. Thus, the objective of all tax mitigators should be to use but never break the law. In fact, in the UK there are so many tax advantages that few, especially non-domiciled, individuals cannot be helped. Some of the main powers enjoyed by the Inland Revenue include:

Under the Finance Act 1976, the Inland Revenue has the ability, where reasonable suspicion exists, to search a private home or business premises without warning. Banks in the UK must declare particulars relating to interest payments made to an individuals account. This provision normally only is used against non-employees. The Inland Revenue has the legal ability to pay third parties for information relating to tax matters. Other government divisions, such as Customs & Excise, often share information. Virtually all British tax treaties have exchange of information clauses. The Inland revenue will often examine estate agent and stockbroker records to try and identify potential tax avoiding/mitigating activities

THE OPERATION OF INLAND REVENUE INSPECTORS

Inland Revenue Inspectors are instructed to collect as much tax as possible and therefore it should be noted that legitimate tax planning schemes are far less likely to be pursued, all things being equal, than their less legitimate counter-parts - The latter being far more likely to bare fruit. This pragmatism is further witnessed by the reluctance, even when there is proof of malfeasance, to pursue those without a known ongoing connection with the UK where UK assets no longer exist. In the case of company accounts, Inland Revenue Inspectors will examine about 3-4% of all submitted accounts each year. The aforementioned decision being based on a grading system; "A" for accepted, "R" for review and ME" for Examine. In general terms, a company's accounts will be reviewed if there exist large profits whilst examinations normally occur when:

Profits are low for the business sector, and/or; directors salaries appear artificially low and/or, large expenses exist in relation to profits and/or, dividend distributions are very high or low1 and/or, (e)   Foreign goods and/or services are purchased when there exist similar goods and/or
services available in the UK

 

THE INLAND REVENUE & 'TRADITIONAL TAX HAVENS'

Unlike many other Western European countries the UK does not have an official list of Tax Havens' which automatically bring investigation. However, it would be naive to believe, for example, that a property held by a West Indian IBC company is no more likely to be investigated than one held by an Irish or American (particularly resident) company. The reason being that the former generally have, no tax liability or treaty protection, no requirement to submit annual accounts and can issue bearer shares. Of course, if the IR cannot locate a beneficial owner, it will face a fait a complet but the activities of any tenants, or former known owners, are likely to be investigated on the presumption that there may be tax evasion

EXAMPLE TAX HEAVEN JURISDICTIONS

Andorra	The Bahamas	Barbados
Bermuda	British Virgin Islands	Cayman Islands
Channel Islands	Grenada	Hong Kong
Isle of Man	Liechtenstein	Monaco*
Netherlands Antilles	Nevis	Panama
Seychelles	Turks & Caicos

* MONACO IS NOT A PURE TAX HAVEN AS IT DOES NOT HAVE ANY INTERNATIONAL TAX EXEMPT COMPANIES AND THEORETICALLY ALL PROFITS EARNED OUTSIDE OF MONACO ARE SUBJECT TO A 33.3% TAX RATE