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Blick Rothenberg LLP
Establishing a Business in the UK
Blick Rothenberg LLP16 Great Queen Street
Covent GardenLondon WC2B 5AHVerenigd Koninkrijk
T:+44 (0)20 7486 0111
F:+44 (0)20 7935 6852
W:www.blickrothenberg.com
Twitter:@BlickRothenberg
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02
03 Introduction
04 What creates a taxable presence in the UK?
06 Registering an establishment or subsidiary
07 Accountingandrelatedfilingrequirements
08 Corporation tax
10 Losses
11 The UK as a holding company location
12 Research and Development tax incentives
14 UK Patent Box
15 Personal taxation
17 Share (stock) option plans
20 Social security
22 Value Added Tax (“VAT”)
24 Workplace pension plan (auto-enrolment)
25 Other issues
26 Our team
28 Blick Rothenberg
Thisbookletisforguidanceonlyandadviceshouldbesoughttoconsiderspecificcircumstances.
Contents
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03
The United Kingdom (“UK”) has always been a major trading nation and partner for many other countries around the world.Whilststillmaintainingastrongmanufacturingbase,the country’s economy has evolved to one that now is at the forefrontofnewdevelopmentsintechnology,biosciences andfinance.
The UK’s attractive taxation regime makes it a good location for a holding company wherebusinessesarelookingtoexpandfurtherintoEuropeorbeyond.
Where a company is looking to do businesswiththeUK,thefiscalimplications are neither complicated noroverlyburdensome.Thisbookletconcentrates on providing practical information to make it easier for overseas businesses to establish a presenceintheUK.
We will therefore address what creates ataxablepresenceintheUK,theprocedures involved in setting up a companyhere,taxrates,implicationsforindividualsworkingforacompany,andotherrelatedissues.
Introduction
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04
What creates a taxable presence in the UK?
UK legislation provides that a UK corporate entity will be subjecttoUKtax.Furthermore,anoverseasentitytradingintheUKislikelytobesubjecttoUKtaxaswell,butprincipallyonlyonitsactivitiesintheUK.
TheissuetobeconsiderediswhetheranactivitycreatesaUKtaxliabilityand,ifso,whattypeofentitytheoverseascompanyshouldestablish.
The right entity – trading with or in the UK
Where a company is trading in the UK,thereareanumberoffactorstobeconsidered.
Where a company is trading with theUK(i.e.hascustomersinthecountry to whom goods or services aresold),thereisunlikelytobeaneedto establish an entity and comply with various related regulations (there is one exception in relation to Value Added Tax which is considered on page22).
Inmanyinstances,anoverseasbusiness will initially wish to research the market to see if it makes commercial sense to establish apresenceintheUK.Thismayeitherinvolvemakingfrequentvisitsto the UK (this booklet does not consider any work permit issues)
or having someone based here on amorepermanentbasis.Theroleof this individual will be to research themarket,makeinitialcontactwithpotentialcustomers,sendout marketing literature and other similarpromotionalactivities.Intaxterms,thesearegenerallyknownaspreparatory or auxiliary activities and commonly do not give rise to any corporatetaximplications.Thereis,however,aneedtoregisterasanestablishment which is considered inthenextsectiononpage06.Tax advice should be sought to determine whether the activities of the establishment fall outside the scope of UKcorporatetax.
Alternatively,theoverseascompanymay decide at the outset that there is an existing or potential market for it and would proceed to establish a presenceintheUK,whichwould haveacorporatetaxpresence.
Insuchcircumstances,theoverseascompany needs to consider whether to register as a taxable establishment (formerly referred to as a ‘branch’) or asubsidiary.
Establishment or subsidiary?
This section considers the issues overseas companies need to bear in mind when choosing the correct entity.
We consider the procedures for registering an establishment or subsidiaryonpage06.
An establishment is not a separate legal entity from the parent company but merely an extension operating underthelawsofanotherjurisdiction.Assuch,itdoesnotprovidethelimited liability that a subsidiary companydoes.
If the nature of the business is such that it is important to ring-fence liabilities arising in a specificjurisdiction,thesubsidiarywillaffordthesaferoption.
The other issue to consider is whether it is important for the overseas company to be seen to haveaUKpresence.Althoughan establishment and a company provideaUKpresence,theperception is that a UK company is a local business with a greater sense of permanence.Ifthisisimportantfromacommercialperspective,youmaywishtoestablishasubsidiary.
The costs of maintaining an establishment or subsidiary need to be taken into account and these haveacorrelationtotheleveloffilingrequirements,whichareconsideredinthefollowingsections.
Finally,isthegroupsensitivetothetype and level of information that is publicly available about its business initsownjurisdiction?Ifitis,thesubsidiarywillbethebetteroption.This is also considered in greater detailinthefollowingsection.
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Registering an establishment or subsidiary
Establishment
The process of registering an establishment involves the overseas companyfilingaformgivingdetailsofitsshareholdersanddirectors.Withtheform,italsoneedstosubmitacertifiedcopyofitsmemorandumand articles of association (company bylawsorequivalent).IfthesearenotinEnglish,theyneedtobetranslated.Theformneedstoprovide details of the UK address from where business is going to be conducted.Theprocessofregisteringan establishment can take up to three weeks but can be less if the documents mentioned above are readilyavailable.
Subsidiary
A subsidiary is also very easy to establish.Therearenostatutoryconsents that need to be obtained priortosettingupthecompany.A company can be formed by submitting a form providing the consent of at least one person who is preparedtoactasadirector.Thereisnorequirementtoformallyappointacompanysecretary,althoughthereisstilltherequirementforthefunctionsof a company secretary to be undertaken.Thisfunctionis normallyoutsourced. It is normal for a company to have at least two directors to allow for greater efficiencyinmanagingthecompany,shouldonedirectorbeabsent.
ThereisnorequirementforanofficertoberesidentintheUK.
Thereisnorequirementforthecompany to have a minimum amount ofissuedsharecapital.
Such a company is normally formed withone£1issuedordinaryshare.Paid up capital can be increased at the time that the company is formed orlater,dependingoncommercialrequirements.
The name chosen for the company mustnotbethesameas,orsimilarto,anexistingcompany’sname.Ittherefore makes sense to register a company as soon as a decision is madetoestablishaUKpresence.
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Accountingandrelatedfilingrequirements
Establishment
If the law under which the parent isregisteredrequirespublicationofauditedaccounts,acopyofthoseaccountsneedstobefiledintheUK.If the parent company has no such requirement,itmustprepareanddeliverforfilingitsaccounts.Theseshould be prepared in accordance with therequirementsofUKcompanylaw.
Theaccountsthatarefiledareavailable for public inspection in the UK.Thiscansometimesbeanissueif the parent is not used to having its financialinformationmadepublic.Insuchcircumstances,theparentshould either form a subsidiary rather thanregisteranestablishmentor,initshomejurisdiction,establishanother company which then registers theUKestablishment.Whentheaccounts of the parent are then filed,onlyinformationrelatingtotheestablishmentactivitiesiscontained.
Subsidiary
A subsidiary needs to prepare and fileannuallyacopyofitsaccountsprepared in accordance with UK companylaw.Theaccounts,once filed,areavailableforpublicinspection.
Theaccountsneedtobefiledwithinninemonthsofthecompany’sfinancialyear-end.Acompanycanchooseitsyear-end.Thiswilltypicallycoincidewiththatoftheparentcompany.
AnauditoftheUKcompany’sfinancialstatementsisrequiredifthegroupasawhole exceeds two of the following:
a. revenuesof£10.2millionperannumb. grossassetsof£5.1millionc. 50 employees
IftheUKcompanydoesrequireanaudit,thecostofmaintainingthe company compared to an establishmentwillbeslightlyhigher.Rememberthough,thatacompanydoes provide the protection of limitedliability.
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Tax rates
The UK corporation tax rate is 20% for the tax years ended 31 March 2016and31March2017.Theratewill be reduced to 19% from 1 April 2017 and further reduced to 17% from1April2020.
Taxable profits
Theleveloftaxableprofitswill,toanextent,dependuponthetradingmodel adopted (the comments that follow apply to both an establishment andacompany).DuetoUKtransferpricinglegislation,tradingbetweenconnected parties needs to be on anarm’s-lengthbasis.Thisistostopinternational groups manipulating intra-grouptransactionssothatprofitsalwaysflowtothecountrywiththelowesttaxrate.
If the business model is such that the UK entity is to provide just marketing andtechnicalsupport,afeewouldbecharged to the parent for the services provided.Itisthisfee,lessrelatedcosts of providing these services and maintainingtheentity,thatwouldbesubjecttoUKtax.
If the UK entity is structured so that it can enter into contracts with third partycustomersinitsownright,it is more likely to have a buy/sell arrangement.
Inthiscase,salestothirdpartieswillbe recorded within the UK entityaccounts.
Intra-group,thirdpartypurchasesand other costs of sales will be offset againstthis,aswillalloverheads and other intra-group and third partycosts.
Inmanycircumstances,itmaybe necessary for the UK entity to undertake a transfer pricing study to demonstrate that the pricing between the parent and its UK presence is what would be agreed by parties actingonanarm’s-lengthbasis.
Corporation tax
Having registered an establishment or subsidiary we need to consider what level of corporate tax liability may arise in the entity.Forthis,oneneedstodetermineboththeapplicablerateoftaxandtheleveloftaxableprofits.
Corporation tax payment and return
The corporation tax liability needs to be paid within nine months of the company’saccountingyear-end.There are provisions for certain ‘large’ companies to pay taxation on account beforetheyear-end.
Acompanyisdefinedas‘large’forpayment on account purposes if either;
a. itstaxableprofitsexceed£10millionin the current accounting period (or as appropriately divided by the number of associated companies in the worldwide group at the start of the current accounting period);
or
b. it was a large company in the 12 months preceding the period and isalsolargeinthecurrentperiod.Forthesepurposes,‘large’isdefinedashavingtaxableprofitsof£1.5millionorabove (or as appropriately divided by the number of associated companies in the worldwide group at the start of thecurrentaccountingperiod).
The corporation tax return needs to be submitted within 12 months of the year-end.Acomputationofthetaxliability will also be submitted with thereturn.
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Losses
Ifanestablishmentincursaloss,this could be available for offset againstparentcompanyprofits,intheparent’sjurisdiction.Additionally,theestablishment losses can be carried forward in the UK for offset against futuretaxableprofits.
If a subsidiary is formed and it incurs losses,thesecanbecarriedforwardindefinitelyforoffsetagainstfuturetaxableprofitsofthesubsidiary,providing they are from the sametrade.
From1April2017,newruleswillenable companies to offset carried forward losses against other income streams and other UK companies withinthesametaxgroup.However,with effect from the same date the profitwhichcanbeoffsetagainstlosses carried forward will be restricted to 50% of the amount oftheprofitsinexcessof£5million.
Generally the losses will not be available for offset against the parent companyprofits,wheretheyarebasedoutsidetheUK,subjectto theirownlocaltaxlaws.
The decision on whether to register an establishment or a subsidiary could be affected by the anticipated results of the businessinitsformativestages.
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The UK is an attractive location for establishing a holding company,whichisusedtoexpandintootherpartsof theworld.
The UK as a holding company location
The UK has a well-developed tax treaty network meaning that withholding taxes on payments from overseascompanies,suchasinterestanddividends,maybereducedandcanoftenbeeliminatedaltogether.
Inaddition,virtuallyalldividendsreceivedbytheUKparentcompany,whether from a UK or overseas subsidiary are exempt from UK tax.Furthermore,theUKleviesnowithholdingtaxondividendspaid,nomatterwheretherecipientislocated.This ensures there is minimal tax leakage where dividends are paid throughaUKcompany.
Where a UK company holds shares in othercompanies,andthesharesaresubsequentlysold,anyresultinggainisexemptfromUKcorporationtax.This is providing the company held at least 10% of the shares in the 12 months leading up to the sale anditwasatradingcompany,or partofatradinggroup,beforeandafterthetransaction.
All of the above and a main rate of corporation tax of only 20% (falling to 17% by 1 April 2020) has made the UK a very attractive location for formingaholdingcompany.
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Research and Development tax incentives
Definition of R&D
Her Majesty’s Revenue & Customs (“HMRC”) and the Department of Trade and Industry have issued some guidance on the meaning of R&D for taxpurposes.ForanactivitytobeconsideredasR&D,itshouldaimto achieve an advance in science or technology through the resolution of a scientificortechnologicaluncertainty.An advance in science or technology includes work which:
• generatesscientificortechnicalknowledge;
• createsaprocess,material,device,productorservicewhichisnewtothefield;or
• appreciably improves something which already exists through scientificortechnologicalchange.
The intended outcome of the R&D should not be something which is already available or could easily be made available by a competent professional working in the relevantfield.
Two regimes
There are two regimes depending on thesizeofthecompany.Acompanyqualifiesasasmallormedium-sizedcompany (“SME”) if it has:
• fewer than 500 employees; and• either an annual turnover not
exceeding €100million or a balance sheet total not exceeding €86million.
Where a company is a member of a group,theholdingcompanyandallcompanies in the group must together meettheSMEdefinition.
Any company that does not meet thesecriteriaisclassifiedasalargecompany.
Small and medium-sized companies (“SMEs”)
SMEs can claim a tax deduction equalto230%oftheirqualifyingR&Dexpenditure.Forcompanieswhichhavetaxlosses,anR&Dtaxcreditequalto14.5%oftheirsurrenderablelosscanbeclaimed.Thisisacashrepayment from HMRC of up to £33.35forevery£100spentonR&D.
ExpenditurethatqualifiesfortheR&Dtax relief includes:
• the cost of staff directly involved in the R&D work;
• 65% of the cost of either independent externally provided workersengagedtoworkonR&D,or the cost of subcontracting specificelementsoftheR&Dworkto an independent third party; and
• the cost of software and consumableitemssuchasfuel,powerandwater.
The R&D work must not be subsidised by grants and must not relate to R&D subcontracted to the company by anotherperson.However,iftheseconditionsarenotmet,thecompanymaystillqualifyforthelargecompanyrateofdeduction.
Large companies
Historically,largecompaniescouldclaim a tax deduction for 130% of theirR&Dexpenditure.Thishasnowbeen replaced by an above-the-line R&DEnhancedCredit(“RDEC”).TheRDECequatesto11%ofthecompany’squalifyingR&Dspend,andaftertaxyieldsanetbenefitof8.8%.
TheUKGovernmentprovidessomesignificanttaxincentives to encourage companies to undertake ResearchandDevelopment(“R&D”)work.
The RDEC for loss-making companies may alsoberepaidasacashcredit,cappedatthe level of payroll taxes incurred in respect ofR&Demployeesduringthatyear.Anyexcess is then carried forward as a credit forthefollowingyear.
Qualifying expenditure has the same criteriaastheSMEregime,exceptthatsubcontracted work must be undertaken either by (self-employed) individuals or certainresearchbodiesandinstitutions. The cost of R&D work subcontracted to othercompanieswillnotqualify.
SMEs can claim relief under the large company regime (but not the SME regime) if they undertake work that is subcontracted tothembyanothercompany.However,the other company must be either large or notsubjecttoUKtax(broadly,anoverseascompany).Hence,whereanoverseasparent company subcontracts the R&D worktoitsUKSMEsubsidiary,thelatterwillqualifyforR&Dreliefunderthelargecompanyregime.
Making a claim
The claim is included in the corporate tax return and must be made within two years of the end of the accounting period in which theexpenditurewasincurred.
Additional relief for capital expenditure
Inadditiontothereliefsdescribedabove,tax depreciation of 100% is available for expenditureoncapitalassets,excludingland,usedforR&Dactivities.
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UK Patent Box
The Patent Box will allow companies to elect to apply a 10%rateofcorporationtaxtoallprofitsattributabletoqualifyingpatents,whetherpaidseparatelyasroyaltiesorembeddedinthesalespriceofproducts.
Who will it benefit?
Companies that receive patent royalties,sellpatentedproducts,oruse patented processes as part of theirbusiness.
What are the benefits?
The effective rate of tax on qualifyingPatentBoxprofitsis10%.Thebenefithasbeenphasedinsince1April2013.From 1April2016,approximately90%oftheadjustedprofitiseligible(givingan effective rate of tax of 11% on PatentBoxprofits),risingto100%from1April2017.
Which patents will qualify?
Patents granted by the UK IntellectualPropertyOffice(“IPO”)andtheEuropeanPatentOffice,aswell as regulatory data protection (‘dataexclusivity’),SupplementaryProtectionCertificates(“SPCs”)andplantvarietyrights.
The Patent Box will apply to new and existing Intellectual Property (“IP”)aswellasacquiredIPwherefurther development has been made to the IP or the product whichincorporatesit.
Future of the Patent Box
FollowingconclusionoftheBaseErosionandProfitShifting(“BEPs”)project,undertakenbythe Organisation for Economic Co-operationandDevelopment,areviewofallPatentBoxregimes,including the UK’s regime has beenundertaken.Goingforward,thebenefitsofthePatentBoxwillonly apply where the underlying development activity has been undertakenatleastpartlyintheUK,withtheprofitswhichbenefitfromthe reduced rate being calculated by reference to the level of activity undertakenintheUK.
The existing regime will remain applicable to current claimants until 2021,andthereisanopportunityfor new claimants to elect into the existing regime before 30 June 2016,andstillbeabletobenefitfrom the existing regime until 2021.However,anynewIPornewentrants to the regime on or after 1 July 2016 will only be able to claimunderthenewregime.
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Personal taxation
Basic principles
Asageneralprinciple,ifanindividualisresidentintheUKinanytaxyear,he/shewillbesubjecttoUKtaxlaws.In certain circumstances the person’s “domicile” also needs to be taken into consideration.
The UK tax year runs from 6 April to thefollowing5April.Areferencetoa2016/2017fiscalperiodreferstothepersonal tax year from 6 April 2016 to 5April2017.
Residence
A Statutory Residence Test is used to determine whether individuals are treated as resident or non-resident fortaxpurposesintheUK.Thetestis in three parts and involves some complexity,but,insummary,anindividual will automatically be treated as non-resident in the UK in the tax yearinquestioniftheymeetanyoneof the following tests;
• they were UK resident in any of the previous three tax years and spend fewer than 16 days in the UK; or
• they were not UK resident in any of the previous three tax years and spend fewer than 46 days in the UK; or
• they left the UK for full time work abroad.
An individual who does not meet any of these automatic overseas tests will
be automatically UK resident in the tax year if they meet any of the following tests;
• they are present in the UK for at least 183 days; or
• they have a UK home available for at least 90 days during a time when they have either no overseas home or an overseas home in which they spend fewer than 30days.TheirUKhomemustbeavailable for at least 30 of the 90 days and they must spend at least 30 days in that UK home during the relevant UK tax year; or
• theyworkfulltimeintheUK.
Where an individual does not meet anyoftheabove,thesufficienttiestest noted below combined with UK days could still make them resident in the UK:
• UK resident family• substantive UK work• available accommodation• more than 90 days spent in the
UK in either or both of the previous two tax years
• more days of presence in the UK thaninanyothercountry.
Domicile
A person’s country of domicile is broadly the country that they consider tobetheirpermanenthome.Theconceptofdomicileisquitedistinctfromthatofresidence.Acountryof
domicile is sometimes referred to as theperson’s‘homeland’.Eveniftheperson has not lived in their homeland formanyyears,thisdoesnotpreventthemfrombeingdomiciledthere.
Taxation of employment income of non-UK domiciliaries
An employee (or director) coming to work in the UK will be liable to UK tax on the employment income relating to dutiesperformedintheUK,whereverpaid.IftheemployeealsopartiallyworksoutsidetheUK,employmentincome for that work is generally taxed only on the amount remitted toorpaidintheUKforthefirstthreeyears (provided they have not been UKresidentpreviously).Itisimportantto get offshore bank account structuringrightandHMRCrequiresarelevant overseas bank account to be nominated.
A non-domiciled individual can decide each tax year if they wish to claim theremittancebasis.ForthefirstseventaxyearsofUKresidence,an individual can freely claim the remittancebasis.Thereafter,anannualchargeof£30,000ispayablefor individuals resident in the UK for atleastfiveoutofthelastninetaxyears.Theannualchargeincreasesto£60,000forindividualsresidentintheUK for at least 12 out of the last 14 taxyearsand£90,000forindividualsresident in the UK for at least 17 out ofthelast20taxyears.
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Change to the taxation of non-UK domicillaries
Witheffectfrom6April2017, non-domiciled individuals who have been UK resident for 15 out of the past 20 years will be treated as ‘deemed domiciled’forallUKtaxpurposes.A non-domiciled individual who is ‘deemed domiciled’ is assessed to UK tax on their worldwide income and capital gains and will no longer be able toclaimtheremittancebasis.
Taxable income
Taxable income includes all incomeandbenefits.Theratesofpersonal taxation are shown to the right in table01,togetherwiththelevelofpersonalallowances.Theseareamounts that each individual is able to earnbeforebecomingliabletotaxation.
Detached duty relief
Where an overseas employee is seconded to the UK for less than two yearsand,providedtheUKisregardedasa‘temporaryworkplace’,UKtaxreliefisavailableforaccommodation,travel and subsistence costs during theassignment.Thisisregardlessof whether the employee personally incurred the costs or the employer funded them (employer funded expenseswouldnormallybetaxable).It is important to ensure that the correct documentation is in place to demonstratethetemporaryassignment.
Table 01
Personal tax rates and allowances
% Band of Taxable Income (£)
Year to 5 April 2017Taxfreeallowance£11,000* 20 1-32,000 40 32,001-150,000 45 Over150,000
Year to 5 April 2016Taxfreeallowance£10,600* 20 1-31,785 40 31,786-150,000 45 Over150,000
*Thepersonalallowanceisreducedby£1forevery£2earnedover£100,000
Share (stock) option plans
Share incentive arrangements can often be an attractive part of an individual’s totalremunerationpackage.
The UK has certain ‘approved’ arrangements which provide considerable tax advantages to the employee and at times also to theemployer.
Thereare,however,pitfallsaswellasreportingobligations.Thisisanareaofconsiderable complexity which cannot beaddressedwithinthisbooklet.
Thefollowingsection,onpages18-19,summarisesthetypesofarrangementsavailable.However,detailed advice should be sought as soon as consideration is being given to establishing a share option plan or granting options under an existingarrangement.
Share (stock) option planspa
ge 1
8
Outline Income Tax (“IT”) Capital Gains Tax (“CGT”) HMRC Who can?
Enterprise Management Incentive (“EMI”)
Upto£250,000ofoptionsperemployee(valuedatthedateofgrantandrestrictedifCSOPoptionsalsoheld-seebelow).
Optionsmustbecapableofbeingexercisedwithintenyearsofgrant.Optionscanbegrantedatadiscountfromprevailingsharevalues.
Noincometaxongrant.
If option granted at a discount an income tax charge will arise on exercise of the option.ThismaybesubjecttoPayAsYou Earn (“PAYE”) and National Insurance Contributions(“NIC”).
CGTongainwhensharessold,deductionforanyvaluechargedtoIT.
SharesacquiredunderEMIoptionsgrantedonorafter 6April2012maybenefitfromEntrepreneurs’Relief(“ER”)(providingcertainconditionsaremet),reducingtheeffectiverateoftaxto10%.IfERisnotavailableCGTwillbepayable at either 10% or 20% (depending on employees level of incomeandgains).
Noapproval,butnecessary to notify HMRC ofoptiongrants.
Recommended to agree the market value of the shares under option with HMRC for advance assurance that no income tax liability will arise on exercise.
The granting company needs to have a ‘Permanent Establishment’ (“PE”) in the UK (or a subsidiary with a PE intheUK).Availabletoanynumberofemployees.Totalvalue of EMI options granted can be no greater than£3million.
Company (or group) must have gross assets less than £30millionandfewerthan250employees.Optionmustbetoacquiresharesintheparentcompany.
Not available for employees who already hold more than 30%ofsharecapital.
Company Share Option Plan (“CSOP”)
Upto£30,000ofoptionsperemployee,valuedatdateofgrant.Mustbeexercisablebetweenthreetotenyearsfromgrant.Optionsshouldbegrantedatprevailingsharevalues.
No IT charge when the employee exercisestheoption,unlessexceptionallythe option exercise price is less than marketvalueonthedateofgrant.
CGT will be payable on disposal of the shares at either 10% or 20%(dependingonemployeeslevelofincomeandgains).
ERmaybeavailableprovidedcertainconditionsaremet,reducingtheeffectivetaxrateto10%.
Must notify HMRC that the CSOP has been established and declare that the plan meets the qualifyingrequirements.
Not available for employees holding 30% or more of sharecapital.Companyhassomediscretionoverwhichemployeesparticipate.
Savings Related Share Option Plan (“SAYE options”)
Inconjunctionwithmonthlysavingscontract,savingsof£5to£500permonth can be accumulated to purchase shares on exercise of options (after three,fiveorsevenyears).Optionsshouldbegrantedatprevailingsharevalues.
No IT charge on grant or when the employeeexercisestheoptions.
CGT will be payable on disposal of the shares at either 10% or 20%(dependingonemployeeslevelofincomeandgains).
ERmaybeavailableprovidedcertainconditionsaremet,reducingtheeffectivetaxrateto10%.
Must notify HMRC that the SAYE arrangement has been established and declare that the plan meets thequalifyingrequirements.
Mustbeavailabletoallemployeesonsimilarterms.
Employee Shareholder Status (“ESS”)
Employees are given shares in their employing company in exchange for givingupcertainemploymentrights.
Employeesmustbeawardedsharesworthatleast£2,000.
No IT charge on award of shares worth £2,000.Sharesawardedwhichexceed this value will attract an IT charge and possiblyNIC.
On disposal of the shares there is no CGT on the gain up to a lifetimelimitof£100,000.
Ifshareswerevaluedatover£50,000onacquisitionthenaportionofthegainwillbechargeable.
Annual reporting requirementsexist.
Company has full discretion over which employees may participate,butstrictrulesmustbefollowedinordertoqualify.
Unapproved Share Option Scheme
Nolimitonvalueofoptionsgrantedtoemployees.Optionscanbeexercisable at any time and can be granted at a discount from prevailing sharevaluesifrequired.
NoITchargeongrant.ITchargewhenexercised and may be subject to NIC and requirepaymentviaPAYE.
CGT will be payable on disposal of the shares at either 18% or 28%(dependingonlevelofgain).
ERmaybeavailableprovidedcertainconditionsaremet,reducingtheeffectivetaxrateto10%.
Noapprovalrequiredbut annual reporting requirementsexist.
Company has full discretion over which employees mayparticipate.
Phantom Share Plan Bonus paid to employees based on increase in value of shares (nosharesactuallyprovidedtoemployees).
PAYEandNICwillapply.ITchargeonfullamountwhenpaidtoemployee.
NoCGT(asnosharesreceived). Noapprovalrequired. Company has full discretion over which employees mayparticipate.
Share Incentive Plan (“SIP”)
Sharesheldintrustforemployees.Companycanofferupto£3,600shares(“freeshares”).SIPcanallowemployeestopurchasefurther£1,800shares(“partnershipshares”)-usingincomebeforetaxandNIC.Companycanmatch these with further free shares (“matching shares”) - up to two for eachshareemployeeacquires.(Maximumshares=£7,500perannum).
NoITchargeonacquisitionofshares. IT charge if shares are withdrawn from trustbeforefiveyears.
NoCGTonvalueofsharesonwithdrawalfromtrustafterfiveyears.CGTongainwhensharessold(ifpreviouslyheldintrustforfullfiveyears:basecost=valueonexitfromtrust).Taxedateither18%or28%(dependingonlevelofgain). A5%shareholdingishighlyunlikely.
Must notify HMRC that the SIP arrangement has been established and declare that the plan meets the qualifyingrequirements.
Mustbeavailabletoallemployeesonsimilarterms.
Stock awards for internationally mobile employees (e.g. restricted stock units, stock options, restricted shares etc.)
Share awards under non-UK plans are usually unapproved for UK tax purposes(althoughsomeplanningisavailable).
The exact treatment will depend on thespecificstockplanandemployee’scircumstances but there is typically an IT charge at exercise on the stock gain apportioned to days worked in the UK betweenawardandvest.
If the employee is not UK domiciled and the stock is in a non-UK company then it is possible that there would be no UKCGTunlesstheproceedswereremittedtotheUK.
Reportable to the HMRC following the end of the tax year in which the shares/options were provided to theemployee.
Dependsontheoverseasstockplanrules.
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Outline Income Tax (“IT”) Capital Gains Tax (“CGT”) HMRC Who can?
Enterprise Management Incentive (“EMI”)
Upto£250,000ofoptionsperemployee(valuedatthedateofgrantandrestrictedifCSOPoptionsalsoheld-seebelow).
Optionsmustbecapableofbeingexercisedwithintenyearsofgrant.Optionscanbegrantedatadiscountfromprevailingsharevalues.
Noincometaxongrant.
If option granted at a discount an income tax charge will arise on exercise of the option.ThismaybesubjecttoPayAsYou Earn (“PAYE”) and National Insurance Contributions(“NIC”).
CGTongainwhensharessold,deductionforanyvaluechargedtoIT.
SharesacquiredunderEMIoptionsgrantedonorafter 6April2012maybenefitfromEntrepreneurs’Relief(“ER”)(providingcertainconditionsaremet),reducingtheeffectiverateoftaxto10%.IfERisnotavailableCGTwillbepayable at either 10% or 20% (depending on employees level of incomeandgains).
Noapproval,butnecessary to notify HMRC ofoptiongrants.
Recommended to agree the market value of the shares under option with HMRC for advance assurance that no income tax liability will arise on exercise.
The granting company needs to have a ‘Permanent Establishment’ (“PE”) in the UK (or a subsidiary with a PE intheUK).Availabletoanynumberofemployees.Totalvalue of EMI options granted can be no greater than£3million.
Company (or group) must have gross assets less than £30millionandfewerthan250employees.Optionmustbetoacquiresharesintheparentcompany.
Not available for employees who already hold more than 30%ofsharecapital.
Company Share Option Plan (“CSOP”)
Upto£30,000ofoptionsperemployee,valuedatdateofgrant.Mustbeexercisablebetweenthreetotenyearsfromgrant.Optionsshouldbegrantedatprevailingsharevalues.
No IT charge when the employee exercisestheoption,unlessexceptionallythe option exercise price is less than marketvalueonthedateofgrant.
CGT will be payable on disposal of the shares at either 10% or 20%(dependingonemployeeslevelofincomeandgains).
ERmaybeavailableprovidedcertainconditionsaremet,reducingtheeffectivetaxrateto10%.
Must notify HMRC that the CSOP has been established and declare that the plan meets the qualifyingrequirements.
Not available for employees holding 30% or more of sharecapital.Companyhassomediscretionoverwhichemployeesparticipate.
Savings Related Share Option Plan (“SAYE options”)
Inconjunctionwithmonthlysavingscontract,savingsof£5to£500permonth can be accumulated to purchase shares on exercise of options (after three,fiveorsevenyears).Optionsshouldbegrantedatprevailingsharevalues.
No IT charge on grant or when the employeeexercisestheoptions.
CGT will be payable on disposal of the shares at either 10% or 20%(dependingonemployeeslevelofincomeandgains).
ERmaybeavailableprovidedcertainconditionsaremet,reducingtheeffectivetaxrateto10%.
Must notify HMRC that the SAYE arrangement has been established and declare that the plan meets thequalifyingrequirements.
Mustbeavailabletoallemployeesonsimilarterms.
Employee Shareholder Status (“ESS”)
Employees are given shares in their employing company in exchange for givingupcertainemploymentrights.
Employeesmustbeawardedsharesworthatleast£2,000.
No IT charge on award of shares worth £2,000.Sharesawardedwhichexceed this value will attract an IT charge and possiblyNIC.
On disposal of the shares there is no CGT on the gain up to a lifetimelimitof£100,000.
Ifshareswerevaluedatover£50,000onacquisitionthenaportionofthegainwillbechargeable.
Annual reporting requirementsexist.
Company has full discretion over which employees may participate,butstrictrulesmustbefollowedinordertoqualify.
Unapproved Share Option Scheme
Nolimitonvalueofoptionsgrantedtoemployees.Optionscanbeexercisable at any time and can be granted at a discount from prevailing sharevaluesifrequired.
NoITchargeongrant.ITchargewhenexercised and may be subject to NIC and requirepaymentviaPAYE.
CGT will be payable on disposal of the shares at either 18% or 28%(dependingonlevelofgain).
ERmaybeavailableprovidedcertainconditionsaremet,reducingtheeffectivetaxrateto10%.
Noapprovalrequiredbut annual reporting requirementsexist.
Company has full discretion over which employees mayparticipate.
Phantom Share Plan Bonus paid to employees based on increase in value of shares (nosharesactuallyprovidedtoemployees).
PAYEandNICwillapply.ITchargeonfullamountwhenpaidtoemployee.
NoCGT(asnosharesreceived). Noapprovalrequired. Company has full discretion over which employees mayparticipate.
Share Incentive Plan (“SIP”)
Sharesheldintrustforemployees.Companycanofferupto£3,600shares(“freeshares”).SIPcanallowemployeestopurchasefurther£1,800shares(“partnershipshares”)-usingincomebeforetaxandNIC.Companycanmatch these with further free shares (“matching shares”) - up to two for eachshareemployeeacquires.(Maximumshares=£7,500perannum).
NoITchargeonacquisitionofshares. IT charge if shares are withdrawn from trustbeforefiveyears.
NoCGTonvalueofsharesonwithdrawalfromtrustafterfiveyears.CGTongainwhensharessold(ifpreviouslyheldintrustforfullfiveyears:basecost=valueonexitfromtrust).Taxedateither18%or28%(dependingonlevelofgain). A5%shareholdingishighlyunlikely.
Must notify HMRC that the SIP arrangement has been established and declare that the plan meets the qualifyingrequirements.
Mustbeavailabletoallemployeesonsimilarterms.
Stock awards for internationally mobile employees (e.g. restricted stock units, stock options, restricted shares etc.)
Share awards under non-UK plans are usually unapproved for UK tax purposes(althoughsomeplanningisavailable).
The exact treatment will depend on thespecificstockplanandemployee’scircumstances but there is typically an IT charge at exercise on the stock gain apportioned to days worked in the UK betweenawardandvest.
If the employee is not UK domiciled and the stock is in a non-UK company then it is possible that there would be no UKCGTunlesstheproceedswereremittedtotheUK.
Reportable to the HMRC following the end of the tax year in which the shares/options were provided to theemployee.
Dependsontheoverseasstockplanrules.
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Social security
Socialsecurity,otherwiseknownas‘NationalInsurance’intheUK,ispayable by both the employer and employee.
The current rates of National Insurance Contributions (“NIC”) by the employer and employee are shownintable02totheright.
An employee on secondment to the UK can claim exemption from UK employer and employee NIC if they meet certain conditions and remain employed in a country that the UK hasasocialsecurityagreementwith.(See the list of relevant countries on page21.)
Where an employee is seconded from a non-agreement country such asAustralia,ChinaorIndia,thenthey are potentially exempt from payingNICforthefirst52weeksofthe assignment provided they meet certainconditions.
Table 02
National Insurance ratesyear to 5 April 2017 for employees not under 21 years of age
Rate
Employer Upto£8,112 0% Over£8,112 13.8%
Employee Upto£8,060 0% £8,061-£43,000 12% Over£43,000onexcess 2%
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Reciprocal agreements
The UK has a social security agreement with the following countries.Theseagreementsallowoverseas employees to potentially claim exemption from UK employee and employer NIC:
•Barbados•Bermuda•Bosnia-Herzegovina•Canada•Croatia•Israel•Jamaica•Japan•Jersey/Guernsey•Macedonia•Mauritius•Montenegro•NewZealand•Philippines•RepublicofKorea•Serbia•Turkey•USA;and• All members of the European
Economic Area:• Austria• Belgium• Bulgaria• Cyprus• Czech Republic• Denmark
• Estonia• Finland• France• Germany• Greece• Hungary• Iceland• Italy• Latvia• Liechtenstein• Lithuania• Luxembourg• Malta• The Netherlands• Norway• Poland• Portugal• Republic of Ireland• Romania• Slovakia• Slovenia• Spain• Sweden• Switzerland
An employer must apply for a formal certificateofexemptionineachinstance.Theagreementsonlyallowexemptionforacertainperiod,typicallyuptofiveyears.
Each agreement works differently therefore further advice should be soughtwithregardstospecificcountries.
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Value Added Tax (“VAT”)
If the above threshold is exceeded in any 12 consecutive monthly period (or the threshold is expected to be exceededwithinthenext30days),aUK established business must notify the UK tax authorities and register for VAT.Itmustthenchargeandaccountfor VAT on the supply of all goods andservicesmadeintheUK,unlesstheyarespecificallyzeroratedorexempt.ThestandardrateofVATintheUKiscurrently20%.Thereisalsoa limited range of goods and services subjecttothereducedrateof5%.
Where a registered business incurs VAT on the purchase of goods orservicesintheUK,itisableto recover this VAT from the tax authorities.Attheendofeveryquarter,thebusinesscalculatestheamount of VAT it has charged to its customers as well as that which it haspaidtoitssuppliers.Thenetamount,dependingonwhethermorehasbeenchargedorpaid,iseither remitted to the tax authorities orclaimedback.Therefore,VATis ultimately only a cost to private individuals,unregisteredbusinessesand businesses which make exemptsupplies.
An overseas business not established in the UK cannot take advantage ofthe£83,000annualthreshold.Ifsupplies of goods physically located intheUK,orcertainservicesdeemedtobesuppliedintheUK,aremadebynon-establishedbusinesses,thenregistrationislegallyrequiredwhateverthelevelofsales.
There are a number of important issues that overseas entities looking to establish a business in the UK need to be aware of:
a. Goods and services supplied to a parent company based outside the EU – when a UK entity established by its parent sells and deliversgoodstotheparent,thereis no VAT chargeable as exports arezeroratedforVAT.IftheUKentity provides services such as consultancy,technicalsupportand marketing these are also not subjecttoVAT.
b. Services supplied to a UK business customer – an overseas company,nothavingitsownpermanent establishment in the UK,doesnothavetoregister
for or charge VAT as long as it is making those supplies from outsidetheUK.TheVATisaccounted for by the customer under what is known as the ReverseChargeprocedure.Theexceptions to this rule include cateringservices,passengertransport and admissions to events.From1January2015,telecommunications and other electronically supplied services to private individuals belonging in the UK are also exceptions tothegeneralrule.Underthesescenarios a UK VAT registration mayberequired.
c. Goods supplied to the UK customer – an overseas company,nothavingapermanentestablishmentintheUK,doesnothave to register for and charge VAT,providedtheUKcustomerisimportingthegoodsintotheUK.If the customer is expecting to take ownership of the goods after they have been imported into the UK,theoverseascompanymayhave to pay VAT at the point of importation then register in the UK in order to recover the VAT paid at
VATisasalestax.Itischargeablebybusinessesiftheyaremakingsupplies(sales)aboveacertainthreshold.Theregistration threshold for a UK established business is £83,000perannum,effectivefrom1April2016.
theborder.Onceithasdonethis,it will then have to charge VAT on its sales even if invoiced by the overseas company as the goods will now be deemed to have been physicallysuppliedintheUK.
The need for the overseas company to register for VAT described above does notnecessarilyrequireittoincorporate a UK company or establishment,astheoverseasentitymayitselfbeVATregistered.This will depend upon the issues discussed earlier in this guide and not just because certain supplies of goods or services are made intheUK.
d. Supply of goods and services within the European Union – an entity registered for VAT in the UK does not have to charge VAT on the supply of most goods or services to businesses in other EU countries.TheVATisaccountedfor by the EU customer under the intra-EUrules.
An overseas company established outside the EU can often suffer UK or European VAT before it isrequiredtoregisterforVATinthe UK or the wider European market.Thiscouldbeinrelationto costs associated with business trips(hotels,conferences,etc.)ormaybe exhibitions attended asparticipants.
This VAT can be reclaimed under a special provision whereby a claim is submitted to the tax authorities in the country where the expenditure has been incurred.
Where a business does register for VAT it can reclaim VAT on most goods and services purchased prior to registration - provided the goods are still on hand at the time of registration and the services were supplied no more than six monthspriortoregistration.
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Workplace pension plan (auto-enrolment)
Table 03
Minimum contributions
Until5April2018*
6April2018*until 5April2019*
From6April2019*
Employer Employee
1% 1%
2% 3%
3% 5%
The employer duties include:
• setting up a workplace pension plan
• assessing and categorising UK workers
• automatically enrolling eligible UK workers into the plan
• collecting pension contributions from employees’ pay
• paying the employee and employer contributions to the plan
• issuing all workers with certain statutory information
• keeping permanent records; and• registering with The Pensions
Regulator.
Staging date
Auto-enrolment is being introduced in theUKoverafiveyearperiodwhichstartedin2012.Allemployersaregivena‘stagingdate’,whentheirauto-enrolmentdutiesbegin.
OrganisationsfirststartingtoemployUK workers after 1 April 2012 can expect their allotted staging date to bebetweenApril2017andFebruary2018.ThePensionsRegulatornormally provides 12 months’ notice ofthestagingdate,inordertogiveemployerstherequiredtime toprepare.
FromOctober2017,anynewemployer will have an immediate duty tocomply.
Worker categories
All employees aged 22 to state pensions age (65 to 67) earning morethan£10,000ayear(2016/17tax year) must be auto-enrolled; the employermustalsocontribute.
All employees aged 16 to 74 earning lessthan£5,824(2016/17taxyear)are not automatically enrolled but have the right to join the workplace pensionplan,althoughtheemployerdoesnothavetocontribute.
All other employees aged 16 to 74 are not automatically enrolled but havetherighttojoin.Iftheychoosetodoso,theemployermustalsocontribute.
Minimum contributions
Minimum contributions are based on abandofearnings.For2016/17taxyearthisisearningsbetween£5,824and£43,000.Minimumcontributionsare detailed in the table 03 to theright.
Anyindividualororganisation,whethersituatedintheUKornot,isobligedtoprovide a workplace pension plan for any workersithasbasedintheUK.
* Dates subject to Parliamentary approval
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Other issues
Anti-avoidance legislation
Inmorerecentyears,theUKhasintroduced tax legislation to discourage the use of aggressive tax planning arrangements.Theseincludemoredetailedtransferpricinglegislation,aGeneral Anti-Abuse Rule (“GAAR”) andaDivertedProfitsTax(“DPT”).
Transfer pricing
In common with the majority of other countries,theUKhasintroduceddetailed transfer pricing legislation thatrequiresgroupstoaccountfortransactions between group companies atarm’s-lengthandtokeepadequatedocumentation.Thisissotheyareable to justify to tax authorities why the prices charged are considered to bearm’s-length.Therequirementsare mentioned in the Corporation Tax sectionabove.TherearereducedrequirementsforSMEcompanies.
General Anti-Abuse Rule
The GAAR was introduced into UK lawwitheffectfrom17July2013.Its primary objective is to deter taxpayers from entering into abusive arrangements and to deter the promotionoftaxabusivearrangements.
The GAAR operates to counteract an abusive tax advantage by applying a ‘justandreasonable’taxadjustment. However,theGAARisnotintendedto apply where a taxpayer makes a reasonable choice of a course of actions and simply chooses one that is moretaxefficientthananother.
Diverted Profits Tax
This tax was introduced by the Government on 1 April 2015 to “counter the use of aggressive tax planning techniques used by multinational enterprises to divert profits from the UK”.WhereDPTapplies a 25% tax charge is imposed on‘diverted’profitsofthemultinationalgroup.Itisimportanttonotethatthistax only applies to ‘large’ companies andwillnotapplytoanSME.Pleasenotethatthecriteriausedtoqualifyasan SME for the purposes of this tax are different from those which apply to R&D taxincentivesdiscussedabove.ForDPTpurposes,anSMEisacompanywhere its group has less than 250 staff anditsturnoverislessthan€50million,and/or its balance sheet is no more than€43million.
DPT typically applies to two types of arrangements:
1. Where there is an ‘Avoided PE’
2. Whereanintra-groupexpense,suchasaroyalty,ispaidbyaUK company to a non-UK group companyandwhere,essentially,therate of tax paid on its receipt is less than16%.
An ‘Avoided PE’ is typically where anon-UKcompany(“ForeignCo”)makes sales to the UK from abroad andarelatedparty(e.g.aUKgroupcompany) provides marketing and salessupportservicestoForeignCo.InthiswayForeignCodoesnothaveapermanent establishment (“PE”) in the UKandthereisan‘AvoidedPE’.
The DPT does not apply in cases where annual UK sales revenues do notexceed£10million,norwheretheUK related expenses do not exceed £1million in an annual accounting period.NordoesaDPTliabilityarisewhere tax (UK or foreign) is being paidbyForeignCoattherateofatleast16%.
The intra-group expenses case applies where the arrangements lack economic substance,exploita‘taxmismatch’and where it is reasonable to assume that the arrangements were designed toreducetax.Similarprovisionsapplywhere,insteadoftherebeingaUKexpense,thereisadiversionofincomeawayfromtheUK.
Whilst the provisions of this tax are widelydrafted,itisexpectedthatHMRC will seek to apply DPT to a modest number of large multinationals that have entered into aggressive tax planningarrangements.
Apprenticeship Levy
This is a new tax that is to be introducedfrom6April2017.Itwillimposea0.5%levyonemployers’paybills.However,therewillbeanallowanceof£15,000tooffsetagainstthe levy and so this new tax will only apply where an employer’s annual paybillexceeds£3million.
Our team
Bob Rothenberg MBEAsiaPacific
+44 (0)20 7544 8888
Nilesh ShahUS/Canada/India
+44 (0)20 7544 8866
Milan PandyaFrance/Italy
+44 (0)20 7544 8738
Simon WagmanSpain/Israel
+44 (0)20 7544 8828
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Melissa ThomasCanada
+44 (0)20 7544 8938
Nils Schmidt-SoltauGermany/Austria/Switzerland
+44 (0)20 7544 8931
Alex AltmannGermany/Austria/Switzerland
+44 (0)20 7544 8747
Blick Rothenberg
We currently act for over 800overseas companies and havealso recognised the need to assistthemmanagetheirUKpresence.Tothisend,wecanprovidea full outsourced accounting andadministrationservice.Wecanadministerinvoicing,debtcollection,expensepayment,management accounts and EuropeanVATreclaim.
If you are an overseas business with operations in a number ofdifferentterritories,BlickRothenberg can also provide a centralised solution to the challenges of international expansion.
Blick Rothenberg is a leading UK accounting and taxpractice specialising in helping overseas companiesestablishapresenceintheUK.BasedinCentralLondon,the practice has 27 partners and directors and around 210 staff with exceptional experience and expertise in all themajorfinancialdisciplines.Weaimtomaketheprocessofestablishing and maintaining a UK presence by an overseasentityaseasyaspossible.
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©May2016.BlickRothenbergLLP.Allrightsreserved.
This publication has been prepared for clients and contactsofBlickRothenbergLLP.Whilewehavetaken every care to ensure that the information in thispublicationiscorrect,ithasbeenpublishedfor general information purposes only and is not
intended to amount to advice on which you should rely.BlickRothenbergLLPisauthorisedand
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2016/17 editionLast updated 04/16
