Is this legal? Moving or restarting company abroad.

[Jon D]

Hi,

I'm really eager to hear everyones feedback regarding a company structure that has been proposed to me.

Firstly, a bit of background. My wife and I launched an online eccomerce store 3 years ago via a ltd company. Things are going well and we've experienced good growth and are now generating a meaningful profit, I have 2 staff members. We have a small office space where we dispatch all our orders and answer customer queries via phone and email. All our tax affairs are normal inline with most UK small companies.

I'm in the process of looking for an accountant and reviewing our company structure to ensure everything is above board and as tax efficient as possible as we'll be churning out some relatively big profit figures in our next tax year. Like most people we've been affected by Covid19 since March and it's really changed the way we work and to some extent my priorities in life. Since Covid took hold both my wife and I have worked remotely from Europe and it's been a real game changer, being out of the office has been a breath of fresh air and our staff have really taken on the mantle dealing with queries and order fulfilment.

It's been proposed to me that we can restructure our business in a much more tax efficient manor, I've detailed these below:

* Set up a new company (Company A) or move our company to a lower tax jurisdiction, our website is global and we can maintain this from anywhere in the world. Launching new collections, maintaining our social presence. Everything is done remotely via laptops.

* Set up a new UK based company (Company B) to partner with our existing suppliers and dropship all our orders. Essentially this company will become a supplier to the new "company A" based in a low tax jurisdiction.

In the above scenario we'd benefit from a reduced corporation tax liability for company A. We'd operate Company B as per normal, charging our services to Company A, all payroll and tax would be dealt with as per normal UK guidelines and we'd both collect a nominal salary of circa £12,500 per year. As it's been explained to me this would reduce our current corporation tax and lower our income tax in line with local international rates (we haven't actually agreed upon a location yet).

I'm always cautious with anything tax related and although the above sounds completely legitimate I'd love to hear anyones thoughts? I'm all for lowering our tax if its all legal and above board. The above sounds a bit similar to how some of the big corporations operate and they have faced quite the roasting in recent years.

Many thanks for taking the time to read all the above, I'd be happy to answer any queries of needed.

JD

[bd6759]

Are you moving abroad?

[Jon D]

Yes, this is the intention. From what I've read it seems we might have to meet strict criteria and limit time spent in the UK, if we keep our house here, bank accounts etc.

If we were just to open a new company as per my example above, say in British virgin islands or another tax haven location but carry on operating from the UK this would certainly seem to be tax evasion.

JD

[bd6759]

From a tax perspective, you can do anything you like as long as you comply with the tax legislation. So it is not a question of it being legal or illegal.

I don't think it is possible to move the registration of a company from one jurisdiction to another. If a company is registered in England and Wales it will remain so until it is dissolved. The registration cannot be transferred to another jurisdiction. So you would need to set up another company in whatever tax haven you choose.

For tax purposes a company is usually regarded as resident in the country from which it is controlled, so wherever you choose to become resident the tax haven company will also become resident.

What you have been proposed is possible if you want to leave the UK. There are lots of pitfalls if it is not done properly, you will be transferring assets abroad and will need to ensure the the transfer pricing legislation is met. I presume you will be paying for bespoke advice with no guarantees that UK tax law will stay the same, in particular that the DST will not extend to targeted tax havens.

[Jon D]

Hi Bd,

Thanks for taking the time to respond to my message. So to play it out, the following would have to happen:

It's likely it would be easier to update the existing company classification from a retail company to a supplier (not sure of the exact classification), this would be really easy as there would be no need to update employment contracts and existing supply lines are already in place, including banking etc.

Part two would be setting up a new company in a relevant country with advantageous tax rates, I'm aware of some jurisdictions which offer really low rates but it's unlikely we'd want to reside there so it'll be upto us to choose and be accepted somewhere. We've been in Switzerland for the summer and love the countryside and climate.

Regarding residency, I'm guessing this is key as if we do not pass this test the UK would likely look at this as tax evasion I would have thought. I.e, working from the UK but setting up a company in a country with a lower tax rate to save on tax?

Moving to a European destination does have a number of advantages as we also intend to spin out a European version of our eccomerce store specifically aimed at Europe, especially with Brexit fast approaching. Do you have to reside somewhere to open a company there?

I've just looked up DST and this seems to be only applicable for large companies and stipulates you must earn:

£500 million of worldwide revenue from digital services activities; and
£25 million of these revenues attributable to UK users (UK digital services revenues).

So not applicable.

Would love any other feedback if anyone would like to contribute at all.

JD

[bd6759]

As said, it’ll only be evasion if you do not pay the correct tax in accordance with the circumstances and the law.
I can see what you are trying to do with the proposed set up, but you don’t have it all correct. If your company continues with its contracts and suppliers, nothing changes. Changing its “classification” doesn’t affect tax liabilities. I’m not sure what you think the tax haven company will be doing to change the taxation point.

The DST rules may very well change.

[Jon D]

"I’m not sure what you think the tax haven company will be doing to change the taxation point."

Generate all our sales, hence the old company will have a much smaller revenue and profit. This would then vastly reduce corporation tax and also personal income from the UK.