UK Fact-File Part 4:
Individual Business Tax-Efficient Structures
4.3 UK Individual Business Use Of Offshore
Tax-efficient structures involving offshore jurisdictions
The establishment of an offshore parent to control and manage
a UK-based operation can sometimes increase the tax efficiency
of a small business, as long as every effort is made to avoid
inadvertently establishing a permanent establishment for the
offshore arm in the UK. However, professional advice in this
area is crucial, and a small business or individual looking
to ‘hide’ their income from the authorities in this way is
likely to be in for a nasty shock; such structures, even when
properly structured, are far from being ‘invisible’ to the
tax man.
Until April 2008, a person deemed resident in the UK but
not domiciled in the country could benefit from a favourable
tax regime, whereby UK tax on overseas gains and income was
only payable where such income was remitted to the UK. In
response to criticism over the number of very wealthy ‘non-doms’
living in the UK, and benefiting from their residence, whilst
paying very little in the way of tax, the government amended
the rules in its 2008 Finance Act.
From April 2008, where a non-dom has been resident in the
UK for seven of the previous ten years, they can only benefit
from the ‘remittance basis’ of taxation if they are prepared
to make a payment of GBP30,000; alternatively, overseas gains
and income will become taxable in the UK. A non-dom resident
for fewer than ten years can remain subject to the remittance
basis if they are prepared to sacrifice their UK personal
allowances (subject to a GBP2,000 minimum). HMRC provides
further information on this here: http://www.hmrc.gov.uk/nonresidents/coming_to_the_uk.htm
.
Over one quarter of the world’s wealth is held in offshore
or 'low-tax' jurisdictions, being a country or region that
has very favourable tax benefits allowing savings or investments
or other assets to accumulate in value virtually free of tax.
Such jurisdictions are also popular as in addition to the
aforementioned tax benefits, they offer privacy and confidentiality
(nowadays becoming much dented), asset protection and freedom
to switch investments to maximise investment returns.
Now that HMRC has removed almost all of the tax advantages
of offshore trusts, there are no 'low-tax' jurisdictions that
are especially advantageous for UK-based independents from
a tax point of view; this being the case, and thinking in
terms of asset protection, the jurisdictions best suited are
likely to be those in the same time zone as the independent,
and which speak the same language (assuming an English-speaking
business person!) Some types of business people may also have
the option to establish residence in a low-tax jurisdiction
while continuing to run or at least profit from their business
in the UK, being careful not to be caught by HMRC management
and control rules, leading to the creation of a permanent
establishment in the UK. Or it may be possible to transfer
a business lock, stock and barrel out of the UK. E-commerce
businesses are a case in point. From this point of view, a
finance centre such as the Isle of Man can stand as an example
of many.
The Isle of Man introduced a ‘0/10’ taxation regime in 2006,
with a 0% rate of corporate income tax for all corporate entities
except financial institutions, which face a 10% rate. However,
in the face of international pressure, and alongside Jersey
and Guernsey, the jurisdiction is again reviewing its tax
regime, and a consultation on this ended in late May 2010.
Updated in December 2010
In late 2010, speculation on the UK Treasury's
intentions with regard to the zero-ten regimes in place in
the Crown Dependencies was sparked
by a statement obtained by Channel Online TV following the
December meeting of the Economic and Financial Affairs Council
(ECOFIN), at which Jersey and the Isle of Man’s tax regimes
were discussed, and a report presented by the EU Code of Conduct
Group was endorsed.
However, the governments of both jurisdictions were quick
to stress that the EU's investigations into the matter were
ongoing, and that no conclusion had yet been reached with
regard to the future of zero-ten taxation.
Personal income tax in the Isle of Man is imposed at a rate
of 10% on income below GBP10,500, and at 20% on income above
that threshold (increased in the 2010-11 Budget; it was 18%
before that). Total income tax liability can be capped at
GBP115,000 for individuals and GBP230,000 for married couples.
Business forms commonly used in the Isle of Man include:
sole proprietorships, partnerships, limited partnerships,
private limited companies, limited liability companies, and
branches.
Trusts are also a speciality in the Isle of Man, and Manx
trust law is based on the English law. The Trusts Act 1995
establishes that both for Manx trusts and for foreign trusts
migrating to the island, Manx law is conclusive and will overcome
any forced heirship provisions emanating from civil law jurisdictions.
The Isle of Man has adopted the Hague Convention on the Recognition
of Trusts Act 1988, albeit with some modifications.
Trust documents are in English, and there are no requirements
for registration; there is no stamp duty. The normal perpetuity
period of a Manx trust is 80 years. There are no restrictions
on the accumulation of income during the perpetuity period.
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