UK Tax Guide For Small Businesses:
An Executive Summary

This is an introductory guide for Small-Business Owners, linking in to our full UK Fact-File. If you'd rather dive right in to the Fact-File, you can use the navigation on the right of this page, or start from the UK home page.

Business Formation: Many small business owners operate very successfully as individuals but they need to register as self-employed with the Inland Revenue. Other than that, you don't need anyone's permission to start a business, and you won't have to register or license your business unless you form a limited company, or unless you require a special license, eg to run a pub or make atom bombs. Limited companies do have to be registered of course, and have to report annually, although for a small company the requirements are not onerous. And remembering that the only two certainties in life are death and taxes, inevitably you'll have to make annual tax returns, whether you're a limited company or not. If you're really in a small way of business, you won't have to bother with VAT, which applies to most types of goods and services in the UK. Of course if you take on staff, life becomes more complicated! Businesses of any size will probably gain from incorporation for a variety of reasons.

Domestic Taxation: The big issue is whether to be taxed as an individual or as a company. With individual taxes going up to 50%, the corporation tax rate of 30% looks attractive. Needless to say, it's more complicated than that, especially if you are a director of your company. Broadly, if you are building an investment-heavy business, a company may be best, while if you are in a simple cash in/cash out sort of business, being an individual trader may be better. Husbands and wives can play some interesting variations, and get the best of both worlds. If you're a 'non-dom', ie not born and bred in the UK, another goal is to remain non-resident, which means not having a permanent establishment (fixed place of business) so that you get taxed only on UK-source income. If there's one aspect of your business on which you should consider taking paid-for advice, it's probably the tax structure. It's so important to get it right at the beginning!

International Taxation: A small business usually has a static location, and you'll trade from there. If you're selling goods overseas it's straightforward, at least within the EU, but if you're selling services to corporates it can be more complicated because the foreign country may take a bite out of your returns, called withholding tax. Then you have to turn to double tax treaties to try to get the money back. It's all a bit of a jungle. And if you're big enough, VAT is an extra complication. If you set up a branch in a foreign country, you need to try to avoid the 'permanent establishment' trap, and you may get bogged down in local VAT. If you send staff - or yourself - to work in foreign countries you need to think hard about their tax situation in advance, both in respect of local income taxation and perhaps because of withholding tax, which may well apply to payments you make from the UK to your overseas workers. E-commerce companies have special opportunities and special problems, although the new EU VAT rules do simplify matters to some extent.

Tax-Efficient Structures: Faced with relatively high individual and corporate tax rates, many British business people devote careful attention to forming tax-efficient structures. If you remain tax-resident in the UK, the use of offshore trusts is no longer effective, although they can still be useful for asset protection. Ownership of companies in low-tax jurisdictions has also become pointless due to ever-more stringent CFC (Controlled Foreign Corporation) rules. What remains is actual emigration, to one of a variety of 'low-tax' or 'offshore' locations. Cyprus, Malta, Ireland, Jersey, Guernsey, the Isle of Man, Monaco and Andorra all have their pros and cons as operating bases for businesses, especially in the e-commerce sector; but of course this is not an option if your business is serving a static population of clients. As recent cases have made clear, becoming non-resident requires a very clear break with UK ties. Non-resident contractors meaning to operate in the UK can also use offshore structures, as long as they avoid the 'permanent establishment' trap.

Business Incentives: There is a wide variety, almost a bewildering variety of support schemes operated by various levels of government, some of them in association with the European Union, offering direct grants to support employment, rebates on taxes, tax credits for investors in small businesses, and R&D tax credits. Grants are available from several sources, including the UK government, the European Union, Regional Development Agencies, Business Link and local authorities. Many grants are limited to small and medium-sized companies. It is well worth investigating what's on offer. However, the saying: 'He who sups with the devil needs a long spoon' comes to mind. The schemes are well-intentioned, no doubt, but they can be intensely bureaucratic, with very intrusive qualification procedures, and a long 'tail' of reporting requirements.

Employing People: Many businesspeople will just tell you: 'Don't do it'. 'Marry in haste; repent at leisure', they say, and it was never so true than when it comes to employment. Don't kid yourself that employees will feel that they owe you anything. Today's workers, encouraged by a slew of anti-business legislation from Brussels, and the general nannying attitude of government, often feel that the world owes them a living. Many employers of course bring problems on themselves by treating employees as little better than slaves. Although in some circumstances the law may force businesses to employ their sub-contractors, try as hard as you can to use self-employed people rather than employees. The Revenue has plenty to say about that, of course, so if you are left with no choice, realize that you will have to operate 'PAYE', provide various statutory social benefits, and that it is extremely hard to dismiss an unsatisfactory employee once you have taken them on. Of course, there are plenty of exceptions to these rather sweeping generalizations. Lucky you if you find some!

Welfare And Lifestyle: Meaning, for the business person herself. Obviously, state social welfare schemes apply to business owners as much as to anyone else, although there may be problems if you operate across national borders. Many business-people will want to have improved (meaning private) health benefits, and almost all will want to find tax-efficient ways of making provision for their pensions. It's important to separate these from your business itself, in case of failure. If you have it in mind to retire to somewhere warmer and less highly taxed, then the time to start is now, in terms of building up a pension away from the grasp of the Inland Revenue.

International Aspects: Perhaps you plan to live out your life as a respected and contented member of your local community. The salt of the earth, one might say, if that's not patronising. But some people will find themselves drawn intentionally or otherwise to an international existence, doing business and/or living in other countries. There are many challenges: apart from the difficulty of arranging your tax affairs satisfactorily, there are the problems that go along with property ownership, education of your children, international removals, health care and pension provision, just to take some of the more obvious issues. Of course no one can predict the future with any certainty, but there are all too many stories of people who have trapped themselves in the wrong investment in the wrong currency in the wrong place, with multiple taxmen on their backs. Most such problems are avoidable, with forethought.

Introductory Guides

Fact-File

Part 1: UK Business Formation for Individuals

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