UK Tax Guide For Entrepreneurs:
An Executive Summary
This is an introductory guide for Entrepreneurs, linking
in to our full UK Fact-File. If you'd rather dive right in
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Business Formation: Many entrepreneurs 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. 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,
but which in any case doesn't apply to many types of corporate
investment. 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.
And special considerations affect the choices of an entrepreneur,
some tax-advantaged investment schemes are better suited to
individuals than to companies. Staying out of the relative
glare of limited company life may sometimes be advisable.
Husbands
and wives can play some interesting variations, and get
the best of both worlds. Longer term, the holy grail is to
turn income into capital, something which the entrepreneur
is especially skilled at; but it isn't easy - The Inland Revenue
has blocked off many of the routes that used to be attractive.
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: If an entrepreneur
has a static location, she'll trade from there, but one of
the advantages of this rather special way of life is that
you're not necessarily tied to one spot, and you have the
opportunity to base yourself in a low-tax location. Getting
your investment returns without tax may be straightforward
inside the EU, although some countries discriminate against
low-tax locations, but 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.
Tax-Efficient Structures: Venture capital
funds (trusts) offer a 30% tax rebate of the sum invested,
and there are additional exemptions for dividend payments
and capital gains. There is also an Entrepreneurs' Relief
which gives a 10% CGT concession. However, faced with relatively
high individual and corporate tax rates, many British entrepreneurs
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 entrepreneurial businesses. But as recent
cases have made clear, becoming non-resident requires a very
clear break with UK ties. Non-resident entrepreneurs 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. Some of these
schemes may well be appealing to entrepreneurs, so 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 contractors 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
entrepreneur herself. Obviously, state social welfare schemes
apply to entrepreneurs as much as to anyone else, although
there may be problems if you operate across national borders.
Many entrepreneurs 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, and perhaps
especially entrepreneurs, 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.
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