UK Tax Guide For Professionals:
An Executive Summary
This is an introductory guide for Professionals, 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: In terms of business
format, some types of professional are bound by the rules
of their profession, and have to use partnerships. But more
and more, you can choose to have a limited company, which
may help with liability. Most professionals have to be appropriately
qualified or licensed. 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. Some professional services
don't have to worry about VAT, especially if you're not limited.
Of course if you take on staff, life becomes more complicated!
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 situation, being an individual may be better. And special
considerations affect the choices of a professional, particularly
if a partnership format is required. 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 professional
firm usually has a static location, and you'll trade from
there. If you're selling services to corporates overseas it
can be 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
may be 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: Faced with relatively
high individual and corporate tax rates, many British professionals
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: there is a case to be made for locating
suitable types of professional activity, say an architectural
practice, in low-tax, 'offshore'
jurisdictions, especially if you are eventually planning to
retire somewhere out of the UK. All of the major accounting
practices seem to be based in Switzerland or similar. Cyprus,
Malta, Ireland, Jersey, Guernsey, the Isle of Man, Monaco
and Andorra all have their pros and cons as operating bases
for professional businesses, although if frequent client contact
is necessary, 'offshore'
may not be an option. 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 professionals, 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 experienced employers
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
professionals to employ their sub-contractors, try as hard
as you can to use self-employed people rather than employees.
The Inland 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
professional herself. Obviously, state social welfare schemes
apply to professionals as much as to anyone else, although
there may be problems if you operate across national borders.
Many professionals 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, working 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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