International Growth Strategies

for SMEs:

The Tax Aspects RACHEL LOCKWOOD BSC ACA CTA

Oury Clark Chartered Accountants

25 January 2012

Main taxes

•Corporation Tax

•Employment Taxes

•Value Added Tax (VAT)

Incorporation vs. Permanent

Establishment

Limited Company • UK Resident companies are subject to corporation tax

• Income is computed in accordance with various income sources: – Trading income

– Property income

– Non trading loan relationships

– Company distributions (if taxable)

– Miscellaneous income

– Chargeable gains

Incorporation vs. Permanent

Establishment Limited Company • A company in the UK can choose an appropriate year end • Many US clients choose a 31 December year end to ensure all accounting and tax filing

corresponds with the US parent • Adjustments to the accounting profit needed for disallowable expenses • Common expenses disallowable for tax:

– Client entertaining – Depreciation – Legal fees of a capital nature

• Capital allowances - tax relief designed to allow the cost of some of your company's assets to be written off against its taxable profits. They take the place of the depreciation shown in the financial accounts. There are different types of capital allowances. For each allowance, there are special rules to calculate how much, if any, relief you can claim. You have to follow these rules, rather than the method used in your accounts for calculating depreciation.

Incorporation vs. Permanent

Establishment Limited Company • The rates of corporation tax are based on the level of taxable profits in the period. • Currently the rates and thresholds are as follows:

• The full rate of corporation tax rate is set to reduce to 23% by 2014. • The above profit thresholds must be divided by the number of companies in the formal

group or under the same common control

2011 2012 2013 2014

Full Rate 26% 25% 24% 23% Profits > £1,500,000

Small Rate 20% Profits < £300,000

Marginal Rate 27.5% Profits £300,001 – £1,499,999

Incorporation vs. Permanent

Establishment Limited Company • Deadlines & Penalties • Small Rate

• Large Rate • Company’s with profits over the full rate threshold must pay their Corporation Tax in

instalments. Corporation Tax is paid in four quarterly instalments, two of which are due before the end of the accounting period.

Deadline Penalty

Payment 9 months after year end Interest on unpaid liability

Filing of Return 12 months after year end Immediate £100 flat fee >3 months additional £100 >18 months tax related penalty

Incorporation vs. Permanent

Establishment Permanent Establishment (PE) • Non-resident company liable to UK Corporation tax if trading

through a PE • A company has a PE when either:

• It has a fixed place of business in the UK, namely: A place of management A branch An office A factory A workshop

• It has an agent acting on behalf of the company who has and habitually exercises their authority to do business on behalf of the company

Incorporation vs. Permanent

Establishment Permanent Establishment (PE) • Profits of a PE are computed as those it would have made if it were a

distinct and separate establishment • Assumptions made:

• The PE has the same credit rating as the non-resident company • The PE has such equity and loan capital as it could reasonably be expected to have

• Deductions are allowed for expenses incurred as for a UK resident company

• Transactions between the PE and the non-resident company are treated as taking place at arm’s length

• No deductions are allowed for: • Royalties paid to other parts of the non-resident company although cost of creating IFA is allowed • Interest payments to other parts of the non-resident company unless incurred as part of a financial

business of banking etc carried on by the PE.

• Non-discrimination clause with US meaning a US PE cannot be taxed at a higher rate than an equivalent local organisation. I.e. they get the benefit

Incorporation vs. Permanent

Establishment Permanent Establishment (PE) • Trading through a PE could potential result in less UK tax to

pay than if a Limited Company is set up

• Why? • Only taxed on profits generated in the UK

• No requirement to divide the corporation tax bands for the number of associated companies

• But should consider: • Certain expenses are not deductible for the PE which would have been for a Limited

Company

• Must publically file the parent company’s accounts in the UK

Secondment – tax efficient

options Secondment • There are various tax efficient options available to seconded employees depending on the period they intend on staying in the UK and how they are to be remunerated. • Recruiting locally in the UK for local knowledge and experience may be preferred however seconding key staff to the UK with product and business knowledge to setup is important to many businesses.

Secondment – tax efficient

options Up to 6 months • If:

• the employee was employed by US parent company prior to secondment

• Remains on US parent company payroll throughout secondment

• US parent company bears all costs – i.e. no recharge of costs to UK company

• Apply for Appendix 4

• The employee and employer do not have to pay UK payroll taxes

Secondment – tax efficient

options Up to 2 years • Detached duty relief allows the company to provide the

employee on secondment with tax free benefits which in other circumstances would be taxable

• If the intention changes (the employee will stay beyond the 2 year allowance) the benefits will become immediately taxable from that day forward.

• Tax free benefits include: • Accommodation

• Travel for the employee to and from home country

Secondment – tax efficient

options Tax equalisation • Offsets any differences in tax rates between US and UK so that working

abroad is tax neutral/advantageous for the employee

• Detached Duty Relief can result in an increased net for the same company cost - Example:

Regular Utilising Detached Duty Relief

Salary £43,000 Payroll Taxes (£7,000) Rent payable By employee (£12,000) Net* £24,000

Salary £31,000 Accommodation Benefit under DDR £12,000 Payroll Taxes Only on Salary (£4,700) Net* £26,300

*Before US social security deduction

Utilising DDR means the employee is over £2,000 better off

Secondment – tax efficient

options Up to 5 years • Certificate of Coverage

• Allows the employee on secondment to continue to contribute to the US social security system

• Exempt from contributing to the UK social security system

• The company does not have to pay employer’s national insurance contributions of 13.8%

UK Employment Taxes UK Employees • PAYE Scheme • As an employer, you'll have to deduct tax and NICs from your

employees' pay each pay period and pay Employer's Class 1 NICs if they earn above a certain threshold

• Legal obligation to operate PAYE (Pay As You Earn) scheme • Payments due every quarter if your average monthly payments are

likely to be less than £1,500, otherwise Monthly • By the 19th of each month - or by the 22nd if you make electronic

payments • If you don't send the correct amount, or if you send it in late, you

may have to pay interest. • After the end of the tax year you must send HMRC an Employer

UK Employment Taxes UK Employees • Employer’s National Insurance Contributions

• As an employer you pay National Insurance contributions (NICs) on the earnings you provide to your employees

• Earnings include not only cash amounts but benefits, such as providing your employees with company cars

• The tax and NICs due on your employees’ earnings are calculated and deducted at the same time through the PAYE system

• the NICs that apply to many employer-provided benefits are calculated separately after the end of the tax year – P11D

UK Employment Taxes UK Employees • Employer’s National Insurance Contributions

Class 1 • Payable by employee and employer • Collected via PAYE • Charged as a % of employee’s earnings • Calculated on annual basis for directors • Currently 13.8%

Class 1A • Payable by employers on taxable benefits to employees • % of cash equivalent of benefit • Currently 13.8%

Class 1B • Payable by employers who have agreed PSA with HMRC • Charged on the combined value of items covered by PSA and the tax payable by employer • Currently 13.8%

End of Session 1