Tax Structuring – Using a UK company as an agent of an offshore company
UK companies are popular for numerous reasons, however one of the key benefits, especially to overseas individuals is the degree of respectability and professionalism that it conveys. This is particularly the case as customers may not wish to contract directly with an offshore company. It can also be a requirement with certain service providers in the UK to use a UK company.
A UK company would pay UK corporation tax on its profits at 20-26%.
There are no special forms of UK company targeted at non residents and therefore if you were non resident for instance and wanted to use a UK company without incurring the corporation tax charges you could look at an agency / nominee scenario.
How this works
The UK company acts on behalf of the offshore company. This is governed by the law of agency with the UK Company being the agent and the offshore company the principal.
If you are the agent for another party, it means that you are authorised to enter into transactions on their behalf and can receive rental income and hold assets, in your name but in circumstances where the full benefit arises to the other party and any business the uk company conducts is purely on behalf of the offshore company.
So in simple terms you run your business through an offshore company but use a UK company as a form of nominee with most of the income being passed back to the ‘principal’ (which would be an offshore company).
This is popular where you have any form of exporting.
For instance the UK company is formed as a sales agent for an offshore company. The UK company handles the invoicing / receipts etc and deducts a market rate commission (eg 5%).
The rest of the profit is passed back to the offshore company and the taxable profits in the UK would be just the 5% commission.
In this case the offshore company is the ‘principal’ and the UK company the agent.
The UK company would sign a contractually binding agency agreement with the offshore company that explains the terms of the agency operation.
The key issues in terms of UK tax is ensuring there is a commercial agency fee and avoiding any permanent establishment issues. You would need to ensure that the fee the UK company receives is set at a commercial rate for the services provided.
The amounts received & paid by the UK company aren’t on its own account and are on behalf of the offshore company (ie it’s not the UK company’s money). Therefore it would usually simply transfer the funds back to the offshore company with a reconciliation statement showing the amounts received, paid and the commission retained. There would also be an invoice for the 5% commission fee.
There are numerous occasions when a UK agency company could be useful:-
The UK company can be used for invoicing purposes, where it could, for example, supply goods on behalf of an offshore company, receive payment into a bank account in it’s name and account for the money to the offshore company. This is probably the main use as it avoids any Permanent Establishment issues for the offshore company. The UK company is simply collecting cash on behalf of the offshore company.
The UK company could be used to supply services to customers on behalf of an offshore company where the customers would not want to deal directly with the offshore company.
UK property management
The UK company could act as a managing agent for collecting rental income on behalf of offshore company (which would own the property) and the offshore company would charge a commercial fee. Tenants would not know they are dealing with an offshore company, capital gains and rental income should be free of tax in the hands of the offshore company.
UK nominee ownership
The UK company could be used to own the property (on paper) on behalf of offshore company, whereby the offshore company is still entitled to all the use and benefit of the property, including any rents and in due course sale proceeds. The UK company is the nominee and offshore company is the beneficiary. A commercial fee would need to be charged to the offshore company.
Isle of Man is popular as are the traditional zero tax havens such as BVI, Panama and Seychelles. Any tax free jurisdiction could be used. Establishing the offshore company in a jurisdiction which had a tax treaty with the UK would not in most cases lead to any tax benefits.
Market rate commission
It is essential that the UK and offshore company operate on arms length terms. This means that the rate that the UK company charges the offshore company should be based on the market rate for the services provided.
There are strict transfer pricing regulations which can impact on this.
Therefore you would need to assess the services that the UK company provides and then see what rate an independent third party company would charge for those services. In the case of a simple reinvoicing company this could be 5% of the receipts. If the UK company undertakes additional activities this would then be increased.
Care should be taken to ensure that you can support the fact there is a genuine agency relationship in place. Therefore ensure a legally binding agency agreement is drafted by a solicitor.
You would usually want to ensure that the beneficial title to the goods purchased is overseas so that the UK company is not treated as realising a profit in its own name. The UK company can own the legal title providing the offshore company clearly holds the beneficial interest.
In most cases there will be no overseas tax charge for the offshore company given it will be classed as trading outside the jurisdiction of incorporation.
Avoiding a UK tax charge
It would be essential to ensure that the UK company did not constitute a permanent establishment of the offshore company and therefore carrying out a trade in the UK. If it was then the profits of that permanent establishment could be taxed in the UK.
You would therefore need to be able to establish that the actual trade was carried out by the offshore company overseas and that the UK company’s activities did not constitute UK trading activities on its behalf. One issue will be the location where contracts are signed. However even where contracts are made abroad, that fact is not conclusive against trading in the UK by the UK company. The trade will be exercised in the UK if there is significant economic activity here contributing to the making of profits.
In practice there would only be a UK tax charge if there is a Permanent Establishment in the UK by the UK company.
There are two broad circumstances where there could be a Permanent Establishment. These are:
- Where there is a fixed place of business through which the business of an enterprise is wholly or partly carried on
- Where an agent, other than an agent of independent status, acting on behalf of the company has, and habitually exercises, contracts in the name of the company
Of key concern will be whether there is a UK “dependent” agent as this can constitute a permanent establishment in certain circumstances.
The OECD notes state that one of the ways in which a permanent establishment of a company could be brought into existence is where an agent acting on behalf of the company has, and habitually exercises, in the UK an authority to conclude contracts in the name of the company.
Anyone who may create a Permanent Establishment for the enterprise is known as a dependent agent, and can be an employee or self employed (and an individual or a corporate entity). The OECD notes state that only persons having the authority to conclude contracts can lead to a Permanent Establishment for the enterprise.
If there was a Permanent Establishment then UK income attributable to the Permanent Establishment would be subject to UK tax.
It would therefore be important to establish that the UK company was not able to enter into contracts on behalf of the UK company, particularly in relation to trading transactions. If this was the case the income could be taxed on the offshore company in the UK.
Anti avoidance rules
If the offshore company is not a subsidiary of a UK company there would be no issue of the controlled foreign company rules applying. However if the offshore company was directly owned by a UK resident individual or if that individual had the power to enjoy the income of that company the UK income tax anti avoidance rules would need to be considered (see ‘Establishing the central management and control overseas’)
Treatment of income received in the statutory accounts
One of the big advantages of using an agency structure is that the UK company would not be taxed on the entire income it received on behalf of an offshore principal but it would only be taxed on it’s commission receipts.
In terms of the accounts for the UK company it would be essential to determine whether for accounting purposes it acted as principal or agent.
This would then impact on whether just the commission was reported as the turnover, or whether the total income and expenses were reported in the accounts. In the case of the latter there is clearly a higher risk of an HMRevenueCustoms enquiry.
UK reporting standards state that in order for a company to be viewed as a principal it should normally have exposure to all significant benefits and risks associated with at least one of the following:
- Selling price: the ability, within economic constraints, to establish the selling price with the customer, either directly or, where the selling price of an item is fixed,indirectly by providing additional goods or services or adjusting the terms of a linked transaction; or
- Stock: exposure to the risks of damage, slow movement and obsolescence, and changes in suppliers’ prices.
Where the seller has not disclosed that it is acting as agent, there is a rebuttable presumption that it is acting as principal.
Additional factors which indicate that a seller may be acting as principal include:
- performance of part of the services, or modification to the goods supplied;
- assumption of credit risk; and
- discretion in supplier selection.
By contrast where a seller acts as agent it will not normally be exposed to the majority of the benefits and risks associated with the transaction. Agency arrangements will typically include the following characteristics:
- the seller has disclosed the fact that it is acting as agent;
- once the seller has confirmed its customer’s order with a third party, the seller will normally have no further involvement in the performance of the ultimate supplier’s contractual obligations;
- the amount that the seller earns is predetermined, being either a fixed fee per transaction or a stated percentage of the amount billed to the customer; and
- the seller bears no stock or credit risk, other than in circumstances where it receives additional consideration from the ultimate supplier in return for its assumption of this risk.
As stated above the distinction between agent and principal in the accounts is crucial as where the substance of a transaction is that the company acts as agent, it should report as turnover in the accounts the commission received in return for its performance under the agency arrangement.
Any amounts received that are payable to the offshore principal would not be included in the agent’s turnover.
You’d therefore need to determine whether the UK company could be classed as an agent for the purposes of the accounts.
As stated above you would need to look at the substance of the transaction and there is a rebuttable presumption that if there’s no disclosure of the principal the UK company would be the principal (and therefore report all the turnover and the subsequent payments back to the offshore company).
If you were using the UK company as a form of front for the offshore company then there would presumably be no disclosure of the agency arrangement. In this case however if you can support the fact that based on the other factors the nature of the arrangement is that the UK company is an agent this should be sufficient.
Using Limited Liability Partnership (LLP)
The alternative option would be to use an LLP. This is a pass through entity for UK tax purposes and therefore the income would be attributed to you personally.
Providing the profits are not profits of a UK trade and you are non UK resident there would be no UK income tax charge on the profits. This therefore has an advantage over the UK Ltd company above in that it can avoid all UK tax whilst still retaining the professionalism and credibility of a UK entity.
In terms of disclosure the notes to the Partnership return specifically state that
‘…Where all the partners are not resident in the UK, the Partnership Tax Return should enter only the profits arising from UK operations…’.
Therefore if the partnership had no UK trading profit the partnership return would effectively be blank.
The downside of an LLP is that it would need to file accounts with companies house showing it’s profit and loss account and balance sheet, even though it may conduct it’s business entirely overseas.