Small firms warned to beware of ‘overseas company tax dodge’

Businesses are being warned to beware of ‘advisors’ offering to help them avoid tax by setting up a company overseas.

Small firms warned to beware of ‘overseas company tax dodge’

Andrew Robinson of DSW Tax Advisory says suggestions that firms could avoid UK tax simply by registering their business in locations like Dubai are too good to be true. He warns that those who are taken in could spend thousands of pounds to no avail and incur the wrath of HMRC.

A host of online sites now offer ‘rapid company formations’ in states such as the United Arab Emirates (UAE), and some are targeting small firms directly. One unsolicited email to a marketing business refers to the UK’s ‘45% tax’ – which is, in fact, the top rate of personal tax and payable only on income above £125,140 – and asks, ‘What if I said we can save you all that tax money by just getting your marketing company set up in Dubai in less than two weeks?’

However, Andrew Robinson warns that there are well-established measures in place to prevent UK companies from avoiding tax in this way.

“For a company to avoid paying UK tax, its ‘central management and control’ has to be outside the UK,” he explains. “That means, for example, that board meetings have to take place outside the UK and that directors who are UK residents cannot have control of the board. However, if directors don’t control the board, they risk losing control of the company.

Even if the company does meet the criteria, if directors are UK residents, they will automatically pay personal tax on any money they receive from it”.

Finally, he warns that before setting up a business in another country, directors should research the market and be aware of any pitfalls. While the UAE has established a number of ‘freezones’ to encourage foreign investment, trade restrictions apply and in some cases businesses are required to have a sponsor – a UAE resident who owns 51% of the company shares.

Andrew adds: “There may be good reasons why directors want to set up a company in the UAE or other overseas location – whether to pursue business opportunities outside the UK or because they plan to leave the UK. However, it is important to ensure that it is set up in the right way to comply with local laws and tax rules, and they also need to understand what they are getting into.

Dubai, for example, is an up-and-coming location, but it is very different to the UK in terms of culture and language, and there is a lot of red tape and regulations. Making business decisions like this will take longer than two weeks, and tax will be only one consideration.

In the current cost of living crisis, finding a quick way to save tax may sound tempting for some firms – but as with all these things, if it sounds too good to be true, it often is”.