How does the taxation work in the UK?
If you establish a UK company, your business will be liable for taxes in the UK, including Corporation Tax, VAT, Income Tax, and dividend tax. In addition, depending on your country of residence, you may also be required to pay taxes there.
However, many countries have Double Taxation Agreements (DTAs) with the UK, which can provide you with partial or full relief from being taxed twice on the same income.
How HMRC taxes foreign income
The process of taking money out of a limited company can be quite tax-efficient, and setting up a UK limited company from overseas is simple and provides several advantages for businesses of all sizes. HM Revenue & Customs (HMRC) allows online registration for tax, meaning you don’t need to visit the UK for company setup or tax registration.
Corporation tax
If your company is incorporated in the UK, it is considered a UK-resident company, meaning it must pay UK Corporation Tax on its worldwide profits. These include:
- Trading Profits: Income from the sale of goods or services.
- Investment Income: Earnings from investments, such as dividends.
- Chargeable Gains: Profits made from selling business assets for more than their original cost.
Generally, a UK-resident company only pays Corporation Tax on foreign profits if it operates through a permanent establishment abroad. For foreign branches, UK companies can apply for credit relief against UK Corporation Tax for any foreign tax paid on those profits.
Registering for UK corporation tax
You must register your UK company with HMRC for Corporation Tax within three months of starting business activities or receiving taxable income. The registration will determine your accounting period, which in turn dictates filing deadlines for your Company Tax Return and Corporation Tax payments.
Value Added Tax (VAT)
The VAT obligations for UK companies operating abroad or trading internationally can be complex. Over 160 countries charge VAT, each with its own rules. When operating internationally, VAT liabilities can depend on where you are selling or buying goods and services, and whether the sale is to a business or individual.
For example, a UK-based company trading outside the EU may have different VAT obligations in countries where goods are held, dispatched, or where suppliers are located. Your company may need to register for VAT in each country where it has tax obligations.
VAT in the UK
You need to register for VAT in the UK if your annual taxable turnover exceeds £90,000 (the registration threshold from April 2024). If your turnover is below this threshold, VAT registration is not mandatory, but you can voluntarily register to claim back VAT on purchases from other VAT-registered businesses.
VAT within the European Union (EU)
In the EU, VAT is typically paid either in the country of origin (where goods are sold) or the country of destination (where goods are received). If selling to VAT-registered businesses, no VAT is charged by the seller, but both businesses need to report the transaction in their VAT returns.
VAT outside the EU
Sales made by a UK company outside the EU are generally zero-rated for VAT. However, you may still need to record sales on your UK VAT returns and may have VAT obligations in countries where you are buying or selling goods and services.
Double taxation rules do not apply to VAT
Since VAT is an indirect tax collected on behalf of the government, it doesn’t fall under double taxation relief. Businesses must charge VAT on sales and remit it to the government, but VAT obligations are separate from double taxation issues.
Personal tax for Non-Resident directors and shareholders
Non-resident directors of UK companies must pay UK Income Tax and National Insurance Contributions (NIC) on income sourced from the UK, such as:
- Salary or wages
- Rental income
- Pension payments
- Savings interest
Additionally, tax on dividends received from UK companies may also be applicable. If your country of residence has a Double Taxation Agreement with the UK, you may be able to claim relief to avoid paying tax in both countries.
Double taxation relief
If a Double Taxation Agreement exists between your country of residence and the UK, you may be eligible for relief. These agreements typically specify the country in which tax is paid, the country where relief can be applied, and the amount of relief you are entitled to.
Depending on the specifics of the agreement, you can:
- Claim relief before being taxed
- Request a refund after paying tax
- Offset taxes paid in one country against the taxes due in another
- Pay a reduced tax rate on income not exempt from tax
The method of relief depends on the nature of the income and the treaty’s terms.
If you work in the UK
If you perform director duties in the UK, any income related to those activities is subject to UK Income Tax and PAYE. However, non-resident directors can avoid PAYE obligations if certain conditions are met, such as attending fewer than 10 board meetings in the UK in a tax year.
Tax on dividends
Dividend income from a UK-resident company is taxable. However, non-UK residents are typically only liable for tax on dividend income under the Income Tax Act 2007. The tax treatment may be limited, as some dividend income is considered “disregarded” income, which includes:
- Dividends from UK-resident companies
- Interest and alternative finance receipts
- Income from certain social security benefits
For non-resident directors, tax liability will be calculated based on the lowest of two possible methods:
- A standard personal tax calculation, where UK Income Tax and NIC apply to taxable income.
- A “disregarded income” calculation, where UK Income Tax and NIC are applied to income other than dividends.
If the latter calculation results in a lower tax liability, your UK tax obligation will be reduced accordingly.
PAYE and Self assessment
As a director, you are considered an officeholder and subject to PAYE. This system allows HMRC to collect tax and NIC from employee earnings, including your director’s salary. You may need to register your company as an employer with HMRC and either process PAYE yourself or through a payroll provider.
As a director and shareholder, you must also register for Self Assessment and file annual tax returns to report income, such as dividends from shares. The deadline for filing your tax return and paying any tax due is January 31st following the end of the tax year.
FAQs about how the taxation works in the UK
What taxes does a UK company have to pay?
A UK company must pay Corporation Tax on worldwide profits, including trading profits, investment income, and capital gains. Additionally, VAT obligations may apply depending on the nature of the business, and personal tax may be applicable to non-resident directors and shareholders.
How does the UK handle foreign income for tax purposes?
A UK-resident company pays Corporation Tax on foreign income only if it operates through a permanent establishment abroad. Companies can apply for credit relief for foreign tax paid on these profits to reduce double taxation.
How does VAT work for UK companies trading internationally?
VAT obligations for UK companies trading abroad vary. Sales outside the EU are typically zero-rated for VAT, but VAT registration may still be required in countries where the company has tax obligations, depending on local rules.
What is the process for claiming double taxation relief in the UK?
If a Double Taxation Agreement exists, a company or individual can claim relief by offsetting taxes paid in one country against those due in another. This may involve applying for relief before tax is paid, requesting a refund, or paying a reduced tax rate.
What taxes apply to non-resident directors of UK companies?
Non-resident directors must pay UK Income Tax and National Insurance on UK-sourced income, such as salary and dividends. Depending on the Double Taxation Agreement with their country of residence, they may be eligible for relief to avoid paying tax in both countries.
Do you have any other questions?
Setting up a UK company from abroad offers a range of opportunities but comes with specific tax obligations. Whether dealing with Corporation Tax, VAT, or personal tax as a non-resident director or shareholder, it’s essential to stay compliant with both UK tax law and the tax regulations of your country of residence.
For more details, check out the Startxpress Help Center and Startxpress Blog.
If you have any more questions or need further assistance, feel free to reach out to us via support@startxpress.io. Our team is here to support you every step of the way.
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