Avoiding Tax by Moving Country?

bobwilson

A person owns a limited company. The company has £500k in the bank, and the owner gets a salary of £8k per year, into his own bank account. He obviously has to pay income tax etc on his £8k per year, and anything he takes out from the business.

After a while, the owner/employee decides to move to the middle-east and run his company from there. After he moves there, he decides to pay himself the remainder of the company's earnings (£500k).

I understand that anything the owner/employee takes out of the business is charged income tax etc., however, what happens after the company has moved or is run from a different country? Presumably anything he takes out of the business is subject to income tax etc. in that country?

I guess I'm looking for clarification here. Is this true, or is there something I'm missing?

If this were true, then surely everyone would set up a Ltd company in the UK, earn loads of money tax free and then pay themselves in another country where there is less income tax, and move back. It just seems like the govmnt. must have something in place to stop this happening..

Just curious thoughts… I feel UK tax law is pretty thorough, so I'd be surprised if this was possible. :eek: Interested in any insight here. Thanks

agrinnall

The main reason why people wouldn't do this is because they would have to be non-resident in the UK for a number of years (not sure how many) for it to work.

And of course, the £500K in the company's account will have had corporation tax paid on the profits from which it was taken anyway (not to mention VAT) so HMRC will already have a chunk of the money.

John_Pierpoint

Multinational companies play these games all the time.

http://www.guardian.co.uk/commentisfree/2010/nov/14/vodafone-tax-evasion-revenue-customs

http://www.private-eye.co.uk/sections.php?section_link=in_the_back

However HMRC takes an interest in things like "Transfer Prices" for goods; but how about charges for using the foreign company's patents/copywrite?

It is a power game, fully tax the multinationals/Banks and they will close down their subsidiary in your country: bye bye employment and a big chunk of tax base, hullo worse balance of payments problems.

Pennywise

In your example, the company would have paid corporation tax on the profits it makes, out of which the £8k is paid. OK, the director/shareholder is only liable to tax on the £8k, but if the company had made £100k, it would have paid £20k tax, leaving £80k out of which to pay the £8k. So, the company's £500k will be net of corporation tax at somewhere between 21 and 28%, meaning it will have paid at least £100k in corporation tax to get itself into that position.

But yes, any more it pays out to someone who is resident in another country will be liable to tax in that other country, as long as they don't retain UK residency or return to the UK too soon or too often.

Of course the problem is how they're going to live on just £8k per year until the company funds have built up enough, and out of that £8k p.a. how are they going to save enough to pay for the costs of emigrating? I think there'd be very few people in a position to do that.

bobwilson

thanks guys, interesting reading. Wow I forgot about corporation tax. So, if a self employed person turns his business into a Ltd. company, he'll have to pay:
corporation tax (approx 20%), VAT (20%), and income tax/NI (approx 30% including NI)..

doesn't that come to just over 50% tax? Wow.

John_Pierpoint

VAT is only payable on the value added, perhaps 10%?
The normal technique for the owner-manager is to pay a minimal salary and take the rest as dividends.

bobwilson

John_Pierpoint wrote: »

The normal technique for the owner-manager is to pay a minimal salary and take the rest as dividends.

But if you do that, you'll be ineligible for a mortgage :cool: , at least, mortgage companies only take the salary figure into account, not dividends as far as I know. In which case you're down for eternal renting

So I guess the only way around all of this is to either pay the 40-50% odd in tax or move to British Virgin Islands or Andorra where there is no income tax !

Pennywise

bobwilson wrote: »

But if you do that, you'll be ineligible for a mortgage :cool: , at least, mortgage companies only take the salary figure into account, not dividends as far as I know. In which case you're down for eternal renting

Whoever told you that? Mortgage companies WILL take dividends and other regular income sources into account.

bobwilson

Pennywise wrote: »

Whoever told you that? Mortgage companies WILL take dividends and other regular income sources into account.

Are dividends free from tax? What is the maximum dividend amount? Can they be paid at any time in any amount?

laurel7172

The owner's salary is an allowable business expense-so you pay corporation tax OR PAYE/NI. Not both.

bobwilson

laurel7172 wrote: »

The owner's salary is an allowable business expense-so you pay corporation tax OR PAYE/NI. Not both.

Then why is the normal technique for the owner-manager to pay a minimal salary and take the rest as dividends.? If the salary is not subject to income tax anyway then what's the point in the dividends?