Tax advice

mragent

Firstly, I have been sensible and booked an appointee with a UK accountant on Tuesday however I do not want to look totally stupid when I go to see him, so that is why I thought to ask on here so I am a little bit prepared.

My situation:

I am selling properties in an EU state, where I spend approx. 5 months each year at the moment. My income is commission payments, and my outgoings are office rent (in the EU state), and standard advertising expenses so nothing too complicated. I do not employ any staff. I am currently self-employed in the UK.

The change:

Self-employed has been fine the last few years, as my income was below £15000 each year and it was nice to keep things simple. Now my business has started to do really well, so it is time to look at perhaps more tax effective ways.

Options:

I see myself as having three options:

1) Carry on as self-employed

2) Operate as a UK Ltd

3) Operate as a Ltd in the country where I operate - 10% corporate tax, 5% dividend tax (however I doubt the dividend tax makes a difference as I am still a UK resident for tax purposes, is that correct?)

Option 3 does seem the most sensible option but I want to be sure where I stand with taking money out of the company, and back to the UK.

Option 2 also is quite appealing however what is a normal cost for a non-VAT company for UK accountancy each year?

Option 1 of course is the simple option, but perhaps the most non tax effective.

Being a Ltd may also make me look more trustworthy to clients.

Thanks in advance!

chrismac1

Firstly, have you registered a Permanent Establishment in whichever EU state you are operating in? Hopefully whichever UK accountant you are seeing will ask you this question and check exactly how you are operating in that country. I have a client who runs exactly the same type of operation in the USA. A decent accountant in my opinion will ask you some questions about the sort of representation - legal and accountancy - you have in the foreign country.

Another key aspect concerns anti-moneylaundering legislation. When I first met this client he was allowing cashouts in the USA which we immediately put a stop to. All cashouts now go back to exactly the bank account the original investment money came from. This prevents him being an unwitting victim of a criminal enterprise where dirty money invested from country X is cashed out to a Bank of America account in the USA. Please ensure your operations prevent this scenario.

You will still be a UK tax resident, based on your post. Any UK limited company is by definition UK resident. So both you and any company will be taxed on your worldwide income, whether or not that is remitted to the UK. This is different to my client who is non-domicile and hence only taxed on income remitted to the UK.

A limited company should save on NI for profits above £20k or so. But I think there are three other reasons to do it:

1. Credibility.
2. Having limited liability.
3. Flexibility over when you declare dividends.

Setting up a limited company is faster and easier than getting rid of one, so not a step to take lightly.

What sort of structure you want in your other country depends a lot on where that country is. One of my clients has rentals in Bulgaria, which is a total nightmare country to do business with for the average northern European. This is totally different to say France or Germany where - as long as you either know the language or have a good translator - the idea of a lawsuit is something credible should the need arise, either as plaintiff or defendant.

mragent

Thanks for your reply.

Firstly, no I haven't and don't exactly know what you mean. At the moment my commissions are coming from private sellers or developers into my UK business account, and I simply declare everything here as self-employed. I am not registered as anything in Bulgaria, as at the moment there is no need to be.

The country in question is Bulgaria. It would make sense to register there, and arrange the Bulgarian Ltd company returns and taxes via a local accountant there. The corporate tax is allot lower compared to the UK, but you are right it is indeed a nightmare country. I tried asking these questions to my Bulgarian accountant but he was pretty clueless as I am not a Bulgarian tax resident. He claimed that if I paid the 5% dividend tax in Bulgaria I wouldn't need to declare anything in the UK - which I think is absolutely incorrect information.

I would then need to declare the dividends on my UK tax return, and pay 10% again after the tax free allowance has been used?

chrismac1

I would go to any lengths to do as little as possible in Bulgaria. Every legal document is in cyrillic. At the time I set up a business there for former employers, you needed two separate bank accounts for VAT and operating that was about as complex as you could imagine. Just staying out of the hands of the Maphia was hard enough, and the contract we were doing was one of those the EU had insisted on as a pre-condition of Bulgaria joining the EU so God knows how much harder it must be for lower profile businesses.

I suggest you Google "Permanent Establishment" and register your operations before the Bulgarian tax folks find you. Luckily the Bulgarian definition of a PE is the same as the standard Western definition, but this was about the only aspect of our operations - in which my involvement was 2003 to 2007 - in which Bulgarian tax and accounting law followed UK law. As we were partnering with EdF we had three legal systems to consider which made life a little harder.

If you are not already aware of this, the Bulgarians are super-sensitive to moneylaundering due to the Maphia involvement in the country when the berlin wall fell, hence the two VAT bank accounts to make VAT scams harder. So I definitely advise being super squeaky clean on your procedures for moving cash in and out of the country.

The UK has a double taxation treaty with Bulgaria. This should mean you pay the higher of the two tax rates across the two countries. Let's say you pay £3,000 in levas or euros in Bulgaria. if the bill on your UK tax return is £4,000 you will pay £1,000 in cash to HMRC. If your UK bill is £2,000 then you pay zero to HMRC but can reclaim zero from the Bulgarians. Any accountant you meet who suggests otherwise needs to outline exactly what the scheme is being proposed to avoid this, and whether it has been cleared with HMRC.

We had KPMG Sofia as our accountants in Bulgaria and I dealt directly with their senior partner, also we had Citibank Sofia as our bankers. Nonetheless there were still some key things about the tax and banking aspects of our contract that we were telling them, whereas in any other country I've operated in it would be the local accountants and bankers telling us. This is not meant in any way as a criticism of those people, it's a criticism of the tax and accounting system and it made dealing with HMRC look like a piece of cake! If you look at 90% of my posts on this site you'll see this comment really means something!

I'm happy to have a phone call with you and leave you with a decent checklist of the things to get right

mragent

Thanks for that very detailed reply.

It doesn't make sense for me to register for VAT - the threshold is 25000 euro in Bulgaria, and £73000 GBP in the UK. My income would be less than £73000 GBP for sure so this is where the UK LTD route would make sense.

As anything in Bulgaria it boils down to the people you deal with - and the legislations are always changing. Since 2007 the country has been in the EU so things have improved a little.

I appreciate your offer of a phone call, that would be very helpful.

antonic

In the UK for VAT purposes its not your income that counts for registration its your turnover.

mragent wrote: »

Thanks for that very detailed reply.

It doesn't make sense for me to register for VAT - the threshold is 25000 euro in Bulgaria, and £73000 GBP in the UK. My income would be less than £73000 GBP for sure so this is where the UK LTD route would make sense.

As anything in Bulgaria it boils down to the people you deal with - and the legislations are always changing. Since 2007 the country has been in the EU so things have improved a little.

I appreciate your offer of a phone call, that would be very helpful.

mragent

Yes thanks I meant turnover and yes my turnover is far below that level anyway.

chrismac1

I didn't raise the VAT issue to suggest you should register, just as an example of where the Bulgarian regulations are much worse.

mragent

I met an accountant today, who pretty much convinced me that the UK LTD option was the best option for me.

What is "normal" for accountancy fees? Now that I have decided to go LTD it is time to shop around. His is my first quote and it was £700-£900 per year including the personal tax return, too (not including VAT!).

Any savings from class 4 NI avoidance could be eaten up due to the extra accountancy fees, however with my basic maths I will still be much better off.

Cheers,
Mragent

chrismac1

Well as my website says 775 plus VAT for a standard limited company package I am not going to disagree with the accountant! Whoever you go with, bear in mind that you have an office in Bulgaria from which you are running a business, and which therefore is most likely a Permanent Establishment - which is a strict legal / tax term and involves you in a number of Bulgarian obligations. So whatever is happening over here you should proactively sort this out.

mragent

Based on your advice, I did some research and I believe that I avoid any issue with the permanent establishment. The reason for this is that the office is only rented and used on a seasonal basis - 3 to 4 months every year.