March 21, 2024

Non-UK Founders’ Guide to Tax Implications of Setting Up a Company In the UK

TABLE OF CONTENTS

Welcome to the non-UK founders’ guide for international founders looking to set up a company and begin operations in the United Kingdom. This guide is designed to help founders understand the various company tax requirements that arise when registering a UK company. Along with answers to UK-specific tax questions, this guide covers various company tax and accounting tasks that founders may need to address. We’ve also included a checklist that provides a handy overview of the process from start to finish.

This guide follows a typical founders’ journey through company registration, team member engagement, accounting setup, company and tax reporting obligations, and tax implications for revenue distribution to founders. We will also look at some specific cases concerning UK tax rules, CFC rules, and transfer pricing rules, to understand when these situations may affect a non-UK founder, and what actions they may need to take.

This guide is divided into the following five sections:

  1. Initial company registration and setup
  2. Team member engagement
  3. Company reporting
  4. Revenue distribution
  5. Specific use cases for UK company setup

Please note that we will only be exploring company tax matters for non-UK founders in this guide. Explore more tax guides below:

📚 Discover the best tax-friendly jurisdictions for registering tech companies

📚 Read the Non-US Founders’ Guide to Tax Implications of Setting Up a Company In the US

This guide is brought to you by the team at Legal Nodes, including Co-founder Nestor Dubnevych and Virtual Legal Officer Stanislav Goza. Legal Nodes is a platform for tech companies operating globally and helps startups establish and maintain legal structures in 20+ countries.

Please note: whilst this article discusses information pertaining to tax rates and tax regulations, none of this information should be considered as legal, tax, or investment advice. Whilst we’ve done our best to make sure this information is accurate at the time of publishing, laws and tax practices may change. For help with tax matters for your company or personal tasks, speak to us.

Part 1: Initial company registration and setup

Whenever a founder must register a new company for their business operations, the very first step will be to explore all the different jurisdictions and entity options available to them. 

Entrepreneurs now have many different company types and jurisdictional frameworks to choose from, and can set up entities in multiple countries, depending on their business needs.

When choosing where to register their company, founders should consider:

  • The company’s purpose: Do you want to raise funds or hold assets? Do you want to hire a team or distribute revenue?
  • Implication of their personal tax status: Where are you considered a resident for tax purposes? Do you possibly need to get tax residency status in multiple countries to manage tax burdens?
  • The global options available: Different countries operate with their own rules for common entity types, which in turn impacts tax obligations and burdens placed on the company and founders. Which jurisdiction offers the best option for you?

Once founders have selected the UK as their most favorable jurisdiction, work can begin to set up the company, tax affairs, and accounting systems.

👉 Register a fundraising company in the UK

Choose a UK legal entity for your company

In the UK there are several different types of entities that you can register for your business. These include: 

  1. Limited Liability Partnership (LLP): A partnership where partners have limited liability, similar to shareholders in a company.
  2. Limited Partnership (LP): A partnership with at least one general partner with unlimited liability and one or more limited partners with liability limited to their investment.
  3. Private Company Limited by Guarantee: A non-profit company where members' liability is limited to the amount they agree to contribute if the company is wound up.
  4. Private Company Limited by Shares (LTD): A company where members' liability is limited to the amount unpaid on their shares.
  5. Public Limited Company (PLC): A company that can offer shares to the public and has limited liability.

Each entity type will have different legal requirements, tax implications, and liability considerations. For global entrepreneurs seeking to establish an entity in the UK, some of these entities will be highly unsuitable, whereas others will be able to help with various business goals. This is where a jurisdiction tax feasibility study can help.

📚 Learn more about startup incorporation in the UK (LTD)

Get a jurisdiction tax feasibility (LLP vs LTD) assessment

Two of the best entity types for business owners planning to set up a company in the UK are the LLP and the LTD. Founders can get consultations from experts, to help them fully understand the tax implications of each option.

Both Limited Liability Partnerships (LLPs) and private limited companies (LTDs) are incorporated at Companies House. They have separate legal personalities and offer limited liability protection for their members. However, some key differences to note include:

  • Tax Efficiency: LTDs are subject to corporate tax on their profits, while LLPs are transparent for tax purposes. This means that the profits of an LLP are considered to be the profits of its members, and therefore taxes are only applied to members, and not the company. Limited companies can be more tax-efficient due to tax-free dividend allowances and lower tax rates on dividends. They can also be used to set up tax-efficient share plans for employees.
  • Share Capital: LLPs do not have share capital or capital maintenance requirements, whereas LTDs do.
  • Investment Appeal: The division of the LTD's capital into shares allows it to attract investments by selling shares or entering into conversion agreements such as the Advanced Subscription Agreement. In LLP structures, investors must become members to invest their funds.
  • Flexibility: In some cases, LLPs offer more flexibility in profit allocations and member introductions or withdrawals compared to LTDs.

Choosing the right entity type at this stage of your journey is critical, as your choice could dictate your future business decisions and even restrict you from making the best choices for your business.

👉 Get help choosing the right jurisdiction and entity for your unique business case

Set up accounting services for your new company

As soon as registration for a new company is underway, founders should turn their attention to scoping and planning for tasks and payments connected to company taxes, accounting, and filings.

One of the best ways to manage all these new obligations is to hire a professional accountant. Many accountants will be equipped to support various business needs, from company reporting to annual company tax returns. They can also guide you on VAT, PAYE, payroll, and other tax-related matters that you must address.

Scope and plan important UK company tax deadlines

Once you’ve set up your accounting services, you’ll want to make sure that you have a clear picture of all the deadlines for filing, reporting, and paying various taxes.

In the UK, HM Revenue and Customs (HMRC) is responsible for collecting taxes, so companies must file a Company Tax Return to declare their company’s profits and losses to HMRC each year. Corporation tax, or company income tax, must also be paid to HMRC. Late filings and late payments can result in penalties with interest.

Planning ahead for important deadlines provides founders with accurate forecasts of obligations that they will encounter through their newly registered company. This helps manage cash flow and also enables your accountant to support you with choosing the right course of action for each company reporting obligation.

👉 Get help with scoping and planning taxes for your new UK company

VAT: what is it and when do you need to register for it?

VAT stands for Value Added Tax. In the UK, if a business has a turnover that exceeds a certain threshold, then VAT registration is obligatory. This allows businesses to charge VAT on their sales, reclaim VAT on purchases, and comply with tax regulations. Businesses with a turnover lower than the threshold can voluntarily register for VAT. The UK government sets the threshold for VAT as well as the rules on when companies must register for it. The threshold was set at £85,000 as of March 2024, however, it looks set to increase to £90,000 from April 1, 2024. 

After online registration with HMRC, businesses receive a VAT number and must include this on all invoices raised that have VAT implications. VAT reporting places an additional burden on companies to report financial information to HMRC on a quarterly basis. Returns are due one month and seven days after the end of the reporting quarter. Some businesses may be able to report annually or monthly, however, they should always adhere to reporting deadlines to ensure they file with HMRC in accordance with regulations. 

Remember, these rules and thresholds can change, so it is always best to seek help from accounting professionals when handling your VAT matters.

👉 Register for VAT and file your VAT reports

EIS / SEIS tax allowance eligibility analysis

If you’re looking to attract investment and generate some funds for your business, some countries offer schemes that can help you do this. In the UK there are two schemes that aim to encourage investment in small or medium-sized companies by offering special tax benefits for investors. These tax relief schemes are known as the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). 

SEIS Tax Relief

SEIS helps very early-stage companies by giving investors a 50% tax break on investments of up to £100,000 each tax year. Investors can also benefit from a capital gains tax exemption on profits from share sales after three years. No inheritance tax is applicable on shares held for at least two years, and losses from share sales can be offset against capital gains tax.

EIS Tax Relief

EIS helps medium-sized start-ups by giving investors a 30% tax break on investments of up to £1 million each tax year. It is similar to SEIS in that investors pay no capital gains tax on profits from share sales after three years.

Companies that qualify for EIS or SEIS need to apply for Advance Assurance from HMRC to demonstrate eligibility for these schemes, making them more attractive to potential investors. It therefore makes sense to assess both schemes early on, to see if and when it might be best to apply for a scheme.

👉 Find out if you’re eligible for EIS and SEIS tax relief

R&D tax relief (R&D credits)

In the UK, Research and Development (R&D) tax relief is available to some companies performing R&D activities. R&D credits act as an incentive that rewards companies investing in research and development activities. These credits allow businesses to reduce their corporation tax or receive cash payments when they spend money on developing new or enhancing existing products, processes, or services.

To be eligible for R&D tax credits, a company must carry out qualifying research and development activities and must have records of the expenditure for those activities in financial statements. There are other eligibility criteria, and the tax relief varies depending on the company’s financial position, the R&D activities, and the company size.

Founders with newly registered companies should check to see if they are eligible for R&D tax relief. Consultations with tax professionals can help founders understand their eligibility and help them apply for the scheme.

👉 Find out if you’re eligible for R&D credits

Part 2: Team member engagement

Now that your company is set up and you’ve connected your accounting services, it's time to focus on your team. If you’ve got plans to hire a team through your newly registered UK company, this section of the guide explores PAYE systems and payroll taxes. If this section doesn’t apply to you, skip ahead to Part 3: Company reporting.

Payroll tax rates

There are many ways that companies can compensate their employees, most notably through payments of salaries, benefits, and stock options.

Before commencing this setup, founders may wish to explore the tax rates and obligations that they will have to embrace by becoming an employer. This can be done through a consultation on payroll tax rates, which will give a clearer picture of the costs and benefits of hiring a team through a UK company.

  • Income tax: UK employers are responsible for deducting accurate income taxes from their employees' earnings and transferring these taxes to HMRC using the Pay As You Earn (PAYE) system.
  • National Insurance Contributions (NICs): Both UK employers and employees pay NICs, with rates varying based on the employee's insurance category. Employers must deduct and pay over NICs to HMRC when making payments for employees’ salaries.
  • Pension contributions: UK employers are required to set up a pension scheme for certain types of employees and contribute to it. Pension regulations dictate which actions must be taken, including the minimum contribution rate for different employees.

👉 Figure out UK payroll tax rates

Set up PAYE and manage payroll for your UK employees

In the UK, employers pay their employees using a PAYE system, and, as mentioned above, PAYE works by employers withholding taxes on the payments they make to their employees. Founders who wish to onboard certain employees immediately or who want to begin searching for team members soon will need to register for and set up PAYE and payroll software as soon as possible.

Employers manage their employees’ salaries using payroll, which is a system that deducts various taxes from employees’ gross wages, and pays them to the government or other organizations. Companies must use HMRC-recognized software to manage Real Time Information (RTI) PAYE payments and deductions. This software reports directly to HMRC and allows employers to accurately calculate pay, taking into consideration any statutory pay requirements, pension schemes, and tax duties.

Not only must UK business owners take responsibility for the PAYE setup and operation in their organization, but they must also be wary of their own National Insurance contributions that they must make to HMRC. After a business registers for PAYE, it will obtain a PAYE number. Going forward, the business is responsible for calculating tax and making payments to HMRC under the PAYE rules. Should an employer make a mistake regarding these taxes, HMRC may seek to recover underpaid taxes directly from the employee(s). In other instances, errors made by the employer or pension provider may result in HMRC recovering funds from either party.

👉 Setup and manage PAYE and payroll

Part 3: Company reporting

UK registered companies are obliged to submit various reports about the status of their company throughout the year. One of the most important reports is the tax return, which must be filed and then paid.

Prepare and file your corporate tax return

In the UK, Company Tax returns are submitted using Form CT600. This form allows companies to report their financial information and calculate their Corporation Tax liability. Once the form is completed, companies must submit it to HMRC. Late filing or forms filed on time with inaccuracies can result in penalties.

Many sections of this form indicate the requirement to complete additional forms to report further information on certain types of tax. Consequently, using an accounting specialist is critical to ensure everything is accurately recorded and submitted in accordance with HMRC’s rules of submission.

👉 File your Company Tax Return and pay your taxes on time

Get a financial audit

Part of an ongoing health-check for companies comes in the form of financial audits. Audits offer numerous valuable advantages and play a crucial role in detecting errors and fraud. Audits help ensure the accuracy and integrity of financial reporting and can swiftly identify both unintentional mistakes and deliberate deception.

In some instances, audits are required to comply with regulations and accounting standards, and a company's consistent history of undergoing audits is often perceived by investors as a testament to compliance, transparency, and adherence to accounting norms. For investors, audits are instrumental in making well-informed investment decisions by providing a clear understanding of a company's financial status and the management's approach.

Founders with newly registered companies should speak with their accounting teams to understand when they might need to do an audit, and what that might look like.

👉 Get a financial audit for your new company

Part 4: Revenue distribution

Setting up systems for effective and compliant revenue distribution is crucial to avoid large penalties associated with mishandling taxes. In this section, we’ll look at the withholding tax for dividends and directors’ fees.

What is the withholding tax rate for non-UK tax residents?

In the UK, a company’s profits can be distributed to company shareholders by the payment of dividends. Directors can also receive payment via directors’ fees for their work as a director at the company or for management services provided. 

Under UK law, both directors’ fees and dividends are subject to tax, and this also applies to any non-UK individuals in receipt of dividends or fees. Founders can get a clearer picture of the tax burdens and structures by exploring withholding tax rates that would apply to their business. Ultimately, the company paying these profits and fees is responsible for withholding the correct tax on any payments to a foreign beneficial owner. 

As these payments are crossing jurisdictional lines, founders may need to seek guidance from experts with cross-border tax knowledge, to ensure that the most suitable approach for paying taxes is taken.

👉 Figure out UK withholding tax rates for dividends and directors’ fees

Part 5: Specific use cases for UK company setup

This final section looks at specific use cases whereby founders must handle additional tax and UK-company related responsibilities. 

What are the CFC rules and when might they apply?

As there are many different tax rules and rates set by individual jurisdictions around the globe, Controlled Foreign Company (CFC) rules have been introduced to prevent businesses from establishing companies in low-tax jurisdictions and benefiting from lower tax rates by filtering their profits through those entities.

In the UK, CFC rules apply to UK companies that own another (subsidiary) company in another jurisdiction. The rules come into force when companies resident outside the UK are controlled by UK resident companies and foreign branches. These rules are complex and the regime uses chargeable gateways to help determine if profits are taxable or not. Different getaways are applied to different types of profits, which are then subjected to taxation if needed.

Recently, the UK has modified its CFC rules so that they align more with international standards such as the Anti-Tax Avoidance Directive (ATAD). These changes include the expansion of the scope of the CFC rules and restriction of exemptions for finance profits.

Understanding how the UK’s CFC rules apply to your business operations is critical, as failure to comply may result in your business appearing to be shifting profits to evade taxes. Non-compliance brings significant penalties, for example if a company provides incorrect information or fails to rectify an error quickly. 

To ensure that CFC rules are complied with fully and penalties are avoided, UK tax professionals can help assess CFC applicability and support a company’s adherence to CFC rules.

👉 Find out if the UK’s CFC rules apply to your business

What are the transfer pricing rules?

Transfer pricing rules require that transactions between connected parties must reflect fair market value. In the UK, legislation allows for transfer pricing adjustments to increase taxable profits or reduce tax losses but does not permit decreasing profits or increasing tax losses. 

What is the “arm’s length principle”?

At the heart of the transfer pricing rules lies the “arm’s length principle”. This principle ensures that transactions between connected parties are treated as if they were conducted under comparable conditions by independent entities. Founders don’t need to worry too much about the complexities of the principles and rules, but they should consult with tax specialists to get proper guidance.

What are the consequences of breaking the transfer pricing rules?

Breaking the UK’s transfer pricing rules can lead to severe penalties, from fines to criminal prosecution, depending on the severity of the violation. In instances where a company fails to keep or produce documentation records a fine of £3,000 applies, whereas tax-geared penalties of up to 30% of lost revenue can be imposed on careless inaccuracies and up to 100% for deliberate inaccuracies and concealment.

👉 Discover if the transfer pricing rules apply to your business

UK Company Taxation Founder’s Checklist

Non-UK Founders’ Guide to Tax Implications of Setting Up a Company In the UK

  1. Initial company registration and setupsome text
    1. Choose a UK legal entity for your company
    2. Get a jurisdiction tax feasibility (LLP vs LTD) assessment
    3. Set up accounting services for your new company
    4. Scope and plan important UK company tax deadlines
    5. Figure out VAT registration and obligations
    6. Assess EIS / SEIS tax allowance eligibility
    7. Assess R&D tax relief (R&D credits) eligibility
  2. Team member engagementsome text
    1. Understand payroll tax rates
    2. Set up PAYE and manage payroll for your UK employees
  3. Company reportingsome text
    1. Prepare and file your corporate tax return (Form CT600) and pay your corporate tax
    2. Get a financial audit
  4. Revenue distributionsome text
    1. Assess the withholding tax rate for non-UK tax residents (dividends and directors’ fees)
  5. Specific use cases for UK company setupsome text
    1. Do CFC rules apply to your business?
    2. Do the transfer pricing rules (arm’s length principle) apply to your business?

Sort your company tax and accounting obligations with help from Legal Nodes

For founders with a UK-registered company, navigating the complexities of managing taxes for global operations can be overwhelming. At Legal Nodes, we collaborate with tax and accounting experts worldwide. Each service provider is both proficient in their respective fields and adept at handling the needs of international entrepreneurs.

We help everyone, from early-stage startup founders to established scaleups looking to expand business operations into the UK. Our Legal Nodes subscriptions and add-ons help businesses understand their global tax options and receive the appropriate support for seamless management of their tax and accounting affairs.

For help with tax reporting and accounting tasks, whether in the United Kingdom or other tax-friendly jurisdictions around the globe, speak to us to get started.

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