Jurisdiction United Kingdom
A) Setting up a limited liability company
1. What is the procedure to be followed to set up a limited liability company in your jurisdiction?
A limited liability company has to register with the Registrar of Companies and file details of the initial statutory structure of the company including:
- Names of initial shareholders
- Names of first directors
- The Registered Office of the company (which is it’s legal address)
- The articles of association (the company constitution or statutes)
There are four classifications of company which can be registered with the Registrar of Companies:
Public Limited Company (“plc”): a company limited by shares which is subject to certain registration requirements to be permitted to offer it’s shares to the general public. A plc is not required to offer its shares to the public simply because it is registered as a plc.
- Private Limited Company limited by shares: This is the most frequently registered classification of company most often used for small and medium sized trading and commercial businesses.
- Private Limited Company limited by guarantee: This private limited company does not have any share capital as the members offer a guarantee in the event their contribution is required by the company. This classification of company is often used for charities, associations and not for profit organisations.
- Unlimited Liability Company: This company does not provide any limitation of liability to it’s members. This classification of company is very rarely used.
Regardless of which classification of company has been registered with the Registrar of Companies it has thirty days within which to register for Corporation Tax purposes with HM Revenue & Customs.
i. Please provide details of the minimum share capital, the currency in which the share capital can be denominated and the time required to set up a limited liability company.
A plc must have share capital of at least £50,000 in sterling of which at least 25% must be paid amounts in excess of this minimum can be in currency other than sterling.
There is no minimum share capital for a private limited company and the share capital (or guarantee for a company limited by guarantee) can be registered in any legal currency.
A company can be incorporated and registered in less than one hour however it is more usual for the process to be undertaken within one day.
2. What are the one-time and annual costs and registration fees that need to be paid by someone interested in setting up a company in your jurisdiction?
Online applications registered within 24 hours cost £15 (paid by debit or credit card or Paypal) and postal applications (which take 8 to 10 days) cost £40. Registering a company on the same day incurs an express fee of £100.
Each company is required to file an annual return and annual financial statements with the Registrar of Companies and to pay an Annual Registration fee of £40 which is reduced to £13 if the annual return is filed online.
3. What is the minimum /maximum number of directors that is required in order to set up a company in your jurisdiction and what are the duties and responsibilities of a director?
The minimum number of directors for a private limited company is one and for a public company is two. The articles of association can stipulate a higher minimum number of directors. There is no maximum number of directors.
At least one of the directors must be a natural person and no director may be less than 16 years old.
The responsibilities of a director of a limited company are set out in legislation, in the articles of association of the company, in shareholders agreements and by reference to court judgements. The main responsibilities of the director are:
- To try to make the company a success for the benefit of the shareholders, using his skills, experience and judgment
- To follow the company’s rules, shown in its articles of association
- To be independent and in doing so to make decisions for the benefit of the company and not for the director’s benefit
- To avoid conflicts in interest and to declare any benefit which the director may obtain from a transaction the company undertakes
- To keep company records and report changes to Companies House and HM Revenue and Customs
- To make sure the company’s accounts are a ‘true and fair view’ of the business’ finances
4. Is a company secretary required? If yes, what are the duties and responsibilities of a company secretary in your jurisdiction?
A company secretary is not required for companies which are registereed subsequent to the introduction of the Companies Act 2006 unless the articles of association of the company required such an officer.
5. Are there any restrictions for foreign investors to hold shares in a limited liability company registered in your jurisdiction?
There are no restrictions on the foreign ownership of shares.
6. Are there any restrictions for a foreigner to carry out a trade or business in your jurisdiction via a limited liability company registered in your jurisdiction?
There are no restrictions on carrying out a legal trade or business in the UK through a limited liability company which may be owned and/or managed and directed by a foreign ownership of shares.
7. Is it possible for a limited liability company registered in your jurisdiction to continue its legal existence in another foreign jurisdiction? If yes please provide details of the procedure to be followed and any restrictions which may be applicable
A company registered in England and Wales will be resident in the United Kingdom for taxation purposes and will remain subject to United Kingdom law.
A company registered in England and Wales can operate in other jurisdictions through branch operations and will be subject to the laws operating in that jurisdiction as well as to United Kingdom law.
8. What is the procedure to liquidate and wind up a limited liability company in your jurisdiction?
There are four main alternatives for the dissolution of a company:
- Solvent dissolution
- Members solvent liquidation
- Creditors’ insolvent liquidation
- Liquidation by order of the Court
The solvent dissolution and solvent liquidation are undertaken by the company and any net assets remaining in the company are distributed to shareholders.
A dissolution is made by the directors submitting a notice to the Registrar of Companies and requires the directors to confirm the company is solvent and would have remained solvent but
for the dissolution. There is a fee payable to the Register of Companies of £10 and the striking of the company from the Registter of Companies takes three months (if there are no objections from possible creditors or interested parties).
A liquidation is undertaken when the shareholders (or the creditors or the Court) resolve to place the company into the hands of a qualified liquidator who then takes control of the company and its assets. The powers of the directors cease on the appointment of the liquidator. The liquidator is required to act in accordance with the Insolvency Act and the Companies Act in winding up the company’s affairs and distributing and assets to the creditors and/or the shareholders.
9. What other vehicles can a potential investor set up to carry out a trade or business in your jurisdiction apart from a limited liability company.
Alternative structures to a limited liability company include a sole trader, a branch operation, a general partnership, a limited partnership or a limited liability partnership.
B) Taxation of limited liability companies
1. What is the current corporate rate of tax to which limited liability companies are subject to on their corporate profits?
From 1 April 2015 the Corporation Tax rate is 20 per cent.
Corporation Tax is applied to the profits and gains of the company arising in it’s accounting period adjusted for tax purposes.
A United Kingdom resident company is taxable on it’s worldwide income and capital gains.
2. What are the tax implications on the distribution of dividends from the limited liability company to its shareholders?
Dividend distributions to shareholders are paid with a 10% tax credit attached. The tax credit is credited against the United Kingdom income tax liability of resident shareholders and is deemed sufficient to meet the basic rate of income tax (which is 20%). Dividend distributions paid to a United Kingdom resident company is not subject to any further taxation when received by that company.
There is no withholding tax on dividend distributions paid by a United Kingdom resident company.
3. Are there any fiscal incentives applicable in your jurisdiction? Briefly describe such incentives and the business sectors to which such incentives are targeted.
Tax reliefs are targeted to attract intellectual property, research and development, the creative industries and to attract holding companies to locate in the United Kingdom
A special regime applies with respect to profits derived from the use of patents which are owned or exclusively licensed to the company.
Profits derived from selling the patented product or selling or licensing or protecting the patent are subject to a reduced rate of Corporation Tax of 10% when the regime is introduced in full which will be from 1 April 2017.
The reduced Corporation Tax rate is being phased in with appropriate percentages of Patent Box profits being subject to the 10% reduced rate over several tax years as follows:
- 1 April 2013 to 31 March 2014: 60%
- 1 April 2014 to 31 March 2015: 70%
- 1 April 2015 to 31 March 2016: 80%
- 1 April 2016 to 31 March 2017: 90%
- from 1 April 2017: 100%
Research and Development Tax Credits
There are two schemes of tax credits to encourage Research and Development, the Small and Medium Sized Company Scheme and the Large Company Scheme.
The Small and Medium Sized Company Scheme permits an enhanced expenditure tax deduction of 225% of the cost incurred on Research and Development in calculating the taxable profits.
If the company is not profitable in a given period it can claim a repayment of Tax Credit. The repayment is 14.5% of the enhanced expenditure amount. This gives an effective cash repayment to the company of 32.6% of the cost incurred on Research and Development.
The Small and Medium Sized Company Scheme is limited to €.5million as this is the cap in the European Community for State Aid.
The Large Company Scheme provides an enhanced expenditure tax deduction of 130%. An alternative to the enhanced expenditure tax deduction is for the company to claim an Above The Line tax credit of 9%. It is expected the Above The Line alternative will replaced the enhanced expenditure scheme in the near future. There is no limited to the amount of relief which can be claimed under the Large Company Scheme.
Creative Industry Tax Reliefs
There are five separate reliefs targeted to attract the creative industries being:
- Film Tax Relief
- Animation Tax Relief
- High-end Television Tax Relief
- Video Games Tax Relief
- Theatre Tax Relief
The relief for each of the above is provided by reference to expenditure meeting the qualifying criteria of the respective relief. The relief is available either by providing an enhanced tax deduction of up to 80% of the qualifying expenditure or by a repayable tax credit of 25% of the qualifying expenditure.
Capital Gains Tax exemptions
A UK resident trading holding company is exempt from taxation on capital gains arising on the disposal of a trading company where the disposal meets the Substantial Shareholding Exemption. The exemption applies where the interest in the company is 10% of more and has been held for more than one year.
Non-resident individuals are exempt from taxation on capital gains arising from the disposal of interests in UK companies.
UK resident individuals may qualify for Entrepreneurs Relief on the disposal of shareholdings in a personal company or of a business asset. A personal company is one in which the individual holds an interest of 5% or more. Entrepreneurs Relief has the effect of restricting the maximum rate of taxation to 10% of the capital gain. There is a lifetime limit of £10 million on the amount of capital gains on which an individual can claim Entrepreneurs Relief.
4. What tax considerations must a foreign potential investor take into consideration before setting up a business in your jurisdiction?
The tax considerations for potential investors will depend on their circumstances and the nature of their business proposal.
However it is worth noting:
- Corporation Tax rates in the UK are among the lowest in Europe
- Significant tax exemptions are available
- Dividends are not subject to withholding tax
- There are significant double tax treaty reliefs
UK corporate tax law also has requirements covering Controlled Foreign Corporations (to ensure profits which would otherwise be subject to UK tax are not diverted to low tax jurisdictions), Transfer Pricing (which follows the OECD guidelines) and thin capitalisation
5. How many double taxation agreements have been signed by your jurisdiction? Please mention other DTAs which are in progress. Does your jurisdiction offer other forms of relief from double taxation should a limited liability company incur tax in a foreign country with which your jurisdiction does not have a treaty for the avoidance of double taxation? Briefly provide some detail of such unilateral measures.
The UK has signed double taxation agreements with over 120 other countries. Most double taxation agreements follow the OECD model and in most instances the UK has obtained and agreed the most preferential tax rates on withholding taxes and tax credit with the counterparty jurisdiction.
There are four double taxation agreements which are in progress: Croatia, Netherlands, Tajikistan and Zambia. Of these only the agreement with Tajikistan represents a new agreement, the other three are replacing existing agreements.
Given the extensive double taxation agreements and the relatively low corporate tax rates applicable in the UK, there is limited unilateral tax credit relief outside of the double taxation treaties. Some credit relief is available for taxation by unilateral taxing authorities such as, for example, the State of California.
6. Please provide details of any deductions allowed for tax purposes including any legal requirements which must be satisfied for such deductions to be allowed in your jurisdiction.
Profits subject to taxation are determined by reference to the accounting profits of a company or business as calculated in accordance with International Accounting Standards and generally accepted accounting practice and adjusted to conform to UK tax law.
The most frequent adjustments to accounting profits to conform to UK tax law are:
For example, expenditure incurred on entertainment, fines and penalties and expenditure not incurred wholly and exclusively for the purposes of the business
Expenditure and income derived from capital items is subject to computation under capital gains rules and these may vary from the accounting rules
Depreciation and amortization
No tax deduction is allowed for depreciation and amortization calculated in accordance with accounting principles. The tax deduction for the diminution in assets from use within the business is provided by Capital Allowances which may be, and usually are, calculated differently from depreciation and amortization.
C) Annual Financial Statement
1. What is annual financial statement?
Annual financial statements must comply with the Companies Act and with International Accounting Standards. The Companies Act requirements applicable to small and medium sized companies reduce the information to be included in their financial statements.
For most small and medium sized companies the information contained in the financial statements will include:
- A short Directors Report
- Income and Expenditure Statement
- Statement of Financial Position
- Cash flow Statement
- Statement of changes in equity
- Notes to the accounts
The accounts filed at Companies House for a small company will comprise of only:
- Statement of Financial Position
- Statement of changes in equity
- Notes to the accounts
2. Which company is required to prepare and file the annual financial statement?
All companies registered in England and Wales must prepare financial statements each year.
The financial statements must be provided to the company shareholders.
Financial statements must also be filed with Companies House where they are available to the public. Small and medium sized companies may prepare abbreviated or modified accounts, which are based on the financial statements, and file these at Companies House rather than their financial statements.
The abbreviate accounts filed at Companies House for a small company will comprise of only:
•Statement of Financial Position
•Statement of changes in equity
•Notes to the accounts
3. Which company is required to have an audit of the annual account?
All companies are required to have an audit unless they fall below the audit exemption thresholds and their articles of association permit the company to be exempt from audit.
The audit exemption thresholds do not apply to public limited companies, insurance or banking companies or certain companies involved in labour relations.
The audit exemption thresholds require a company to fall below any two of the following three criteria:
- Turnover of £6.5million
- Total assets of £3.36mn
- 250 employees
If a company exceeds two of the above criteria in any year it will still be exempt from audit if it fell below two of the criteria in the preceding year. This means a company has to exceed these criteria for two successive years to lose it’s exemption from audit.
4. When is the deadline for preparation and filing of the annual account?
The filing deadline for accounts to be submitted to the Registrar of Companies are set by reference to the end of the company’s financial year:
A public limited company within seven (7) months
A private company within nine (9) months
All companies with have taxable income must also submit their accounts and their tax return to HM Revenue & Customs within one year of the end of their financial year.
5. How does the company file the annual financial statement?
Paper copies of original signed accounts may be filed with the Registrar of Companies by hand or by post to Companies House which has addresses in Cardiff in Wales, Belfast in Northern Ireland, Edinburgh in Scotland and in London in England.
Most company accounts can also be filed online at Companies House use iXBRL software with agreed “tagging” of the accounts.
All accounts have to be filed online with HM Revenue & Customs using iXBRL software with agreed “tagging” of the accounts.
6. What is the penalty for non-compliance?
The penalty for late filing of accounts at Companies House for a company are:
Time after the deadline Penalty Penalty
Private company Public company
- Up to 1 month £150 £750
- 1 to 3 months £375 £1,500
- 3 to 6 months £750 £3,000
- More than 6 months £1,500 £7,500
The penalties are doubled if the accounts are filed late for two successive years.
The penalties for late filing of accounts, tax returns or the late payment of tax by a company with HM Revenue & Customs (“HMRC”) are:
Time after the deadline Penalty
- 1 day late £100
- 3 months late Another £100
- 6 months late HMRC estimate the tax liability and add a penalty of 10% the unpaid tax
- 12 months late Another 10% of any unpaid tax
If the accounts and tax returns are for three successive periods the £100 penalties are increased to £500 each.