Treaties can help offshore companies pay tax at less than 25%
13th September 2024
Posted in Articles by Andrew Marr
From 1 April 2023 the headline rate of UK corporation tax increased from 19% to 25%. However, companies with low profit levels could still enjoy the 19% rate. This works by taxing profits as follows:
1. The first £50,000 of profits were taxable at 19%.
2. Profits between £50,000 and £250,000 were taxable at 26.5%.
3. Profits over £250,000 were taxable at 25%.
In this way, a standalone company with profits of less than £250,000 would pay tax at an overall rate of less than 25%.
The above limits need to be divided by the number of ‘associated companies’ which are broadly companies in the same group or under common ownership. This stops a ‘group’ paying lower rates of tax by fragmenting its profits.
There is a general rule that offshore companies cannot benefit from these lower rates of tax. Therefore, prima facie, a standalone offshore company which is subject to UK corporation tax (for example because it has a property rental business) on profits of £50,000 would pay £3,000 more tax than an equivalent UK company. However, this is not the whole story, because tax treaties can ‘trump’ the normal rules.
UK-Isle of Man tax treaty
Article 24 of this treaty broadly sets out that an Isle of Man company should not suffer a worse tax position than would be the case for a UK company in the same position. In practice this means that Isle of Man companies should be able to benefit from lower UK corporation tax rates in appropriate circumstances. Old HMRC guidance supports this position and so it should be uncontroversial to use the lower rates in appropriate circumstances, although it would make sense to put a note in the tax computation that the treaty is being relied on. Clearly, issues such as associated companies would need to be considered (as they would be for a UK company) before concluding that the lower rates are applicable.
Forbes Dawson view
This is an important reminder about the value of using a company in a jurisdiction with a good treaty network. Although we consider corporation tax rates above, the principle can be applied to any scenario where the general rules seek to prejudice an offshore company in some way. Some offshore jurisdictions (such as British Virgin Islands and Cayman Islands) do not have these treaty advantages and so may be made to suffer extra tax in the future. Anecdotally, we are seeing HMRC offering some resistance to this point but we think that this can be put down to a lack of experience from those making the enquiry and so can be rebutted.
