We are a firm of architects based in Guernsey where we are structured as a limited partnership. We are considering employing an architect in the UK who will assist with design and will liaise with UK clients. The clients would continue to be engaged with the partnership. What UK tax issues will we need to consider?
For UK tax purposes,
a Guernsey limited partnership is likely to be treated as a ‘transparent’ entity. This is confirmed by the HMRC entity classification list in HMRC’s International Manual at INTM180030. Although this list is not definitive, it does reflect the conclusion reached by HMRC when considering these entities in the past.
As a transparent entity, the members of the limited partnership, rather than the partnership itself, will be subject to UK tax. This means that income tax rates would apply to any taxable profits; for the current tax year, the highest rate of 45% would apply to UK taxable income above £150,000.
ITTOIA 2005 s 6 provides that:
‘(2) Profits of a trade arising to a non-UK resident are chargeable to tax under this Chapter only if they arise—
‘(a) from a trade carried on wholly in the United Kingdom; or
‘(b) in the case of a trade carried on partly in the United Kingdom and partly elsewhere, from the part of the trade carried on in the United Kingdom.’
Article 3 of the UK/Guernsey double tax agreement similarly provides that
‘(2) The industrial or commercial profits of a Guernsey enterprise shall not be subject to United Kingdom tax unless the enterprise is engaged in trade or business in the United Kingdom through a permanent establishment situated therein. If it is so engaged, tax may be imposed on those profits by the United Kingdom, but only on so much of them as is attributable to that permanent establishment.’
Together these provisions mean that only profits which are attributable to a permanent establishment in the UK would be subject to UK tax.
The double tax agreement takes priority over domestic law, and art 2 defines a permanent establishment as:
‘1(k). The term ‘permanent establishment’, when used with respect to an enterprise of one of the territories, means a branch, management or other fixed place of business, but does not include an agency unless the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of such enterprise or has a stock of merchandise from which he regularly fills orders on its behalf.’
As the employee will be involved with design work, then he will be carrying on part of your business in the UK. We then need to consider whether that business will be carried on from a ‘fixed place of business’.
An office will be treated as a fixed place of business, whether it is rented or owned, and this would include a serviced office. If the employee will work from home, this may also be treated as a fixed place of business for the partnership: for example, if the contract of employment gives the partnership rights over the employee’s home office.
As noted above, if there were a permanent establishment, tax would be due at a rate of up to 45%; and the tax due would be based on the profits attributable to the UK permanent establishment.
A better solution would therefore be to establish a UK limited company. The company would employ the architect in the UK, and carry on all activities in the UK. The company would be owned 100% by the Guernsey limited partnership.
The company would be subject to corporation tax in the UK at a flat rate of 20%. No withholding tax will arise when dividends are paid, but you would need to consider how any dividends would be taxed when received by the partnership in Guernsey. However, I would expect that the overall tax rate would be less than 45%.
The Guernsey partners can be directors of the UK company: there is no requirement to have a UK director. Even if the company is managed and controlled from Guernsey, it would remain resident in the UK for corporation tax purposes as it is incorporated in the UK. There is no residence tie-breaker in the double tax agreement which override this.
You will still need to take care that the UK company does not create a taxable presence in the UK for the Guernsey limited partnership. If the UK company has premises which it allows the partnership to use, this would be a fixed place of business. Similarly, if the company (or its employee) negotiated contracts with clients on behalf of the partnership, this could also create a permanent establishment.
The taxable profits of the UK company will be determined by the application of the UK transfer pricing rules. Any transactions between the UK company and the Guernsey limited partnership must be recognised on an arm’s length basis. There is an exemption from the transfer pricing rules for small and medium sized enterprises (SME) but this will not apply as the partnership is resident in a non-qualifying territory.
Clients would continue to be engaged with the Guernsey limited partnership, and the UK company will therefore be acting as a service provider to the partnership. The UK company could charge the Guernsey partnership on the basis of an hourly rate for the architect it employes, and this rate would reflect both the direct costs overheads. Alternatively, the UK company could act on a ‘retainer’ basis and a charge made which covers its costs. In both cases, the UK company would need to make an arm’s length profit.
An agreement should be put in place between the company and the limited partnership which sets out:
The UK company would need to register a payroll with HMRC and account for PAYE withholding tax, and national insurance. PAYE and national insurance would still arise even if there were no UK company established.
No VAT registration should be required if the company only receives income from the Guernsey partnership. However, it may voluntarily register and this would allow it to recover VAT incurred, for example, on rent. The costs of filing VAT returns would need to be considered against the potential recovery.
