Tax minimisation in light of CFC rules [UK, contractor income, crypto trading]

[phrack]

I am a software contractor based in the UK. I also do some crypto trading on the side.

I came up with the following tax minimisation plan:

1. Incorporate in Cayman/BVI.
2. Have contractor income paid into that company, and invest through this entity too.
3. Only pay myself enough to live on for a few years whilst I live in the UK (and pay UK income tax on that minimal income).
4. Some years in the future, move to a 0% income tax country, establish tax residency, and cash out the company into my personal holdings before potentially returning to the UK a few years later with clean money I can use to buy a house etc...

After doing some more reading, I understand that CFC rules would apply to me, hence the income paid into the Cayman/BVI entity would incur UK corporation tax, making the cayman entity largely pointless. Is this right?

Is there anything I can do aside from physically relocating to a tax haven?
Also is there anything else glaringly wrong with my plan? Would (2) and (3) above work if I paid income into a UK company, then 'cashed out' that company some years in the future in a zero income tax country?

Cheers & apologies if this has all been asked before.

 

[Sols]

After doing some more reading, I understand that CFC rules would apply to me, hence the income paid into the Cayman/BVI entity would incur UK corporation tax, making the cayman entity largely pointless. Is this right?

Correct.

Is there anything I can do aside from physically relocating to a tax haven?

No.

Unless your budget has room for setting up a team/operations in Cayman/BVI to ensure the company is tax resident there and your role is purely as a passive shareholder.

Also is there anything else glaringly wrong with my plan? Would (2) and (3) above work if I paid income into a UK company, then 'cashed out' that company some years in the future in a zero income tax country?

It won't work.

Or rather, it will work until one day it doesn't: when HMRC looks at all the data about you that they have received from overseas and compare it to your tax return. And that will not be a very nice day.

 

[Au999]

Is there not a CFC getout in the UK for 'low profit' companies - specifically under 500k active trade / £50k passive trade?

"Low profit exemption - where annualised total taxable profits or accounting profits are less than £500,000 (of which less than £50,000 represents non-trading income)"

I'm maybe not reading it right but I take this to mean you can make up to half a mill in a CFC without being taxed on it

 

[Marzio]

I'm maybe not reading it right but I take this to mean you can make up to half a mill in a CFC without being taxed on it

Yes, that's correct

There's also the exempt period exemption for CFCs that have come under UK control for the first time. The period of exemption is temporary, usually 12 months.

You can see all exemptions here.

 

[phrack]

Yes, that's correct

There's also the exempt period exemption for CFCs that have come under UK control for the first time. The period of exemption is temporary, usually 12 months.

You can see all exemptions here.

So it seems that £500k/year is tax free, but only if that £500k can be classed as "accounting profits".

This article defines accounting profits as follows:

Accounting profits include only income items, such as foreign exchange gains which would be treated as items of income (rather than capital) if the CFC were UK resident. Additionally it only includes income if that income is included in arriving at the pre-tax profits of the CFC. Thus income that goes straight to reserves is not included nor is income that is treated as a prepayment, although it would be included if and when it is released from reserves

First it says that "accounting profits" are anything that would be taxed as income such (e.g. contractor fees?). But then it qualifies that if those profits are not used and just sit in the company as cash (reserves) then they don't count as accounting profits, but then once those profits are spent, they count as accounting profits so are tax free. Am I slow in the head or is this extremely confusing?
I think it means that you have to pay the profits out of the company each year to get the £500k exemption, you can't just accumulate funds in the company and pay them out at a later date.

 

[Martin Everson]

I came up with the following tax minimisation plan:

Forget that plan. Won't work period!!!

Both Cayman and BVI require substance as mentioned. Secondly living and working in UK through an offshore company and not paying tax in UK is general abusive practice under GAAR and a clear shifting of your tax base. Thirdly both of those countries report the company structure directly to HMRC as it will have no substance and even with substance it is an abusive practice. Exemption will not work here my friend. HMRC will bankrupt you with crossborder legal fees fighting such a case if you dare to think otherwise.

Twelve no/low tax countries share data on companies with no substance with UBO's country

Since March 2021 twelve countries now automatically share information on companies with no economic substance and where beneficial owners are non-resident. I think non-resident folk with companies in the below countries may be in for a letter from their tax man. Anguilla Bahamas Bahrain...

www.offshorecorptalk.com

 

[Au999]

I'd take the 'taxable profits' mentioned in the exemption above to be those profits you'd pay tax on after all costs, expenses, capital allowances and other deductions. Just like if you were paying corporation tax to HMRC.

But from reading around I also think it has to be a real substantive offshore company on the ground and not just some paper excercise to fool the tax man.

 

[clemens]

But from reading around I also think it has to be a real substantive offshore company on the ground and not just some paper excercise to fool the tax man.

that's the general rule of the game from now on.