After 8 years of operating his business under the red tape and tax burdens of a UK limited company, Paul C. set his sights on offshore incorporation. Could this be the right option for you? Find out as Paul gives his advice on the pros and cons of offshore incorporation.
International Man: Tell us a bit about yourself.
Paul C: From a young age I've always been interested in technology and more specifically computers. I started out writing BASIC programs and following magazine articles. That was just the start for me. As I got older I began to see how popular computers were becoming in the mainstream with the average person and thought it was the perfect tool for a small business. So aged 15, while still in the final years of school - very early 1990s - a friend and I started a small business to sell free and shareware software. The idea was that you made money from the media and replication costs. At the time the online world was restricted to bulletin boards and Usenet which the average person didn't have access to due to the costs and technical ability required. The business we started wasn't overly successful, it was more fun and an experiment, but we both gained valuable experience from doing it.
Then came the advent of the Internet. My epiphany was at the age of 23 while at university in 1996 doing a BSc in Multimedia Technology: We had been tasked with doing research and having clicked on the Netscape icon on the computer desktop, I was amazed at how easy it was to find the information I needed, even back then.
Fast forward to 1999, I graduated from university and then along with two friends started a UK company building websites. This didn't go well to start with, as in '99 everybody was doing websites. We struggled and then had to go our separate ways and get jobs. I decided to keep the company going and use it in my spare time outside of my day job to try and build something. Rather than doing generic websites I focused on more complex projects that involved dedicated programming and database work. This went very well, and after two years in my day job I was able to quit and carry on full time with my own company. I worked under that UK limited company for the next 8 years, until in 2009 I decided that there had to be a more efficient way to run things. I was really getting fed up with all the red tape involved in running a company in the UK. So I started looking at different offshore solutions.
IM: How have you internationalized yourself?
PC: The main way that I have internationalised myself is to try and get as much of my dependence on UK institutions to a minimum. I don't really do stocks and shares as I find the markets take too much time to study properly to be successful. I decided to diversify into owning commodities such as gold and silver, which I have done since late 2008. I really don't like the idea of owning a specific currency and this includes the British Pound, which isn't far off the dire straights that the Euro and US Dollar find themselves in.
The only Sterling that I keep is enough to live off of and a little for emergencies, anything else is invested. There are a few currencies that I'm keeping an eye on that I might look to as a store of cash, but for now I'm happy with buying gold and silver on market pull-backs, silver is looking even more attractive at the moment after the recent drop. With regards to my company, I decided to wind up the UK limited company and go for an offshore equivalent.
IM: What prompted you to set up an offshore corporation to manage your UK finances?
PC: The main reason that I decided on an offshore corporation is due to the ease of managing it. The way I run my business, I don't have any employees. If I need work done then I'll always contract a supplier in. This means that my overheads are very low.
However, while running the business I also want to keep the red tape and administration to a minimum, and unfortunately living in the UK and having a UK limited company for me meant that I always seemed to be filling in forms and trying not to miss deadlines of when they had to be in. There had to be a better way. Also, as with anybody, I really didn't want to pay as much tax as I was. I think this is something that almost everybody would look at to begin with, but it's not always obvious how and where you can make the savings.
IM: Why did you set up an offshore corporation versus one based in the UK?
PC: As I've already mentioned, the main reason was to cut down on the red tape and administration. I'd much rather concentrate on running the business and generating income rather than sitting down filling in forms. I also have concerns about privacy issues. With a UK limited company, your accounts and details are listed at Companies House [the official UK government register of UK companies] and for a small fee the directors’ details can also be divulged to anybody that wants them. This to me is in some ways good and bad. On the one side you can check out the businesses that you might want to work with, on the other anybody that wants to can find out where you live. I'm big on privacy, and working in the industry I do I know full well how easy it is to use that information. With the jurisdiction that I chose for being offshore, the company register is totally private — details cannot be divulged unless it has to do with criminal proceedings, which suits me just fine.
IM: What are the biggest benefits you gain from this setup?
PC: The main benefits are, as I mentioned, the privacy aspect, plus VAT on intangible supplies. Any service that is provided by a VAT registered company in the UK (or to a greater extent the EU) can have the VAT zero-rated; as a service is not a tangible item, it is classed as “for export” so there is no VAT due. This is ideal for my company as the vast majority of overheads are services. For businesses that mainly deal with physical items that stay within the UK borders this isn't so viable as the VAT is still chargeable. So before using the VAT savings as a reason, you need to really think about what your business does now or what it might do in the future. Otherwise, you might have a trouble or two down the line.
Another great benefit is that I no longer have to have my accountants render accounts to be submitted to Companies House, which makes a saving on annual bills and also on the aforementioned red tape. Of course I still do have accounts drawn up: any business tracking their profit and loss would be silly not to. The accounts are for me to use to see how well things are going and to also work out the tax due on profits.
Finally a great advantage is the flexibility of being able to move at the drop of a hat. Right now I am tied to the UK due to family and some other circumstances. However if I decided to move away from the UK, having the offshore company means I can continue trading without altering anything apart from a mail forwarding address. With a UK company it would become a lot more complex.
IM: Are there any pitfalls our readers should be aware of?
PC: I think the main pitfall of an offshore company is the tax on profits aspect. A lot of people instantly think by having an offshore company they won't be taxed or they can hide their profit. This is not the case. While you can choose not to tell HMRC that your company exists (and if you never bring money into the UK this will probably work), but based on UK tax law you could well get into trouble. I did consider this but for me it doesn't work. I'd much rather be working on my business rather than fighting court cases, of which there have been many. I read the HMRC tax manuals and legislation extensively and came to the conclusion that the best thing to do was go by the book. Based on the UK tax rules for companies, if a company has its "mind and management" in the UK, then the company is classed as also being resident in the UK for corporation tax. This means if you live in the UK and make business decisions here you had better be ready for court if you don't register the company.
What this means for me is that I have to fill in one form each year—the CT600 Corporation Tax return. This is a snap as I have all the details from my books which are drawn up by my accountants. If you manage things correctly you can offset costs against this tax bill. By offsetting the cost of the offshore company itself, the costs of accountants and anything else the business pays out for, the corporation tax bill can be reduced quite significantly. These are costs you would have to pay out on anyway so why not use them to reduce your tax footprint and all within the tax law. Of course you should always speak to a qualified accountant and do your own research.
A second pitfall is that of dishonest companies that advertise their services for setting up offshore companies. Some will make all sorts of claims about evading tax and saving thousands, but when push comes to shove you will be the one in hot water, not them. They will have made a nice amount from the incorporation of the company already. So before doing anything, make sure you are dealing with a reputable company.
Also keep in mind the offshore jurisdictions’ own tax laws. Most offshore centres will not tax a company if it doesn't trade locally, so you only have to deal with tax in the UK. However, if you have chosen a jurisdiction that does tax you, make sure this country has a double taxation treaty with the UK — this will stop you from being taxed twice on any profit as the UK will take into account that your company has been taxed once already.
IM: Can you take us through the process of setting up your overseas corporation?
PC: The main thing to look out for is the formations company that will actually incorporate your company. If you are careful and do your research you'll end up being very happy. The company that you deal with is important, as you will have a long lasting relationship with them. Not only will they incorporate the company, but they will also deal with any local administration and, if you wish, deal with mail forwarding services (and in some circumstances run a virtual office for you that answers calls etc.) So research this company very well as it's the linchpin of the whole process.
You can pay extra for nominee directors and shareholders, but in my opinion this isn't worth it. If you are going to try and play the game with the tax authorities then they will see through this instantly. A nominee director cannot perform any company duties and any decisions will ultimately be traced back to you. Remember that if you pick the company jurisdiction carefully the company register will be private anyway.
Once you have the company incorporated all that remains is to register it with HMRC, which is as simple as filling in a single form. Then it's just a case of getting a bank account. Again a lot of offshore incorporation services will charge you for a "bank introduction", but this is not a service you should take up. Almost any bank anywhere will be willing to open an account for you should you fit their criteria as a customer. I have one offshore account for the company, plus an onshore one for easy access. As long as you are willing to pick up the phone then you can have an account in any country. Just go for the accounts that will give you the best deal, and best access. In the age of Internet banking this could be anywhere in the world. At the end of the day banks want customers wherever they are.
IM: How would you recommend interested UK readers get started?
PC: First and foremost, I think the best thing to do is decide if an offshore company is for you… it is definitely not a one-size-fits-all approach. If you deal mainly with physical products that stay within UK borders, then it's probably not what you want. If you export or if you deal with intangible services then it might fit the bill.
Once you decide an offshore company is for you, start researching a formations company to use. Ask around in some online forums as there are plenty of people out there that have had good and bad experiences and who are more than willing to give pointers. A point of massive importance is the actual jurisdiction that you decide to incorporate within — all have their own rules and nuances, so read about them carefully and find the one that best suits what you want to do.
Ultimately the company I decided to deal with was OCH Ltd. (www.offshore-companies.co.uk). Their website isn't the best in the world but when you speak to them they know what they are talking about. They are very quick to respond via email too, and even when I've queried things and had a problem they have sorted it out without issue.
Initially, I signed up for the service to form the company with a sole director and shareholder. I also went for the bank introduction, but after reading some more I asked them to remove that (which they did no problem and refunded the fee). I decided to sort the banking out myself and have saved on that.
Since the initial incorporation, I have also added mail forwarding so I can use the offshore address in any official company correspondence. On average, they send a packet with mail once a month. For more important mail I maintain a UK PO Box address. However, it doesn't have to be a PO Box, it could be a normal street address. I'm just paranoid about giving out to much info easily.
The two locations I looked at closely were the Seychelles and the Commonwealth of Dominica. In the end I chose the second due to their increased privacy laws on the company register.
Other companies that I also contacted and held a dialogue with include:
- Jordans International: They offer an almost complete service, but, as you can imagine, the annual costs increase. I personally use my own accountant who I've briefed on what's required. But if somebody needs the complete package they might be a good place to start. They also use the UK as an offshore location for those in other countries as the UK can be quite appealing if you're not based here as a resident.
- ISLA Associates Ltd.: They have good information on their website, and when I contacted them they were helpful and didn't try and con me into hiding finances offshore. They pointed out the issue of residency and didn't make any fraudulent claims. So had I not gone with OCH, then these were second on my list. If you have the cash, they can also arrange second citizenship.
Those were the main companies I spoke to. There were others, but nothing much more than the odd one line email, so nothing much to write home about. That said, I would still recommend independent research. It’s important to back up any claims made with your own footwork and if required legal advice. At the end of the day it's not them who gets hung out to dry should you take action on bad advice.
Research banks and which ones will give you the best deal. It's all pretty much the same as you would do if you were solely UK based. Always question the process and the product to make sure whatever it is is 100% correct for you and your business.
Read through the online tax manuals at www.hmrc.gov.uk. There is a lot of useful information in there that will stop you making a mistake, and also if followed correctly save you money.
All in all, forming an offshore company was the best decision I've made in a long time. It's freed me from a lot of administration which has lifted a big weight from my shoulders, I know that I can take it with me anywhere in the world and continue working without a hitch. I'd love to see the UK authorities make it easier for UK businesses, but I don't see that happening any time soon. There have been moves to simplify tax in the UK and make it fairer, but while some things have changed, for me they haven't changed enough. Far too many rules and regulations.
IM: A perfect way to finish our interview. Thanks Paul.
PC: My pleasure.Editor’s Note: One expert on offshore companies whom we’d highly recommend is none other than Doug Casey, the original International Man. Doug’s been to over 145 countries and started offshore companies in a number them. He wrote a thick and detailed free guide on this topic, including his favorite countries. It’s a must-read for those interested in this extremely important topic. Click here to download the PDF.