How does double taxation work?

If you form a UK company, you will be liable to some form of tax in the UK, including Corporation Tax, VAT, Income Tax, and dividend tax. You may also be required to pay tax in your country of residence.

However, many nations have Double Taxation Agreements (aka ‘Double Tax Treaties’ or ‘Double Tax Conventions’) with the UK. This means you may be able to apply for partial or full relief in one country to avoid being taxed twice.

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Setting up a UK limited company online is an incredibly straightforward process, even for non-UK residents, and it offers a number of financial and professional benefits to businesses of all sizes.

Tax registration can also be carried out online through HM Revenue & Customs (HMRC), so there is no need to visit the UK to set up your company or register for tax.

Corporation Tax

If your company is incorporated in the UK, it is a UK-resident company. This means that your business is legally required to pay UK Corporation Tax on its worldwide profits (i.e. profits generated in the UK and abroad).

Profits liable to UK Corporation Tax include any money that your company makes from:

• doing business – i.e. trading profits from the sale of goods or services
• investment income – e.g. dividends from shares owned by the company
• selling business assets for more than they cost – this type of profit is known as ‘chargeable gains’

Generally, a UK-resident company does not pay Corporation Tax to foreign countries on any profits from sales in those countries unless the company is trading through permanent establishments there. Instead, it will simply pay UK Corporation Tax on those foreign profits.

UK-resident companies with foreign branches (i.e. permanent, fixed premises that are situated outside the UK) can apply to HM Revenue & Customs (HMRC) for credit relief against UK Corporation Tax for any foreign tax paid on the profits of foreign branches.

Registering for UK Corporation Tax

Your UK limited company must be registered for Corporation Tax with HMRC no later than three months after starting to do business or receiving any type of taxable income.

You can register for Corporation Tax online. HMRC will use the information you provide during registration to work out your Corporation Tax ‘accounting period.’ This determines your deadlines for filing Company Tax Returns and paying any Corporation Tax you owe.

The deadline for submitting a Company Tax Return is normally 12 months after the end of the accounting period that it covers. The deadline for paying any UK Corporation Tax you owe is usually 9 months and 1 day after the end of the accounting period.

Value Added Tax (VAT)

VAT rules are more complex when a UK limited company is based in a foreign country and/or sells internationally, whether online or through business premises.

More than 160 countries charge VAT, and the VAT rules in each country are different. It is important to be aware that, in addition to UK VAT, you may also have VAT obligations in other countries.

VAT rules depend on whether you are buying or selling goods or services within or outside the UK and EU. To work out the VAT obligations of your UK limited company, you will need to consider the VAT rules in:

• the UK (where your company is registered)
• your own country (where your company operates from)
• the country or countries where your stock is physically located and dispatched from
• the country or countries where your suppliers are based

Once you start trading outside the UK, your VAT position also depends on:

• whether you are selling goods or supplying services
• whether your customers are other businesses or private individuals
• where the customer is based and whether they are VAT registered

For example, if your company is registered in the UK, based in your country of residence, and selling to international customers, you may need to register for VAT in each country. If your stock is held and dispatched from somewhere else and/or you have suppliers in other countries, you may also need to register for VAT in those countries.

VAT in the UK

Your company will need to register for VAT in the UK if its annual VAT-taxable turnover is greater than £90,000 (the VAT registration threshold from 1 April 2024). Your VAT-taxable turnover is the total of everything your company sells that isn’t VAT-exempt, not how much profit you make from those sales.

Generally, if your turnover is below the threshold, you don’t need to register for VAT or charge VAT. However, you may need to register in some other cases, depending on the types of goods or services you sell and where you sell them.

Businesses can choose to voluntarily register for VAT, even if their turnover is below the threshold. Voluntary VAT registration may provide a number of benefits to your business, such as being able to claim back the VAT your company pays on the goods and services it buys from other VAT-registered businesses.

VAT within the European Union (EU)

Under European VAT rules, businesses generally pay VAT in one European country only. Either in the country of origin (where the goods are sold from) or in the country of destination (where the goods are received). However, the rules applying to private individuals differ from those applying to businesses.

When based in the EU and trading with other EU businesses, VAT on goods is normally levied in the country of destination. If both businesses are VAT-registered, the supplier does not charge VAT, but both businesses need to record the transactions on their VAT returns.

This means that:

• when your company buys goods or services, VAT would be levied in the country where you receive the goods or where your services are supplied
• when your company sells goods or services, VAT would be levied in the country where your customers receive the goods or services

When selling goods and services to EU consumers (i.e. non-VAT registered businesses and individuals), you will charge VAT in the EU country of destination or supply.

VAT outside the EU

If your UK limited company is based outside the EU and buys or sells goods or services outside the EU, sales are normally zero-rated or outside the scope of EU VAT. However, you will still need to keep evidence of sales and you may need to record them on your UK VAT returns. You might also have other VAT obligations in the non-EU countries where you buy and sell goods or services.

Double-taxation rules do not apply to VAT

VAT is not like other taxes that are eligible for double-taxation relief. This is because VAT is an indirect tax that businesses collect on behalf of the government.

Essentially, this means that you add a VAT charge to the price of the products or services you sell, then you pay some or all of the collected VAT to the appropriate government(s).

Seek professional tax advice

Given the potential complexity of VAT on international sales, you should consult with a tax specialist in the country where your company is based (i.e. your country of residence). It is also advisable to speak to HMRC about your VAT obligations.

Personal Tax for Non-Resident Directors and Shareholders

Directors of UK companies normally have to pay UK Income Tax and National Insurance contributions (NIC) on UK income, even if they live in a different country. ‘UK income’ includes earnings from:

• salary/wages
• rental income
• pension
• savings interest

As a non-resident director, the country where you live may also tax you on this UK income. Furthermore, you may have to pay tax on any dividends you receive from shares in your UK limited company.

Double Taxation relief

If your country of residence has a double taxation agreement with the UK, you may be able to claim tax relief on your personal income to avoid being taxed twice.

A double taxation agreement effectively overrules the domestic laws of both countries party to the particular agreement. It sets out:

• the country you pay tax in
• the country you apply for relief in
• how much tax relief you are entitled to

Depending on the particulars of the agreement, you can apply for either:

• partial or full relief before you are taxed
• a refund after you are taxed

This means that you would make a claim to HMRC to exempt your income from UK tax. Or, you would make a claim to the tax authority in your country of residence to exempt your UK income from tax in that country.

Alternatively, the agreement may allow you to offset the tax paid in one country against the tax due in the other. Or, pay a reduced rate of tax on income that is not exempt.

The UK has agreements with many countries, and the method of double taxation ‘relief’ will depend on your exact circumstances. For example, the nature of the income, and the specific wording of the treaty between the UK and your country of residence.

If you work in the UK

The situation is more complex if you perform any of your director’s duties in the UK. HMRC’s rules state that any income you receive from your company regarding the carrying out of your role whilst in the UK (e.g. attending board meetings, visiting suppliers, etc) is subject to personal tax in the UK through Pay As You Earn (PAYE).

In such instances, non-resident directors of UK companies may also be liable to Class 1 NIC on their income. However, as an administrative concession, HMRC will not seek payment of Class 1 NIC on your director’s salary if you can satisfy all of the following conditions:

• you only visit the UK for work for the purpose of attending board meetings, and
• you attend no more than 10 board meetings in a tax year, and each visit lasts no more than 2 nights at a time; or
• if you only attend 1 board meeting in a tax year, and the visit lasts no more than 2 weeks

Establishing your tax status can be complicated, but it is crucial to managing your company’s and your own personal finances. To avoid reaching the wrong conclusion regarding personal tax and NIC compliance, you should always seek advice from an accountant or tax advisor. Help and advice is also available from HMRC on 0300 200 3300 (if you’re calling from the UK) or +44 135 535 9022 (if you’re calling from outside the UK).

Tax on dividends

Dividend income is taxable if the source of the income is in the UK, e.g. a UK limited company. However, the Income Tax Act 2007 limits the tax liability of non-UK residents to:

• the amount of personal tax that would be chargeable on income, other than the ‘disregarded income’ outlined below, but before the deduction of the annual tax-free Personal Allowance of £12,570 (2024/25)
• plus the amount of tax deducted at source from the ‘disregarded income’ (i.e. Corporation Tax deducted from company profits before dividends are paid)

‘Disregarded income’ includes:

• dividends from UK-resident companies
• interest and alternative finance receipts from banks and building societies
• income from unit trusts
• income from National Savings and Investments
• profits from public revenue dividends
• profits or gains from transactions in deposits
• certain social security benefits, such as State pensions or widows’ pensions
• taxable income from purchased life annuities, except annuities under personal pension schemes

Your overall personal tax liability on dividend income will be whichever of the following calculations produces the lowest figure:

• Normal personal tax calculation – UK Income Tax, NIC, and dividend tax rates applied to total taxable income from all sources (salary, expenses, dividends) above the tax-free Personal Allowance
• Alternative personal tax calculation – Dividend income is ‘disregarded’ (excluded) from personal tax liability, but UK Income Tax and NIC rates are applied to your other taxable income and you don’t benefit from the tax-free Personal Allowance

If the ‘alternative’ calculation produces a lower personal tax liability than the ‘normal’ tax calculation, your UK tax liability will be restricted to the lower amount.

HMRC provides useful guidance on working out your taxable income from UK dividends if you’re not resident in the UK.

Pay As You Earn (PAYE) and Self Assessment

Directors of UK limited companies are classed as office holders. Under the Income Tax (Earnings and Pensions) Act 2003, office holders are treated as employees for personal tax purposes. This means that you will most likely need to register your company as an employer with HMRC and operate Pay As You Earn (PAYE) as part of your payroll.

PAYE is the system that HMRC uses to collect Income Tax and NIC from employment. Through PAYE, your company will make any necessary deductions from your director’s salary (and any employees’ wages) and pay the deductions to HMRC every month or quarter.

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You can register as an employer with HMRC online. To operate PAYE, you can choose to appoint a payroll provider (e.g. an accountant or bureau) to take care of this for you, or you can do it yourself using payroll software. In both cases, you will need to collect and record information about yourself and any other employees to work out the correct tax codes.

Self Assessment requirements

As a company director and shareholder, you will also need to register for Self Assessment and file tax returns every year to report any untaxed earnings, such as dividends from shares. Self Assessment registration can be carried out online through HMRC, and you must complete annual tax returns and pay any tax due to HMRC by 31st January after the end of each tax year.

The most popular and convenient way to file your Self Assessment tax returns is online. Income from all sources and capital gains, whether received from the company or elsewhere, must be declared on the tax return. You must also complete a tax return even if you don’t have any tax to pay.

Getting help with tax

There is no legal requirement to appoint an accountant to deal with the tax affairs of your UK limited company. However, we strongly advise consulting a tax specialist or an accountant in your own country to help you navigate the specific tax laws in both your country of residence and the UK.

This will ensure that your business has the correct systems in place, is legally compliant, and is operating in the most tax-efficient manner for maximum profitability. Professional tax advice and assistance will also save you a tremendous amount of time and money in the long run.