Busman's holiday

British entrepreneurs are selling up at a profit, retiring and emigrating. They're moving to the Mediterranean region, US, New Zealand and Australia for a more relaxed life in sunnier climes. Between 2001 and 2011, 3,599,000 people permanently left the UK for a new life abroad, according to the Office for National Statistics.

However, not content with leading a slower-paced lifestyle, these expats often get itchy feet and set up a small business that they can run from the comfort of their new home abroad. While seemingly simple, the legal and tax complexities of running a business from an overseas territory must not be underestimated.

There's been an increase in the number of clients wanting to set up a business abroad over recent years. Many entrepreneurs anticipate little hassle because of how much they can access online. But there are several key issues to note.

First, there's no one-size-fits-all solution. Rules differ from country to country and should be explored extensively before even considering starting up a venture. Establishing an international business requires individuals to learn about new economies incredibly quickly, often with no prior knowledge.

Although many factors to be considered when setting up a business overseas will be comparable with the UK, it is essential to research and plan a move well in advance and seek country-specific information from an expert.

Business structure must be determined early to gain respectability and ensure compliance with local and international tax rules and regulations. While business owners may be fully aware of the structures available in the UK, other suitable entities will vary based on country and business purpose.

When a new company is set up as an offshoot of an existing overseas business or is going to be international in scope, subsidiary or offshore company structures can be considered, but professional advice should be sought first.

Taxing issues

For corporation tax purposes, a company will generally be resident in the country from where it is managed and controlled. Where the practicalities of this are not fully considered, it is not uncommon for businesses to unintentionally create a taxable presence in a country.

For example, if an entrepreneur sets up a business in Spain, but the main management systems are in place with an investor in the UK, usually the business will be required to pay both UK and Spanish taxes. This can be problematic and may lead to the company having to deal with multiple tax calculations and double taxation treaties.

Depending on the country, local authorities and taxation rules will differ considerably and business owners must be aware of these variations. Some countries have tighter and more complex rules than others, which can often make it hard for new owners to get a project up and running.

Everything from capital gains tax to corporation tax to inheritance tax can vary widely. When choosing a base for a business, it is worth considering that UK corporation tax rates are among the lowest in Europe, with a flat rate of 20 per cent applying from April 2014 to all companies, regardless of size.

Entrepreneurs should also consider factors affecting their individual residency status. If they intend to become non-UK resident after moving abroad, it is important that the new statutory residency test is considered. By no means simple, this test helps to determine whether an individual is a resident in the UK for tax purposes.

Under UK rules, it has long been the case that if an individual is in the UK for 183 days or more in a tax year, they are considered to be a UK resident. But the new rules add further layers to the test, meaning that an individual can be present in the UK for fewer than 183 days per year but will still be classed as a UK resident, depending on a number of other factors, such as family and business connections to the UK. So, seeking advice to clarify an individual's residency position is extremely important.

Case in point We have a family of clients who are running a number of businesses from the UK and Spain, who sought advice when one shareholder wanted to relocate to Spain permanently. Their situation highlights the importance of good planning when dealing with international tax issues. Three brothers are equal shareholders and directors in two companies, with one company resident in the UK and the other resident in Spain. Two of the shareholders are UK resident, living with their families in north­west England. The third shareholder lives in Spain permanently and satisfies the statutory residency test, making him non-­UK resident. All board meetings for the UK resident company are carried out at the UK premises, which is also the registered office. The UK-based directors are in charge of the day­-to-­day management and run the company from UK premises. The non-UK resident director either attends board meetings in person, subject to the number of visits he can make to the UK within the rules, or via Skype. Other than this, he has no significant input in the way the company is run. The Spanish company is managed completely by the non­-UK resident shareholder and director. Board meetings for this company are also held in Spain. By structuring the companies in this way, we have helped the clients avoid being caught within both Spanish and UK tax systems at the same time. They are governed by their own respective tax jurisdictions, with no double taxation issues.

Investment schemes

When moving to a new country, the effects of beneficial UK tax reliefs can be lost. If an individual's relocation means that they are no longer a UK resident, they will not be eligible for tax reliefs exclusive to the UK. This includes reliefs available under the enterprise investment scheme (EIS) and seed enterprise investment scheme (SEIS). When investing in new UK businesses, these reliefs can be very beneficial to entrepreneurs, so it is important to consider the effects of relocating.

However, many jurisdictions offer attractive expat tax regimes so it's worth reviewing these to ensure that a tax-efficient structure can be put in place.

It's difficult enough making the move overseas without the added complexity of setting up a new business. While many people are choosing to pack up for a new life abroad, they can sometimes be unaware of the financial implications of doing so. This is especially the case for entrepreneurs, who by nature will be keen to get involved in new and exciting projects.

Although tax may not be the main driver when making commercial decisions, it does have a significant effect on any business, and as a result, requires extra consideration for those setting up a business abroad. Careful tax planning is vital and, if done properly, can significantly reduce burdens down the line.