Winding up of BVI company and UK tax

Question:

I have no experience in this area and would be grateful for some general direction given the following information in relation to a recent client. Client has a company that was registered in British Virgin Islands in Oct 2003. Beneficial owner is a UK resident.

Company director / secretary is a consulting company in BVI. Bank account is an International business account managed by Barclays in Isle of Man.

Revenue credited to that account is earned entirely from organisations outwith the EU.

Client is interested in closing the arrangement down mainly to repatriate funds.

Questions are: 1. Does tax only arise when the funds are transferred back to the UK? First credits for earnings was Sep 07. 2. To what extent is this set up subject to potential HMRC disclosure investigation. Obviously keen to avoid interest and penalties! 3. What issues are there associated with shutting down the BVI company.

Thanks

Answer:

This is a complex scenario and you should ensure it is considered in detail.

The first thing you need to establish is whether the BVI income has been subject to UK tax. I assume that the argument is that the BVI company is non resident due to its central management & control being abroad? Assuming this is the case the other issue to consider would be the anti avoidance rules in Chapter 2 of ITA 2007.

The reason why this is important is that it would determine when the tax charge arose.

The anti avoidance rules apply (broadly speaking) where:

- There is a transfer of assets by an individual
- As a result of the transfer income becomes payable to a non-resident person (eg an offshore company or trust)
- The transferor must have power to enjoy that income
- The transferor must be ordinarily resident in the UK in the year of liability.

If this applies the income of the BVI company could be taxed on your client if he has the power to enjoy the income/assets of the BVI company. Note that assessing these conditions can be complex.

If this applied the BVI income would have been taxed on your client. There are provisions to prevent double taxation where income is subsequently received by the company.

Therefore for instance there would be no further tax charge on a dividend of the accrued income if it had previously been taxed under the transfer of asset provisions. Note that this doesn't apply to capital and therefore a winding up & capital distribution would not be entitled to the relief. Therefore if this was the case distribute the accrued income first.

If the anti avoidance rules didn't apply then the disposal/winding up would be the taxable event. Again it would depend on whether he received an income dividend or capital dividend during the course of the winding up.

Note that there is a motive exemption to exclude the transfer of asset rules (ie where there was no tax avoidance motive for using the company). However this should have been declared on the self assessment returns. The position could also be amended if your client is a non dom.

We have a lot more detail on this in our Practitioner Zone.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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