Doing Business/Expanding into the UK: Tax Issues to Consider

Given the historical link between Australia and the UK, many Australia businesses looking to expand overseas will consider the UK. When seeking to enter the UK market, whether by selling goods or services to UK customers, there are important tax considerations to address. These issues also differ depending on whether the business will establish a physical presence in the UK.
This article provides an overview of some key tax implications and potential issues that Australian businesses may encounter when conducting business in the UK, either remotely or through a local presence.

Operating in the UK Without a Physical Presence

Value Added Tax (VAT)

Even without a physical presence in the UK, Australian businesses selling goods or services to UK customers must consider their exposure to the UK’s Value Added Tax (VAT). VAT generally applies to most business supplies made in the UK by “taxable persons” once their taxable turnover exceeds the registration threshold (currently £90,000). The standard VAT rate is 20% (subject to reduced or zero rates in certain cases).

Importantly, the Australian business may still trigger UK VAT obligations notwithstanding that it does not have a UK entity, a UK office, or any UK-based employees. Non-UK businesses making taxable supplies to UK customers may still be required to register and account for VAT. Unlike UK-established businesses, overseas traders do not benefit from the standard VAT registration threshold, meaning VAT registration may be required from the first sale.

Determining whether UK VAT applies depends not only on the nature of the supply but also on the “place of supply” rules, which differ for goods and services.

Goods only

For goods, VAT generally applies where the goods are located at the time of supply. As a result, supplies made in the UK by an overseas business typically fall within the scope of UK VAT, requiring the supplier to register. This is highly likely to be triggered where the Australian business is drop-shipping goods into the UK, and where those goods are stored, packed and delivered from a UK-based “third-party warehouse”.

Note: where goods are packed and shipped from Australia direct to an end consumer in the UK, VAT will apply if the sale is made via an online marketplace (e.g. a website or mobile app).

Services only

VAT treatment can vary depending on the nature of the customer. In many business-to-business (B2B) scenarios, alternative mechanisms may shift the VAT reporting obligation to the customer (generally referred to as a “reverse charge”). By contrast, supplies to end consumers (B2C) more commonly trigger a requirement for the supplier to register and account for VAT directly.

UK permanent establishment risk

For an Australian business that has commenced operations in the UK without establishing a formal physical presence in the UK, there remains a risk that His Majesty’s Revenue & Customs (HMRC) may seek to tax profits arising from those activities. This risk arises where HMRC considers that the business has created a permanent establishment (PE) in the UK.

The concept of a PE is defined under both the UK domestic tax laws and in the Australia–UK Double Taxation Agreement (DTA), as modified by the Multilateral Instrument (MLI), with the DTA taking precedence. Broadly, the DTA allocates taxing rights between the UK and Australia and provides that the UK may tax business profits only to the extent that they are attributable to a UK PE.

A PE may arise in a number of ways. Most commonly, it is created where the business has a fixed place of business in the UK through which its activities are wholly or partly carried on. This includes, for example, an office, branch, or other premises at the disposal of the business. However, the DTA provides that a PE will not arise where a facility is used solely for the storage, display, or delivery of goods – circumstances that typically apply to most third-party warehouse arrangements. If this is the only presence in the UK, generally this specific scenario would not trigger a PE in the UK per the DTA.

However, a physical location is not strictly required in all cases. A PE may also be deemed to exist where a person in the UK acts as a dependent agent of the business and habitually exercises authority to conclude contracts in the UK on behalf of the business.

Accordingly, even in the absence of a formal UK presence, the nature and extent of activities carried out in the UK must be carefully assessed to determine whether a UK PE exists.

If the activities do not comprise a PE in the UK, then UK income tax would not apply to the profits or gains on sales to UK customers. However, where there is a PE in the UK, (and assuming the Australian business is operating by a company) it will be subject to UK corporation tax on the profits and gains attributable to that PE.

Note: The current main UK rate of corporation tax is 25%. A reduced rate of 19% applies to profits up to £50,000, with marginal relief providing a gradual increase in the effective tax rate for profits between £50,000 and £250,000, reaching the full 25% rate for profits above £250,000.

Operating in the UK With a Physical Presence

As outlined above, if an Australian business establishes a physical presence in the UK—whether through employees working in the UK or through maintaining a business premises with staff—there is a significant risk that a PE will be created in the UK.

If so, assuming the Australian entity is a company and it has a PE in the UK, that company will be subject to UK corporation tax including the requirement to register with HMRC and the associated tax compliance obligations. If this is the case, from a commercial perspective, it may be preferable for the Australian business to consider establishing a separate UK entity for its expansion into the UK – whether by incorporating a new Australian company or a UK entity (so that the UK tax obligations only apply to that new entity and the UK activities and not to the existing Australian business).

Corporation tax considerations for a UK subsidiary

If a UK-incorporated company is established it is generally treated as UK tax resident and, as such, will be subject to UK corporation tax on their worldwide profits and gains. An exception may apply where a company is regarded as solely resident in another jurisdiction under the terms of a relevant DTA (e.g., if central management and control/the place of effective management of a UK incorporated subsidiary is in Australia, the Australia-UK DTA may determine that company to be an Australian tax resident. If so, that UK company may still be subject to tax in the UK, via it having a PE in the UK).

In terms of compliance obligations, a UK company is typically required to pay its corporation tax liability within nine months and one day after the end of its accounting period. The corporation tax return must be filed within 12 months of the end of the accounting period.

Where a company’s taxable profits exceed £1.5 million for an accounting period, it will generally be required to pay its corporation tax via quarterly instalment payments (QIPs). Under this regime, the first two instalments are payable during the accounting period itself, with the others paid after year end. The £1.5 million threshold is divided by the number of associated companies within the group—being companies under common control or where one entity controls another. For example, where a UK company has a single Australian parent, this would typically reduce the threshold to £750,000.

For very large companies with annual taxable profits exceeding £20 million, accelerated instalment payment rules apply. In these cases, tax payments are brought forward further, with the final instalment due by the 14th day of the final month of the accounting period (assuming a standard 12-month accounting period).

Other UK business vehicles: Partnerships

An alternative structure for establishing a business presence in the UK is through a partnership. A UK partnership may be formed where two or more members carry on a business together with a view to profit. The UK offers various partnership structures, including general partnerships, limited partnerships, and limited liability partnerships (LLPs).

For UK tax purposes, partnerships are generally treated as transparent entities. This means that the partnership itself is not subject to tax on its income or gains. Instead, profits are allocated to the partners, who are each taxed on their respective shares.

Partnerships are required to submit an annual partnership tax return to HMRC, reporting the partnership’s income and its allocation among the partners. The tax treatment of each partner will then depend on their tax residence status. Non-UK resident partners are typically subject to UK tax only on their share of UK-source profits, whereas UK-resident partners are taxed on their share of worldwide partnership profits.

Returning profits to Australia

Where a UK subsidiary is established, profits can be returned to an Australian parent company by way of dividends. Subject to limited circumstances, the UK does not impose withholding taxes on dividends paid by UK companies.

From an Australian tax perspective, the dividends received by the parent company from a UK subsidiary (assumed wholly owned) would not be subject to tax in Australia (being non-assessable, non-exempt (NANE) income). However, as no Australian tax is paid, there is also no franking credit generated by those profits (and such a structure inherently results in a higher effective tax rate.)

Conclusion

This article provides a snapshot of some of the likely tax issues that may arise. If an Australian business is seeking to expand into the UK, we recommend obtaining specific advice from your Australian tax adviser and a UK tax adviser. This same recommendation applies if expanding into other countries.

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