Contractors' Questions: Can I pay less tax by incorporating offshore?

Contractor’s Question: Can a businessman really cut his tax bill by incorporating his business in Malta, as one high-profile British entrepreneur, James Dyson, has apparently done, without breaking HMRC rules?

Apparently there is no Capital Gains Tax for Britons who sell-up a business based on the island. Would one-man businesses like me be able to exploit this loophole, too, in the event that I wind-up? And is it true that businesses registered there can pay monies to their subsidiaries around the world at lower tax rates than if they were in Britain?

Expert's Answer: Without relocating to Malta, it would not be possible for a one-person limited company to replicate what James Dyson has reportedly done.

Each country has its own tax policies, which is why the Maltese may be able to pay monies to their subsidiaries at lower tax rates than if they were in Britain. However, to prevent international groups of companies generating and retaining profits in low tax jurisdictions, legislation exists to apportion profits of controlled foreign companies (CFCs), back to the UK and charge tax at the main UK corporation tax rate.

As a one-person business is registered where it is controlled (assuming the company is controlled by a British resident), then it will still be taxed in the UK. In the Dyson case, they may have had a shareholder or director relocate to Malta to bypass this control issue. Furthermore under British law, a person resident and domiciled in the UK can be taxed on their world-wide income and capital gains. For many contractors, these two factors combined would nullify the benefit of moving a company offshore as they would still have to pay UK corporation and personal tax.

Each person and business has different circumstances so I would advise consulting with a specialist tax accountant if you are considering moving abroad to understand the implications specific to yourself. Such a professional advisor may be able to advise you on how to lose tax residency (assuming you are British), which may be the potential opening for the type of (legal) tax-reduction arrangement that you appear to seek.

The expert was Martin McKechnie, a director at the Low Tax Group, a specialist accountant for contractors and one-person businesses.