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bigduckontax
bigduckontax, Accountant
Category: Tax
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I'm in the UK and I started an online retail business last

Customer Question

I'm in the UK and I started an online retail business last year which i ran as a sole trader / self employed. I've been considering forming a limited company but have held off from this decision because I will be moving to China for 2 years+ as my wife has a job there. With my impending move should I still consider forming a UK company or is it possible /better to form an offshore one? Last year's turnover suggests I would also be liable for UK VAT. I still plan to run my business whilst in China but currently all my stock and customers are UK/European-based. Would the Chinese deem my income to be taxable by them, in which case would forming a Chinese company be the way forward? How should I go ahead with the most suitable scenario?
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I am Keith one of the experts on Just Answer and will try to assist. I would caution you that this is essentially an UK tax information site. Firstly Chinese Income Tax: Most foreign citizens who work in China for longer than 183 days [because of the double taxation treaty between the UK and China)] are liable to pay Chinese Individual Income Tax (CIIT) and your proposed activity would come under that heading. The first difficulty as I see it is running a business with stock and customers European based is who is going to move the stock for you? You will have to employ someone reliable to do this and even on minimum wage this will be a relatively expensive exercise and gobble up a lot of the income. However if you can operate in this way then you could form an UK company for this purpose and its activities would be beyond the scope of Chinese tax. However, were the company to pay you wages then these would be caught by UK and Chinese tax although the Treaty precludes the same income stream being taxed in both jurisdictions. The Treaty does not, however, protect you from differences in rates of taxation. The Treaty operates by means of tax credits, the tax deducted in one country being allowed as a tax credit in the other. Now, if the operations of your business are administratively and logistically possible without your presence then I would suggest that an UK company would be the solution viz a viz CIIT, but, of course, as soon as you start to draw moneys from the company then UK taxation would kick in once your personal allowance of 10.6K was exhausted and, if it was below this figure, then there would be no tax credits to offset Chinese tax. Forming a Chinese limited company is possible, but you will need local support for that purpose and that will not come cheap. Also the income drawn will definitely be subject to CIIT. Whichever way you turn you are faced with Benjamin Franklin's oft quoted dictum that in life there are but two certainties, death and taxes! I do hope that my reply has been of some use to you and shed some light on your way forward.
Customer: replied 2 years ago.

Hi Keith

My business is predominantly buying products in bulk from UK wholesalers and reselling on Amazon UK and I also make a few sales on it's other European websites. With the view of moving to China I have outsourced the handling and preparation of the goods to a specialist UK company, which yes is a cost to me but the only solution I saw to continuing the business as is. So whilst in China my role would be reduced, hands free, instructing and overseeing the process via the internet.

So bearing this in mind, if I ran the business as a Ltd Co, took a salary of no more than the personal allowance limit and drew any other profits as dividends, paid any VAT due, I assume that would cover me as far as HMRC are concerned, but would I be liable for any Chinese tax, when all I am doing in China is purchasing stock in the UK via the internet, to sell to UK residents, and also liaising with my outworkers? Is this deemed to be 'working' in China?

Expert:  bigduckontax replied 2 years ago.
Yes, if you are below the personal allowance you will not be taxed, but have a care as NI contributions kick in at GBP 486 per month [5832 per annum] You will have to arrange for these to be made if you exceed the lower income limit in any one month.
The company's activities will be outside the scope of CIIT, but moneys paid to you as salary will be subject to their tax as indeed will dividends. From what you say you will have minimal UK tax deducted to give you a tax credit to offset CIIT.
Customer: replied 2 years ago.

If I retain my UK bank account to which any salary or dividends are paid surely the Chinese authorities cannot tax it!? Then am I free to use my UK cashpoint card at a Chinese ATM without impunity, or better still, open a Chinese bank account and transfer funds from the UK occasionally!?

Expert:  bigduckontax replied 2 years ago.
I advised you in my first answer of the taxation position in respect of CIIT. The Chinese authorities might take a very dim view of your proposals should they find out and please do not forget that Just Answer is in the public domain. You will appreciate that I cannot possibly comment upon your latest proposal [tongue in cheek]. Opening a local account and transferring moneys is a possibility, but you may find the Chinese authorities inquiring into the source of funds. Even UK and unbelievably Swiss banks do this and exchange information with other jurisdictions, particularly within the EU.
Customer: replied 2 years ago.

I'm not trying to avoid taxes I just need to know the simplest and most cost effective route to take, say for a gross income of GBP40,000?

Expert:  bigduckontax replied 2 years ago.

Put the business through an UK company would be my advice. Deduct expenses. Pay yourself and your wife and children even 4500 yuan each [GBP 460]. That is tax free in China. Their 20% rate is for the next 4500 yuan [1500 at 10%]. An income of 40K [just over 390K yuan] is well up into the Chinese 45% rate of tax.

Customer: replied 2 years ago.

My wife has a job to go to in China so I don't imagine she'll want tax free money from me. My kids are not yet teenagers, is it ok to pay them?

Should I do anything about my tax status with regards ***** ***** remain UK or change to China?

Expert:  bigduckontax replied 2 years ago.
Yes, providing they are paid under the lower income limit there is no requirement to report the payments monthly under the Real Time Information System monthly.You are clearly liable to CIIT. As far as the UK is concerned you and your wife should complete a form P85 and send it to HMRC. Fortunately there is no time limit for its submission, it is available on the web and can be filed on line. On receipt HMRC will class you as non resident.
Customer: replied 2 years ago.

Would I still be liable for VAT in the UK or does the P85 exempt me from all UK tax?

Expert:  bigduckontax replied 2 years ago.

No, the P85 is purely an Income and Capital Gains Tax document.

If the company you operate goes over the 82K VAT turnover limit in any one year then it will have to be registered and VAT will have to be accounted for on the UK based business in the normal manner..

Customer: replied 2 years ago.

So I would still be liable for UK VAT? Or some sort of Chinese sales tax?

What about company profits over and above expenses and the tax free salary allowance?

Expert:  bigduckontax replied 2 years ago.
Your company is UK based so you can forget about Chinese tax. Those profits would be taxed under the UK Corporation Tax regime at a rate of 20%.
Customer: replied 2 years ago.

OK, I think I'm getting the idea!

So to summarise, any profits on my Ltd Co would be liable to UK tax whilst personal and family drawings (salary, divs, etc) over the 4500 yuan allowance would be taxed in China.

Is that correct?

Also, going back to the mention of payments to children, would these need to be credited to each child's bank account, could it be paid into my own, or could I set up designated accounts for them that I had access to? If all paid to my account would they need to be seen as separate payments or would one combined payment be ok?

Expert:  bigduckontax replied 2 years ago.
Yes, you have the gist. It is always better for your children to have separate bank accounts then you cannot be accused of receiving the moneys yourself. My daughter, for example, had her first bank account when she was just a year old, but that was in Scotland where the law is different. It was a bare trust account until she reached the age of majority in Scotland which is, of course, 16. Not many people know that!
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Expert:  bigduckontax replied 2 years ago.
Thank you for your support.
Customer: replied 2 years ago.

.......and thank you for your advice.

Expert:  bigduckontax replied 2 years ago.
Delighted to have been of assistance.

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