The principal forms of doing business in the United Kingdom are as follows:
'Sole traders' are self-employed individuals who are carrying on a trade. Whether a person is trading in comparison to making investments is not set out in the legislation and is the subject of considerable case law in the United Kingdom. There are 'badges of trade' that provide guidance to determine whether they should be taxed as running a trading business or simply making investments. As noted in the section on income tax, a sole trader is charged to income tax on their chargeable trading income along with their other sources of income.
A partnership exists if more than one person is carrying on a business with a view to making a profit. There is, however, no statutory definition of a partnership, and HMRC will look at the substance of the arrangement rather than the legal form. For tax purposes, a general or limited partnership is transparent and not an entity that is separate and distinct from the partners (but see limited liability partnership below). A partnership’s taxable profits are computed and then allocated to the individual partners in accordance with the profit-sharing ratio.
When considering an individual's status as a partner in an overseas partnership, the UK authorities will not be bound by how the entity is classified in its country of origin. Case law has determined a number of matters that should be considered when establishing whether a non-UK entity should be taxed in the United Kingdom as if it were a company or a partnership (which means that a UK-resident partner of a foreign partnership could be treated as if they had an ownership interest in a corporate entity). HMRC also maintains a public list of non-UK entities and the decisions it has previously made regarding their classification. However, if the parties have flexibility regarding the constitution of such entities, then their classification may be viewed differently, either by HMRC or the courts. This area is complex; consequently, specialist advice should be sought.
There are a number of different types of partner. Common examples are (i) full partner: also referred to as an 'equity partner' where the individual shares fully in the profits and losses of the partnership and takes an active role in running the partnership; (ii) salaried partner: a person who is held out to be a partner but is actually on a fixed salary rather than having the advantage/risk of a share in all the profits and losses; (iii) sleeping partner: a partner who takes no active role in the partnership but shares in the profits/losses; (iv) limited liability partner: a type of partner introduced in 2000 with the introduction of a limited liability partnership (LLP), where the partnership itself is a separate legal entity and the partner's exposure to losses is limited.
A partner is generally treated as self-employed for UK tax purposes. However, in the case of UK LLP's, the business must apply a series of tests (at least once per year) to its partners to ensure that they are self-employed, rather than employed. In essence, this tests whether an individual has risk and can be rewarded from being a partner in a business.
A mixed member partnership is one that has individuals and companies as members. Anti-avoidance rules can, in certain circumstances, reallocate (for UK tax purposes) profits from a corporate partner to an individual where the individual could confer some benefit from the corporate partner's profit share. Similarly, these provisions can reallocate an individual's share of losses to a corporate partner.
A company is a separate legal entity from the people who control it or work for it. A business run by an individual or partners (above) can be incorporated into a company at any time, and a completely different tax regime will apply (see the Corporate tax summary for more information).
Treatment of trusts
Trusts under English law have evolved over several centuries. They can be divided into 'express' trusts, which are expressly created by deed or will, and 'implied' trusts, which are imposed by law or equity. Express trusts are used by individuals for a wide range of purposes, including the control of the use and destination of property, provision for those incapable of holding property for themselves, provision of benefits to employees, and charitable and educational trusts. The tax treatment of trusts has undergone significant changes, and there remain few tax reasons for transferring property into non-UK resident trusts for UK resident and domiciled individuals. Non-UK resident trusts are, however, frequently used by non-UK domiciled individuals. UK resident trusts continue to be used by UK domiciled/resident individuals as a means to provide for children/grandchildren whilst retaining an element of control over the assets.
UK legislation currently provides a favourable regime for non-UK domiciled individuals setting up non-UK trusts with their overseas assets in that tax is broadly only due when payments/benefits are received from the trust. Capital payments, including benefits from non-UK resident trusts, are broadly matched to trust income and gains if the beneficiary is UK resident. The rules in connection with non-UK domiciled individuals and trusts were changed from 6 April 2017. The rules are very complex and specialist advice should be sought in this area.
Trust register - 5th Anti-Money Laundering Directive (5MLD)
On 23 January 2020, the UK government launched a technical consultation and provided draft regulations in respect of the Trust Registration Service (TRS). The final regulations were laid in Parliament on 15 September 2020 and came into force on 6 October 2020. These regulations will implement the 5MLD and will amend the Money Laundering and Terrorist Financing (Information on the Payer) Regulations 2017. These regulations expand the previous rules introduced under 4MLD where there were requirements:
- for trustees to maintain accurate and up-to-date records, in writing, of all of the beneficial owners (and potential beneficial owners) of a trust, and
- for HMRC to maintain a register of beneficial owners (and potential beneficial owners) of taxable relevant trusts
The key changes proposed will widen the scope of the trusts required to register on the TRS and extend access to the information provided beyond law enforcement agencies.
Which trusts are to be included in the TRS?
The 5MLD removes the previous link between the TRS and taxation. It is proposed that all express trusts will be required to register under the TRS unless they are specifically defined as ‘out of scope’. In addition to UK resident trusts, HMRC envisages that any trust deemed to be administered in the United Kingdom will now be required to register. Their view is that a trust will be ‘deemed to be administered in the United Kingdom’ if:
- they have one UK trustee, or
- where a trust is not required to register in another EU member state and enters into a business relationship with an ‘obliged entity’ in the United Kingdom or acquires real estate in the United Kingdom.
There is a wide definition of ‘obliged entity’ for these purposes. It includes banks, accountants, and law firms.
What information is required?
The 5MLD provides a distinction between the information required for trusts with an obligation under 5MLD and ‘taxable trusts’ (which would have been required to register under 4MLD). All trustees required to register under the TRS must provide the following for the relevant trust:
- Its name.
- The date it was settled.
- Its tax residence.
- The place it is administered and a contact address.
- The value of assets at the time of registration.
Trustees required to register that are not ‘taxable trusts’ must provide the following information to HMRC in respect of individuals who are defined as ‘beneficial owners’. The definition of beneficial owner includes settlors, trustees, and beneficiaries in certain circumstances (i.e. the recipient of a distribution from a discretionary trust and, for an interest in possession trust, the income beneficiary):
- Their full name.
- Month and year of birth.
- Country of residence.
- Nature and extent of the individual’s beneficial interest (to include a note of whether the individual is a settlor, trustee, or beneficiary).
Taxable trusts will also be required to provide the following in respect of individual ‘beneficial owners’:
- Their full name.
- Date of birth.
- National insurance number or UTR, or, if the individual’s usual residential address is not in the United Kingdom, the individual’s passport number or identification card number.
- Nature of the individual’s relationship to the trust.
The registration requirements are as follows:
- Trusts in existence at 6 October 2020 must register by 1 September 2022.
- Trusts created after 6 October 2020 must register within 90 days or by 1 September 2022 (whichever is later).