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I believe that HMRC would accept this arrangement. Your scheme looks like it would work, but you would have to be EXTREMELY careful about maintaining it! You would be taxable in the UK if, for some reason, your IoM business were considered to have a permanent establishment in the UK. Simply having common ownership by a UK resident does not give you permanent establishment, but if the IoM's director ever undertook an activity, such as accepting an order, approving credit, or some other management-type decision from the UK rather than the IoM, then HMRC could determine that the IoM company does have a permanent establishment, subject it to tax, and your benefits are gone.
One thing to make sure of is the director's time spent on the IoM. Any year in which he spends more than 183 days on the Isle, he is considered an IoM resident. This might not be a problem. HOWEVER, if he spends individual days over many trips during the year, and those trips average 90 days or more each year, in the fourth year he is considered to be an IoM resident. IoM residents are subject to income tax.
As far as reporting it under the DOTAS rules, the DOTAS rules state that any scheme that will result in a tax benefit inuring to the company must be reported. HMRC says that a tax benefit includes the avoidance or reduction of a charge to tax, a relief from tax, repayment of tax and as mentioned the deferral of tax or the avoidance of an obligation to deduct tax.
In your case, you are paying lower taxes. This is a benefit. However, if you are a small or medium size company, and the scheme was developed in-house, it does not have to be reported. HMRC states " ‘in-house' schemes are only required to be disclosed when the tax advantage is intended to be obtained by a business that is not a small or medium enterprise."
To determine if you are a small or medium size company, you must meet certain headcount, turnover, and balance sheet ceilings. There is a good flowchart located at http://www.hmrc.gov.uk/aiu/dotas.pdf in Paragraph 4, on page 26, that you can use.
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Thank you for your reply Roger, that is very helpful indeed.I since read this part of the INTM, which may provide the best clue as to how HMRC would analyse the arrangement: http://www.hmrc.gov.uk/manuals/intmanual/intm120210.htm#IDASLRZFRegarding the personal residency rules in IoM, that's an excellent point to bear in mind. It seems that if the 90 day average threshold were to be exceeded, the director may in fact become liable to income tax from the beginning of the FIRST year! Although the days of arrival/departure aren't counted for this purpose (see http://www.gov.im/media/97083/pn14407taxresidenceintheisl.pdf). I'm assuming, however, that days of departure/arrival are insignificant to HMRC when deciding the location where central management and control of a company is exercised.It seems this scheme would be better suited to a business model involving intellectual property, whereby Company B takes up more of holding company role as the licensor of the IP, e.g. the director is a book author who transfers ownership rights to Company B. After an initial visit to IoM, perhaps the director's visits would only be required to make future visits in order to execute instruction's for the holding company's bank account (I suppose this could be done from yet another jurisdiction, unless doing so risked qualifying as a tax resident there). If the structure was changed slightly, such that the above example would involve Company A selling the books themselves before sending royalties to Company B for every copy sold, might that give rise to the "arm's length" principle and a limit on the amount of profit that could be transferred?Finally, regarding the DOTAS rules, I am particularly interested in whether or not the PROMOTER of the scheme would be best advised to disclose. Seeing as from a consequential tax residency standpoint, the scheme does not differ from advising the client to simply move to IoM and employ staff to oversee the day-to-day management of Company A back in the UK. Hardly avoidance, rather relocation, no?
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