Is this illegal? - New business.
Discussion
Hi guys,
Ill keep it brief. A very old/good friend of mine has been running an electronics business for some time now through eBay. It has been marginally successful and he would like to now expand.
He contacted me yesterday suggesting we pair up as business partners (we have done in past and it has worked well). His idea involves buying direct from Chinese suppliers/manufacturers and exporting it out from China directly as it is substantially cheaper and he has the capital to invest into the company.
However, he will also have a store or two here in the UK and he will be living in the UK not China. He has employees here in the UK too but the factories/suppliers are in China. The Import/Export company will be registered in my name, so I am cautious
Everything seemed good to me - But then he mentioned "This way we will save on Tax too" and my mind got thinking with alarm bells.
Is this illegal? Or is this common practice? I have read things about Tax Evasion and Tax Avoidance, and Tax Avoidance seems legal given you follow the rules.
P.S - I don't have any more details as to how the business will be run, costs etc. So I am just looking for some insight into whether or not I should back away from this, or if I can proceed with peace of mind.
Thank you
Ill keep it brief. A very old/good friend of mine has been running an electronics business for some time now through eBay. It has been marginally successful and he would like to now expand.
He contacted me yesterday suggesting we pair up as business partners (we have done in past and it has worked well). His idea involves buying direct from Chinese suppliers/manufacturers and exporting it out from China directly as it is substantially cheaper and he has the capital to invest into the company.
However, he will also have a store or two here in the UK and he will be living in the UK not China. He has employees here in the UK too but the factories/suppliers are in China. The Import/Export company will be registered in my name, so I am cautious
Everything seemed good to me - But then he mentioned "This way we will save on Tax too" and my mind got thinking with alarm bells.
Is this illegal? Or is this common practice? I have read things about Tax Evasion and Tax Avoidance, and Tax Avoidance seems legal given you follow the rules.
P.S - I don't have any more details as to how the business will be run, costs etc. So I am just looking for some insight into whether or not I should back away from this, or if I can proceed with peace of mind.
Thank you
Fundamentally, the business he proposes would be "legal" although you would want to ensure that the items he is "importing" and "exporting" are not restricted in any way. There are certain classes of goods which you need licences and clearances for. One UK businessman received a US jail sentence for exporting batteries to Iran which could have been had military applications.
As for the tax aspect, as has been said, you would need to have a crystal clear explanation from this individual as to how he intends to make these tax savings i.e. whether he is making use of actual tax regulations (avoidance = legal) or simply not declaring the trading activity (evasion = illegal).
As for the tax aspect, as has been said, you would need to have a crystal clear explanation from this individual as to how he intends to make these tax savings i.e. whether he is making use of actual tax regulations (avoidance = legal) or simply not declaring the trading activity (evasion = illegal).
I'm curious why the business would be 'registered' in your name only. If it means you would be the only director, you will have quite a few responsibilities which you should understand fully before agreeing.
If you are both 'equals' - and presumably 50/50 shareholding - why aren't both of you directors?
Nothing seems illegal from what you have described, presumably all taxes and import duties will be paid as necessary.. but look after yourself..
If you are both 'equals' - and presumably 50/50 shareholding - why aren't both of you directors?
Nothing seems illegal from what you have described, presumably all taxes and import duties will be paid as necessary.. but look after yourself..
Hi all,
Thank you for your replies.
I have spoken to him about it and he has explained, that because he will have a greater % of employees based in the China location, it makes better sense to pay the wages to the staff via the Chinese registered business. Or so he says..and apparently something to do with lower corporation tax.
As for the products, they will be items which are all regulated and checked thoroughly before selling. He has been using a same set of suppliers for years now and they have always come through with all requests.
The reason I am asking PH is, while he is a close friend of mine, sometimes when people want something they can skew the truth slightly, in order to help push you to agree with them. I don't see that as negative, I just see it as a sales tactic. He is trying to sell the idea for me, so I wanted an unbiased opinion from PH.
Thanks
Thank you for your replies.
I have spoken to him about it and he has explained, that because he will have a greater % of employees based in the China location, it makes better sense to pay the wages to the staff via the Chinese registered business. Or so he says..and apparently something to do with lower corporation tax.
As for the products, they will be items which are all regulated and checked thoroughly before selling. He has been using a same set of suppliers for years now and they have always come through with all requests.
The reason I am asking PH is, while he is a close friend of mine, sometimes when people want something they can skew the truth slightly, in order to help push you to agree with them. I don't see that as negative, I just see it as a sales tactic. He is trying to sell the idea for me, so I wanted an unbiased opinion from PH.
Thanks
Firstly, you need to sit down with your business partner and an accountant with experience in such matter to discuss how such a vehicle would work, and the tax implications. Why would the business be in your name, and not joint? That would ring alarm bells for me.
If the factories/suppliers you would be buying from already exist, why would you want to employ any staff in China? That just opens up a whole new can of worms. I used to import stuff from China, but we used a local agent to manage the process for us. They take a cut, of course, but save you a lot of hassle and the need to fly out there too regularly.
There is, i'm sure, money to be made, but such schemes to come with huge risks, health and safety, quality, currency fluctuations. I wouldn't get involved with such a thing without somebody involved who has genuine experience of doing this sort of thing before. Also, China is no longer the low cost manufacturing panacea that it was 15 years ago, and doing business in China particularly comes with it's own issues.
Edited to add, if you have doubts about his trustworthiness now, then I think he's the wrong person to go into business with.
If the factories/suppliers you would be buying from already exist, why would you want to employ any staff in China? That just opens up a whole new can of worms. I used to import stuff from China, but we used a local agent to manage the process for us. They take a cut, of course, but save you a lot of hassle and the need to fly out there too regularly.
There is, i'm sure, money to be made, but such schemes to come with huge risks, health and safety, quality, currency fluctuations. I wouldn't get involved with such a thing without somebody involved who has genuine experience of doing this sort of thing before. Also, China is no longer the low cost manufacturing panacea that it was 15 years ago, and doing business in China particularly comes with it's own issues.
Edited to add, if you have doubts about his trustworthiness now, then I think he's the wrong person to go into business with.
Edited by anonymous-user on Thursday 19th November 11:06
The Moose said:
Surely what he's proposing is that by you owning company A and him owning company B, by setting the price that stock is bought/sold between the two businesses you can control which company makes how much profit. That way you can use both your corporation tax allowances.
If that's the case then there is a possibility of tax "naughtiness" here surrounding customs valuations and import duty. Here's how you could work it:Company A has a factory in China and a shop in the UK. Company B just has an office in the UK. Company A manufactures widgets at a cost of 50p per widget.
Company A's factory sells the widgets to company B for 10p. Company B exports the widgets to the UK, where it sells them to company A's shop for 20p. Company A then sells them for £1.20. Company A makes a profit, company B probably breaks even, but since company A and company B are owned by the same people, the only person who is losing out is HMRC.
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