Companies are subject to corporation tax on their total taxable profits (including capital gains). The rates of corporation tax are set annually for the tax year commencing on 1 April. The corporation tax rate for the year commencing 1 April 2017 is 19%.
From 1 April 2020, the corporation tax rate will fall to 17%.
Corporation tax is payable once a year, nine months after the end of the accounting period, unless the company is ‘large’ (i.e. one whose annual profits exceed £1.5million). A large company must pay corporation tax in quarterly instalments commencing 6 months and 14 days into the company’s accounting year. From 1 April 2017, very large companies
(i.e. those with taxable profits exceeding
£20million) are required to make quarterly instalments commencing 2 months and 14 days into the company’s accounting year.
UK and foreign dividends received by UK companies are generally exempt from UK tax, though the specific exemption criteria should be reviewed in each individual case.
Dividends paid by a UK company are not subject to any withholding tax.
The profits of a UK branch of an overseas company are liable to tax at the same rates of corporation tax as a domestic company. The UK does not impose withholding tax on profits transferred by a UK branch to its head office.
A UK company with overseas branches is generally liable to UK corporation tax on the profits of those overseas branches (with a credit given for some or all of any foreign taxes paid on those profits). However, a UK company can elect to exempt its foreign branches from UK tax. Once made, the election is permanent and will apply to all of the company’s overseas branches.
A company’s trading losses can be used in the following ways:
There are anti-avoidance provisions in place that restrict the ability to carry forward losses in certain circumstances, normally associated with a change in ownership of the company coupled with a change in the nature or conduct of the trading activity.
New loss relief laws delayed by the 2017 snap election detailed that only 50% of profits in excess of £5 million would be capable of offset in an accounting period by brought forward losses, although there would be a relaxation that carried forward losses can be offset against all profits. It is expected that the these proposals will be implemented at a later date.
Profits and losses arising in the same period can generally be offset between UK companies that are 75% members of the same worldwide group. In limited circumstances, losses of an EU group member may be offset against a UK group company’s profits. Intra-group transfers of assets between UK group companies are normally tax-neutral. Group companies can generally elect to account for VAT as if they were a single entity.
A company which is resident outside of the UK but in which a UK company has a 40% or more shareholding is potentially a CFC. A CFC charge arises if the CFC has chargeable profits and no exemptions apply. The exemptions include CFC’s with low profits or low profit margins, those which are resident in a territory on the “good list” and those where the local tax could be 75% or more of the corresponding UK tax on these profits. The rules are generally targeted at the artificial diversion of profits from the UK in cases where the CFC has little or no underlying commercial substance.
When a company first comes within the scope of UK corporation tax it is required to notify HMRC in writing within three months of the start of its accounting period. Penalties apply for non-compliance.
Thin capitalisation is dealt with as part of the UK’s transfer pricing regime. This can apply to limit the tax deduction for interest where the rate of interest, the amount borrowed, or the terms on which it was borrowed, were significantly different to what might be expected at arm’s-length.
In addition, UK members of large groups may be subject to a ‘worldwide debt cap’ test, whose purpose is to limit the tax deduction for interest and other finance costs of UK companies in large groups to the external interest and other finance expenses of the group as a whole. The worldwide debt cap only applies to groups that have 250 employees or more and either; an annual turnover exceeding €50million, or a balance sheet asset total exceeding €43m.
Further legislation delayed by the snap election but expected to be implemented in the future includes the limitation of the interest expenses that can be offset against profits of UK companies/ groups to 30% of a group’s earnings, with a de minimise group threshold of £2 million net UK interest expense, while repealing the “worldwide debt cap” rules
The UK imposes an arm’s-length pricing standard for transactions between companies and related parties. A company is required to self-assess any transfer pricing adjustment as part of its general corporation tax self-assessment process. Penalties may apply for failure to maintain adequate records to justify arm’s length prices. In matters of transfer pricing the UK generally follows the OECD’s transfer pricing guidelines.
The rules apply to both transactions where the related parties are both in the UK, and where one of the related parties is located overseas. Thin capitalisation issues are dealt with under the transfer pricing code.
Small and medium sized enterprises are normally exempt from the UK transfer pricing regime, unless the other party to the transaction is located in, broadly, a tax haven.
Individuals are assessed to income tax based upon their income within the tax year (which runs from 6 April to 5 April). The rates of income tax for the tax year beginning 6 April 2017 are as follows:
|Taxable Income||Rate of Income Tax|
|£0 – £5,000||20%||0%*||0%|
|£5,001 – £33,500||20%||20%||7.5%|
|£33,501 – £150,000||40%||40%||32.5%|
* The 0% rate is not available if taxable non-savings income exceeds £5,000. In addition, there is a personal savings allowance of £1,000 for basic rate (20%) taxpayers. For higher rate (40%) payers, the allowance is reduced to £500.
Individuals who are UK resident are entitled to an annual personal tax-free allowance, which is deductible from total income. The standard personal allowance for the tax year 2017/18 is £11,500. Individuals who are not UK resident but are resident elsewhere in the EEA are also entitled to a UK personal allowance, as are certain residents and nationals of territories with which the UK has a double tax treaty with the appropriate provisions.
An individual’s liability to income tax is based on their tax residence and domicile. For employees and the self-employed
(including members of a partnership),
the place where work is carried out can also be relevant. A statutory test applies for determining the residence status of individuals, which replaced the previous mixture of case law and HMRC practice.
Personal tax is self-assessed by reference to the tax year ending on 5 April and individuals are obliged to submit an annual tax return to HMRC. The 5 April date originates from the switch by the UK from the Julian to the Gregorian calendar in 1752.
In general, an individual who is UK resident for tax purposes is liable to UK income tax on their worldwide income from all sources. This is subject to the provisions of any applicable double tax treaty.
Individuals who are UK resident but not UK domiciled benefit from a different treatment. ‘Domicile’ is an English law concept and, broadly speaking, an individual has his domicile in the country that is his ‘real’ or permanent home which, if he has left it, he intends to return to. An individual who is UK resident but not UK domiciled can make a claim to be liable to UK tax on his non-UK income and gains only when they are remitted to (received in) the UK. This principle is commonly referred to as the ‘remittance basis’.
Non-UK domiciled individuals who are long-term UK residents must pay an annual charge if they wish to continue to have the benefit of the remittance basis. The annual charge for a non-UK domiciled individual who has been resident in the UK for at least seven of the previous nine tax years is £30,000; where the individual has been resident in the UK for at least 12 of the previous 14 tax years the annual charge is £60,000. It is not mandatory for an individual to pay this annual charge, but if they choose not to they will be liable to UK tax on their worldwide income and capital gains in the same way as a UK resident and domiciled individual. Once an individual has been resident in the UK for more than 15 out of the last 20 years, he will no longer be entitled to the remittance basis. Non-UK domiciled individuals who are or intend to become resident in the UK are strongly advised to take advice; whilst the remittance basis rules can be complex, there are often significant tax planning opportunities.
Partnerships are normally treated as transparent for UK tax purposes. While a partnership tax return is required to be filed with HMRC, Partners who are individuals report their share of the partnership’s profits or capital gains on their personal income tax return.
CGT is payable on capital gains made on the disposal of chargeable assets. A disposal takes place whenever the ownership of an asset changes and includes a part-disposal. Gains and losses are computed by comparing the disposal proceeds with the cost of the asset plus any qualifying expenditure incurred on enhancing the asset. Where the parties are connected, market value is substituted for any actual consideration paid.
Capital losses can generally only be set off against capital gains.
UK resident individuals are taxed on capital gains in excess of their CGT annual exempt amount (£11,300 for 2017/18) at either 10% or 20% depending on the total taxable income and gains of the individual during the tax year in which the disposal arose. Gains on the disposal of residential properties are however subject to rates of 18% or 28%.
The ‘remittance basis’ (see Personal Income Tax section) also applies to capital gains; non-UK capital gains are only liable to UK tax if they are remitted to the UK, but long-term UK residents may be charged to receive these benefits.
Certain disposals by individuals of businesses, business assets or shares in a trading company may qualify for a CGT rate of 10% under the entrepreneurs’ relief provisions, provided certain conditions are met.
Capital gains made by UK companies are taxed at normal corporation tax rates. For companies only, the amount of gain is reduced by ‘indexation allowance’, which is aimed at eliminating the element of the gain attributable to the effect of inflation on the value of the asset.
Disposals by a UK company of shareholdings of 10% or more in trading companies may qualify for exemption from tax under the Substantial Shareholding Exemption provided certain conditions are met.
The general rule is that non-UK residents are not liable to CGT on gains made on UK assets. However, for disposals of UK residential property made by non-resident persons (including companies), a nonresident capital gains charge (NRCGT) may be due. Non-resident individuals are subject to NRCGT at either 18% or 28%. Non-resident companies are subject to tax at 20%. This NRCGT charge only applies to gains arising since 5 April 2015 i.e. the property will be rebased to its 5 April 2015 market value.
In addition, capital gains made by “nonnatural persons” (broadly, companies) on disposals of high value residential property in the UK (valued at £500,000 or more) will be liable to CGT at a rate of 28%. Certain exemptions and reliefs may apply and where a property is subject to both a NRCGT and a “non-natural persons”, the latter takes priority. This charge only applies to the part of the gain accruing after April 2013.
CGT can also arise on gains made by a non-resident person carrying on a trade in the UK through a branch or agency, on the disposal of UK assets used in the trade. Similar provisions apply for a non-resident company carrying on a trade in the UK through a permanent establishment although the tax due would be corporate tax.
Stamp Duty of 0.5% of the consideration is payable by the purchaser on the transfer or sale of shares or marketable securities in UK companies.
Stamp Duty is not chargeable on transactions for shares quoted on certain growth markets such as the London Stock Exchange’s Alternative Investment market
SDLT is payable by the purchaser on transactions in land and buildings situated in England, Wales or Northern Ireland. A separate regime, Land and Buildings
Transaction Tax, applies to those in Scotland. The rates of SDLT from April 2017 are:
|Residential property*||Non-residential property|
|£0 – 125,000||0%||£0 – 150,000||0%|
|£125,001 – £250,0010||2%||£150,001 – £250,000||2%|
|£250,001 – £925,000||5%||Over £250,000||5%|
|£925,000 – £1,500,000||10%|
Where a purchaser of residential property already owns another residential property, there will be an additional 3% SDLT due (in addition to the rates shown above).
Also, a 15% SDLT rate applies to the total purchase consideration where a “nonnatural” person e.g. a company, acquires residential property for consideration of more than £500,000. Reliefs are available however where, for example, the company acquiring the property is a property developer.
An annual tax is payable by non-natural persons (broadly, companies) owning residential property in the UK valued at £500,000 or more. The amount payable depends on the value of the property, but ranges from £3,500 to £220,350. Certain exemptions and reliefs may apply.
VAT is levied at every stage of the sale and purchase of goods and services within the UK and the EU. All businesses with an annual turnover in excess of £85,000 (as from 1 April 2017) must register for VAT. Broadly, a VAT registered business charges VAT on goods and services supplied to customers and can reclaim VAT charged on goods and services supplied to it.
The standard rate of VAT is 20%. Some supplies of goods or services are exempt from VAT and others may be subject to a zero or reduced rate of VAT.
VAT registered businesses must account for VAT by completing and submitting a quarterly VAT return form. The return is used to calculate the difference between VAT chargeable on supplies made by the business and VAT on supplies made to it. The difference results either in a refund or a payment to be made.
The UK does not generally impose taxes on sales (other than VAT).
There are no local taxes on income, capital gains or wealth.
However, local taxes are levied on the occupiers of property. Business rates are calculated by reference to a deemed annual rental value of the property and are deductible from the business’s taxable income. The local tax on residential dwellings (Council Tax) is based on the ‘capital value’ of the relevant building as at 1 April 1991 and is payable by the occupier of the property.
The UK has entered into Double Tax
Agreements with around 140 countries.
A list is provided as an Appendix.