Taxation in the United Kingdom
Difference between resident company and foreign company
A company is considered a taxpayer if it is incorporated in the UK or if its head office for administration and management is in the UK.
A foreign company is considered to have a permanent establishment in the UK if:
has a fixed place of business in the UK where the business of the company is wholly or partly carried on; either.
An agent acting on behalf of the company and who ordinarily exercises authority to do business on behalf of the company in the UK.
Taxation in the United Kingdom
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Main corporate tax rate, not applicable to profits from oil exploitation 19%
(a reduced rate of 10% applies when attributable profits can be attributed to the exploitation of patents)
Tax on diverted profits 25%, applies if multinational companies use artificial arrangements to divert profits abroad to avoid UK tax
Tax rate for foreign companies:
Resident companies are taxed on their income in the UK and worldwide.
A non-resident company is subject to UK corporate tax only on business profits from a permanent establishment in the UK;
or on business profits attributable to a trade in the sale or development of British land (even if there is no permanent establishment in the United Kingdom).
From 6 April 2019, non-UK resident companies, including those that invest in UK property through collective investment schemes, will be required to pay corporate tax instead of income tax on profits.
Properties in the UK. Any other UK-sourced income received by a non-resident company is subject to UK income tax at a base rate of 20%, without subsidies.
Capital gains taxCapital gains form part of a company’s taxable income, but are exempt if they come from the sale of a substantial interest in both UK and foreign companies.
Substantial ownership is typically a determined interest in a minimum of 10% of an investee company for a period of 12 months in the 6 years preceding the purchase.
Non-resident companies are generally not subject to capital gains tax, unless the gains were made by a permanent establishment in the UK.
From April 2019, gains from the sale of UK property, and certain property-related investment securities, by non-residents are subject to UK tax.
For sales prior to April 2019, the scope of the charge is restricted to UK residential property sales only, and more restricted categories of non-residents.
Capital losses are allowed only as compensation for capital gains.
Earnings from certain types of assets—such as land and buildings used for a business—may be deferred when all or most of the earnings are reinvested in other assets of that type within a certain period
(usually three years—called “rolled-ver”, “rolled over”).
Tax deductions and creditsFor business tax purposes, total profits are the total of:
(i) the business’s net income from each source (trade, property deal, interest, dividends, etc.) and
(ii) net attributable profits from the company emanating from capital goods. The rules that govern the deduction of expenses vary according to the type of income to which the expenses are related.
In general, all expenses that are not capital in nature and are used for business purposes are deductible. Local municipal taxes are generally deductible.
Interest is deductible within the debt limit rules that apply to companies that are members of large groups. Most business donations to charity are also deductible.
There is a 13% R&D tax credit for R&D spending for large companies, while SMEs can claim a 230% deduction on their R&D spending.
A “Patent Box” regime has been gradually introduced for 5 years, to allow companies to apply an effective rate of 10% on all profits derived from qualifying patents.
There are special tax reliefs for expenses in the production of films, animation, video games, high-end television programs and orchestral concerts.
Operating losses can be offset against profits from the current fiscal year, while excess losses can be carried forward to the previous year.
Operating losses generated before April 1, 2017 can be postponed indefinitely, and offset with operating profits from subsequent fiscal years.
Operating losses generated after April 1, 2017 can be offset with any type of profit. In both cases, the deferral is limited to 50% of benefits above a group limit of GBP 5 million per year.
Capital losses can only be offset by capital gains, and carry forward is prohibited.
For accounting periods ending on or after April 1, 2020, the use of deferred capital losses is limited to 50% of GBP 5 million pooled allowance gains (split between capital and non-capital looses capital).
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Other corporate taxesA general anti-abuse rule (GAAR) applies to a number of taxes on transactions made on or after July 17, 2013.
Profits from the extraction of gas or from oil or gas rights in the UK and on the UK continental shelf (“decoupled profits”) are subject to UK tax;
(at the full rate of 30% of benefits over GBP 300,000 and a reduced rate of 19% for benefits under GBP 300,000). Such activities also capture 100% of the rebates on most capital expenditures.
In addition to corporate tax, a 10% surcharge is applied to “adjusted” dissociated benefits.
An Annual Tax on Enveloped Dwellings (ATED) is levied on the purchase and possession of high-value residential properties (over £500,000) through a company or other legal entity.
The minimum amount is GBP 3,700 for a property valued at GBP 500,000 (minimum value for 2020/2021).
A bank rate of 0.1% is applied to short-term liabilities and 0.05% to shares and long-term liabilities. The first GBP 20 million of attributable liabilities are exempt.
Bank profits are also subject to a supplemental 8% corporate tax surcharge on profits in excess of GBP 25 million.
Most insurance premiums are taxed at 12% (life insurance and other long-term insurance are exempt).
There are several environmental taxes, including a tax on waste, a tax on climate change and a tax on aggregates.
Social security contributions made by the employer represent 13.8% on all earnings above GBP 169 per week (first GBP 3,000 are exempt).
Employers must pay 0.5% of their total payroll above GBP 3 million to create a training aid fund (with an annual subsidy of GBP 15,000 to offset tax payments).
Real Estate Stamp Duty (SDLT) is levied in England and Northern Ireland on transfers of real estate;
with rates varying between 0% and 12% for residential properties (15% if the property is assessed at more than GBP 500,000 ) and 0% to 5% for non-residential properties.
Similar taxes – the Land and Buildings Transaction Tax (LBTT) and the Land Transaction Tax (LTT) – are levied on property in Scotland and Wales, respectively.
As a temporary measure in the face of the COVID-19 pandemic, the zero-rate brackets for SDLT, LBTT and LTT for residential property purchases are temporarily increased until March 31, 2021;
and an additional 2% surcharge is applied in addition for the acquisition of residential property by non-resident buyers from April 1, 2021.
The assignee pays a stamp duty, taxed at 0.5% on instruments for the sale of shares.
A Digital Services Tax (DST) is levied at a rate of 2% on the income of large companies that provide a social media platform, online search engine or online sales site to UK users.
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The tax applies to companies with sales of over GBP 500,000, of which over GBP 25 million related to UK user participation.
An embezzled profits tax, at a rate of 25%, applies when multinational companies use artificial arrangements to embezzle profits abroad to avoid taxation in the UK.
Transport companies may choose to pay a tonnage tax instead of the normal corporate tax.
International comparison of corporate taxation
United Kingdom OECD USA Germany
Number of tax payments per year 9.0 10.1 10.6 9.0
Time required for administrative formalities in hours 114.0 163.6 175.0 218.0
Total amount of taxes in % of earnings 30.6 41.6 36.6 48.8
Source: Doing Business