A background to UK business taxes
The UK corporation tax regime is intended to be attractive to investors. The UK has also implemented various international initiatives to reduce tax avoidance. The key characteristics of UK business taxes are summarised below:
- There is a relatively low rate of corporation tax – 19 per cent falling to 17 per cent from 1 April 2020.
- The UK is attractive for holding companies. The participation exemption from chargeable gains ('substantial shareholding exemption') can apply where a shareholder holds at least a 10 per cent interest in a trading company or group for 12 months. Dividends received by a UK holding company from other UK or overseas companies will often be able to benefit from exemption.
- Company dividends are not subject to withholding tax.
- The UK patent box regime provides a 10 per cent corporation tax rate on profits attributable to qualifying patents.
- There are R&D tax reliefs (including deductions or tax credits for certain SMEs, or an 'above the line' credit for other companies).
- Interest and royalty payments may be subject to withholding tax (at 20 per cent) unless relevant exemptions, or reliefs under a double tax treaty, apply.
- There are various restrictions on the availability of tax deductions for interest and other expenses (e.g. under transfer pricing, distribution, corporate interest restriction and anti-hybrid rules).
- Gains arising on disposals of UK land will generally be taxable.
- Stamp taxes apply to transfers of shares and other securities (usually at 0.5 per cent) and to transfers of land (rates vary according to property type and location in the UK).
- Businesses in the UK may need to account for payroll taxes (including social security contributions) and VAT on relevant supplies. The standard rate of VAT is 20 per cent.
- There are various anti-avoidance and anti-abuse rules to consider.
When is a company subject to UK tax?
A UK tax-resident company is generally subject to corporation tax on its worldwide profits.
A company will generally be UK tax-resident if it is incorporated in the UK or, in the case of a non-UK incorporated company, if the central management and control of its business is in the UK.
Non-UK tax-resident companies are liable to corporation tax if they trade in the UK through a 'permanent establishment'. This includes a fixed place of business for trading operations and may include some agents in the UK.
Other rules can affect when a company is or is not subject to tax in the UK. For example:
- The terms of any applicable double tax treaty may be relevant
- A 'foreign branch exemption' election may allow a UK resident company to exclude profits and losses attributable to non-UK permanent establishments
- Diverted profits tax can apply where a non-UK company avoids a UK taxable presence or is involved in transactions lacking economic substance
- Non-residents may be taxed on gains made from direct or indirect disposals of UK land or on the profits of certain other transactions involving UK land
- A non-UK company may need to register for VAT in certain cases
- Stamp taxes can apply on acquisitions of certain assets e.g. shares and land.
Branch or Subsidiary
Non-UK companies often carry out business in the UK through a subsidiary or a branch. The key tax characteristics of both options are outlined below:
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Branch
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Subsidiary
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No ring fencing of liabilities.
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Potential ring fencing of liabilities (subject to secondary tax liabilities in certain cases).
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Start-up losses may (possibly) be available to set against home profits.
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Start-up losses carried forward to set against future profits in the UK.
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No VAT on supplies to/from head office under UK approach.
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VAT on supplies to/from head office.
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Transfer pricing may need to be considered.
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Transfer pricing may need to be considered.
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UK corporation tax on income, profits or gains attributable to that branch.
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UK corporation tax on worldwide income, profits and gains.
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Ultimately, the choice between a branch or subsidiary will depend on the company’s particular circumstances as well as on non-tax factors.
Non-UK businesses with UK activities will need to consider carefully whether they have created a UK taxable presence and potential employment tax liabilities for employees/directors who have duties in the UK, even if they are not UK tax resident.
Compliance
There are a number of continuing compliance obligations to consider when starting a business in the UK. For example:
- Notifying HMRC when the company falls within the charge to UK corporation tax and submitting annual tax returns
- Registering and accounting for VAT on the supplies of goods/services in the UK
- Informing HMRC when the company employs individuals and establishes a payroll system.
How can Burges Salmon help?
Our corporate tax team provide tax advice to companies and their shareholders, ensuring our clients make tax-efficient and yet commercially beneficial decisions for their business. We offer a range of advice including tax-planning for shareholders and their companies, tax efficient group structuring and restructuring and tax-efficient disposals. Our team would be happy to assist you further. Tax rules are subject to change, and the treatment may depend on your particular circumstances (and non-UK tax considerations may also be relevant). Professional advice should be sought as appropriate.
For further information or if you have any questions, please contact our corporate tax team.