UK: UK Tax Environment: An Overview

Last Updated: 21 May 2018
Article by Sue Lawrence

The UK is still an attractive destination for foreign investment, despite the uncertainty brought about by its negotiations to leave the European Union. But doing business in the UK can be tricky if you're not familiar with local regulation.

A recent study by LexisNexis found the UK tax code has more than doubled in size since 1997, reaching more than 11,000 pages. Tax rates are controlled by the Finance Act, which leaves provision to update rates and duties every year - though that doesn't always happen.

The complexity doesn't end there. Certain taxes have been devolved from Westminster, the seat of power, to Scotland, Wales and Northern Ireland. This means the regions have the power to set and administer some taxes, and so where you base your business can affect your tax burden. To date these devolved taxes are fairly minimal - usually around stamp duty - although Scotland can set some personal income tax rates and bands, and Northern Ireland can set corporate tax for certain activities to remain competitive with its neighbour, The Republic of Ireland's, much lower corporate tax rate.

So, what are the main taxes a business operating in the UK should be aware of? While we cannot provide an exhaustive list, nor an in-depth description of how they may affect your business, what follows is a starting point to understanding your tax obligations in the UK.

Corporation tax

The corporation tax rate for company profits is currently 19%, though the rate that applies to you could depend on your company's accounting period, or the period covered by your company tax return. This period can't be longer than 12 months and is normally the same as the financial year covered by your company or association's annual accounts. Note your accounting period and financial year could be different.

UK corporation tax is a self-assessment regime, meaning the taxpayer is responsible for calculating its taxable profits including whether any reliefs apply, tax adjustments are required or whether any anti-avoidance rules apply. Although there are some tax benefits and specific rules for group companies, each separate entity is required to prepare a tax return and calculate its tax liability. It is not possible to submit group tax returns.

A company must register for corporation tax within three months of starting to trade - the trigger point includes buying, selling, advertising, renting a property or employing someone. You must register with Her Majesty's Revenue and Customs (HMRC), which can be done online. Penalties may arise for registering late. You must also file your returns and pay your tax liabilities online, via the HMRC portal.

Your corporation tax filing deadline could differ from other taxes. You need to pay corporation tax before you file your company tax return, and the date you need to pay it depends on your accounting period; the deadline is nine months and one day after the end of your accounting period for the previous financial year. However, you need to prepare your company tax return to work out how much corporate tax is owing, and the deadline to file your return is 12 months after the end of the accounting period it covers.

Deductions, reliefs and tax credits

You may be able to get deductions or claim tax credits, known as reliefs, on your corporation tax. You can deduct the costs of running your business from your profits before tax when you prepare your company's accounts, but anything you or your employees get personal use from must be treated as a benefit.

You can also claim for capital allowances if you buy assets that you keep to use in your business, such as equipment, machinery, business vehicles.

Other reliefs include:

  • Research & development relief, which can be claimed by a range of companies that seek to research or develop an advance in their field, even for unsuccessful projects. To qualify, you must meet the government definition of R&D, and you must be part of a specific project to make an advance in science or technology, not in social science or a theoretical field.
  • The Patent Box, which enables companies to apply a lower rate of 10% corporate tax to profits earned after 1 April 2013 from patented inventions developed and licensed in the UK. The company must own or exclusively license the patents, and must have undertaken qualifying development on them.
  • Reliefs for creative industries (CITR) are available if your company makes a profit from theatre, film, television, animation or video games. The relief works by increasing the amount of allowable expenditure. To qualify for CITR, you must pass a cultural test or qualify through an internationally agreed co-production treaty.
  • Disincorporation relief is available if you're closing your company and becoming a sole trader, ordinary business partnership or limited partnership. It allows a company to transfer certain types of assets to its shareholders, who continue to operate the business in an unincorporated form, without the company incurring a corporate tax charge on the disposal of the assets.
  • Terminal, capital and property income losses are available as relief by offsetting the loss against your other gains or profits in the same accounting period.
  • Trading losses can be the basis of a relief claim if your company or organisation is liable for corporation tax and makes a loss from trading, the sale or disposal of a capital asset, or on property income. You get tax relief by offsetting the loss against your other gains or profits of your business in the same accounting period.
  • Marginal relief is only available if your company had taxable profits between £300,000 and £1.5m that were either from before 1 April 2015, or from oil rights or extraction in the UK or UK continental shelf.

Note that if your accounting period is shorter than 12 months, any thresholds will reduce in line; for example, if your accounting period is 6 months, the £300,000 small profits threshold is halved to £150,000. However, any rates applied are for the whole year.

VAT

The UK has a value added tax (VAT) on the final consumption of certain goods and services in the home market, which is collected at every stage of production and distribution. Most business-related goods and services will be subject to VAT. There are several rates, but the standard is 20%.

Businesses should register for VAT with HM Revenue and Customs (HMRC) if the value of their taxable turnover in a 12-month period is greater than the current VAT registration annual threshold of £85,000. You can register voluntarily if the business turnover is less than the threshold, unless all sales are exempt. VAT returns must be submitted online on a quarterly basis, and outstanding tax liabilities settled electronically.

If you're a VAT-registered business in the UK supplying goods and services to VAT-registered customers in another EU country, you must also tell HMRC about those supplies through submission of an EC Sales List (ESL). It should be noted, that reporting is also required for inter-company movement of a company's own goods to another EU country.

Cost of Labour

UK employers must calculate and deduct several types of tax from salaries at the point of payment. The major ones are national insurance (NI), set up to fund the NHS and welfare system, and payroll taxes. These are deducted via a system called PAYE, or pay as you earn.

Employers are legally responsible for completing all PAYE tasks even if an agent is getting paid to do them. A non-resident company can't set up a standard payroll scheme until it has business premises in the UK. Businesses must pay the PAYE to HMRC by the 22nd of the month for all salaries paid for the previous month.

Class 1 NI includes primary contributions (the employee's national insurance) deducted from employee's pay, and secondary contributions (the employer's NI) which are paid by the employer. Both depend on the employee's earnings and the NI category letter. NI contributions are normally 12% of net salary, and employer's NI usually 13.8% of net salary. All payroll data must now be submitted to HMRC in real time, rather than at the end of each tax year.

Other taxes to be aware of

  • Stamp duty: Businesses may have to pay stamp duty for transactions on the transfer of land or interests in land; grants or assignments of leases; and transfers of chargeable securities such as shares in companies. Stamp duty land tax is applicable if you rent or buy premises; stamp duty reserve tax may apply when you purchase shares or other securities.
  • Capital gains tax: Self-employed sole traders or those in a business partnership pay Capital Gains Tax on any profits made from selling assets, as opposed to other companies who pay the equivalent via Corporation Tax. There is an annual tax-free allowance for total taxable gains below which no tax is paid.
  • Business rates: A sort of property tax introduced in England and Wales in 1990, business rates are a tax on occupation of non-domestic property paid to the local municipal authority, or council. Tenants such as offices and shops usually pay this directly to the local council if it is not part of the rent paid to the landlord. Rate levels are set centrally with the potential for locally applied rebates for disruption impacting on a business's ability to operate, such as long-term building or transport works.

TMF Group

We have the local knowledge to help you set up and operate compliantly in the UK. Get in touch with our local experts to discover how we can support your practical application of the tax regime in the UK.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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