This is part 7 of 7 of our guide: 'Doing business in the UK'.
The following is a broad overview of the tax issues relevant to establishing business operations in the UK.
UK corporation tax
Broadly, UK companies are liable to corporation tax on their worldwide profits although certain exemptions may apply whereby profits arising outside the UK are subject to tax in that other country.
A non-UK resident company is liable to UK corporation tax on the profits of a trade carried on by it through a permanent establishment in the UK, and on capital gains realised on the disposal of capital assets used or held by it for the purposes of that UK permanent establishment.
Profits that are attributable to the permanent establishment are those that it would have made if it were a distinct and separate UK enterprise, engaged in the same or similar activities under the same or similar conditions, dealing wholly independently with the rest of the non-resident company of which it is a part. In applying the legislation, the permanent establishment is to be treated as having equity and loan capital in the proportions relevant for an independent company operating in the UK.
A non-UK resident company which carries on a trade in the UK other than through a permanent establishment is liable to UK income tax rather than corporation tax on the profits attributable to that trade. However, from 6 April 2020, non-UK resident companies in receipt of income from UK property will be subject to UK corporation tax on that income, rather than UK income tax (as is currently the case).
Rates of tax
The current main rate of corporation tax is 19%. It is to be reduced to 17% from 1 April 2020.
A system of quarterly accounting for corporation tax exists for larger companies (ie companies with profits of at least £1.5m).
Exemptions & reliefs
There are a number of tax incentives to doing business in the UK. Most notably, where certain criteria are satisfied, substantial shareholding relief provides a corporation tax exemption on the sale of an interest of 10% or more in a trading company. There are also significant reliefs available for qualifying spending on research and development, and for investment in unquoted trading companies.
Inter-company trading/transfer pricing
It is generally not possible to reduce the amount of UK taxable profits by means of adopting artificial pricing methods. Under both UK tax law and the UK’s double tax treaties, the UK Revenue is able to ignore actual prices and charge tax as if arm’s length prices had been paid. This would catch, for example, excessively high interest and management charges, and royalties that are paid to the non-resident parent of a UK subsidiary with a view to reducing the profits subject to UK tax.
Payments of interest, royalties etc by a UK permanent establishment to its overseas head office are not deductible for UK tax purposes.
Stamp duty is a tax on documents and is charged on the transfer of stock and marketable securities at a rate of 0.5% of the chargeable consideration. Transfers with consideration of £1,000 or less and which do not form part of a larger transaction or series of transactions are exempt from stamp duty. There are also various other exemptions including intra-group transfers, transfers on divorce or death and transfers from share incentive plans.
Value added tax
Value Added Tax (VAT) is a form of consumption or indirect tax. It is charged on the supply of goods and services made in the UK where the taxable supply is made by a taxable person in the course of business.
A UK-established person must register for VAT where its taxable turnover is over the threshold for compulsory registration (currently £85,000 per year). A person may voluntarily register if it makes taxable supplies and/or carries on a business and intends to make taxable supplies (even if its taxable turnover is below the threshold for compulsory registration). Two or more bodies corporate can be registered as a single taxable person for VAT purposes (ie a VAT group).
The general rule is that all supplies of goods and services are subject to VAT at the standard rate unless they are exempt or subject to VAT at a lower rate. There are three rates of VAT: the standard rate (applies to most goods and services – currently 20%); the reduced rate (applies to some goods and services such as home energy and children’s car seats – currently 5%); and the zero rate (such as most foods and children’s clothing – 0%).
There are some goods and services on which VAT is not charged – known as exempt supplies. These include (among others) postage stamps, a number of financial products and land and buildings (where no option to tax has been made). Other supplies are outside the scope of VAT, such as certain supplies made between landlords and tenants.
In light of the above, where a person sells assets to another person, VAT will usually be payable on the purchase price. However, where the assets of a business are transferred as a going concern and certain conditions are met, this will be treated as neither a supply of goods nor a supply of services for VAT purposes.
Doing business in the UK
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A guide to setting up, running & managing a business in the United Kingdom.