U.K. Summary 2014
Investment basics:
Currency – Pound Sterling (GBP)
Foreign exchange control – No
Accounting principles/financial statements – UK GAAP/IAS. Financial statements must be filed annually.
Principal business entities – These are the public and private limited liability company, limited liability partnership, limited partnership, partnership, Real Estate investment Trust (REIT) and branch of a foreign corporation.
Corporate taxation:
Residence – A company is UK resident if it is incorporated in the UK or its place of central management and control is in the UK.
Basis – A UK resident company is subject to corporation tax on worldwide profits and gains (see ‘Taxable income,” below), with credit given for overseas taxes. Foreign profits (and losses) (including those from certain capital assets) arising from the permanent establishments (PE) of a UK resident company may be excluded by making an irrevocable election. The effect of the election may be deferred where there have been losses in any of the PEs. There are anti-diversion rules based on the new CFC rules (see “Controlled foreign companies,“ below) that may restrict the profits that can be excluded from the charge to UK tax by virtue of the election. A nonresident company is subject to tax only in respect of UK-source profits, which include the income of a UK PE, income from UK real estate, certain UK-source interest income and gains on assets used for purposes of a PE‘s trade.
Taxable income – For a UK resident company, corporation tax is imposed on trading income, several baskets of non-trading income and capital gains. Normal business expenses may be deducted in computing taxable income, provided these are not capital expenditure. No deduction is available for the depreciation or amortization of land, buildings or other tangible fixed assets. Instead, tax relief is available for qualifying capital expenditure on plant and machinery (including certain integral features in buildings) at an annual writing-down allowance of 8%/18% on a reducing-balance basis, depending on the type of asset. Full relief is available for the first GBP 250,000 of expenditure (excluding automobiles) per annum per business/group of companies incurred from 1 January 2013 to 31 December 2014. The amount of expenditure available for relief will fall to GBP 25,000 as from 1 January 2015. There is a limit on deductions that can be taken for financing costs where UK companies are members of a large group (as defined). These ‘debt cap” rules apply broadly where the aggregate tax deductions for net financing costs of UK group companies exceed the worldwide group’s gross accounting financing costs.
Taxation of dividends – A dividend exemption applies to most dividends (and distributions) unless received by a bank, insurance company or other financial trader. Dividends received by a non-small UK company on most ordinary shares and many dividends on non-ordinary shares from another company (UK or foreign) are exempt from UK corporation tax, with no minimum ownership period or minimum ownership level. The exemption also can apply to small companies receiving dividends (and distributions) from UK companies or foreign companies resident in a jurisdiction that has concluded a tax treaty with the UK that includes a nondiscrimination provision. (A small company is a ‘micro or small enterprise,‘ as defined by the EU).
Capital gains -Capital gains form part of a company’s taxable profits. Gains (or losses) on the disposal of substantial shareholdings in both UK and foreign companies can be exempt. The main conditions, broadly, require the selling company to have continuously owned at least 10% of the shares of the company being sold for at least 12 of the 24 months before disposal and the selling company/company being sold must be trading or members of a trading group (without, to a substantial extent any non-trading activities) for at least 12 months before disposal (in some cases this may have to be 24 months) and immediately after the disposal. When an election has been made to exclude the profits of PEs (see “Basis” above), the exclusion also may apply to gains and losses of certain capital assets of the PE, unless the company is a close company. A nonresident company generally is not subject to tax on its capital gains unless the asset is held through a UK PE. A capital gains tax charge was introduced from April 2013 for nonresident companies and certain other vehicles disposing of UK residential property valued at more than GBP 2 million. Exemptions from this charge are available in various circumstances (broadly, where the property is not being used as a residence of a shareholder owning 5% or more of the company).
Losses -Trading losses generally can offset total profits of the year (including capital gains), with carryback of the excess to the preceding year permitted. Trading losses may be carried forward indefinitely (unless there is a change of ownership of the company and a major change in the nature and conduct of the trade within three years), but can be offset only against trading income. Capital losses may be offset only against capital gains and may only be carried forward.
Rate – The main rate of corporation tax is 23% and will reduce to 21% from 1 April 2014, and then to 20% from 1 April 2015. The main rate does not apply to ‘ring fence” profits from oil rights and extraction. A small profits rate of 20% applies to companies with taxable profits of less than GBP 300,000 per annum. Companies with taxable profits between GBP 300,000 and GBP 1.5 million are effectively taxed on a sliding scale at an average rate between the main rate and the small profits rate. The GBP 300,000 and GBP1.5 million limits are reduced if he company has any associated companies or the accounting period is less than 12 months.
Surtax – No
Alternative minimum tax – No
Foreign tax credit – A UK resident company is subject to corporation tax on its worldwide profits (including capital gains), with credit given for most overseas taxes. As noted above (see under ‘Basis”), a UK company may elect to exempt the profits (and losses) of foreign PEs from UK corporation tax, provided certain conditions are satisfied. Where such profits are excluded from UK taxation, no credit is available.
Participation exemption – Most dividends, including foreign dividends, are exempt (see above under ‘Taxation of dividends”). In addition, capital gains on the disposal of substantial (i.e. 10% or more) shareholdings in certain companies are not subject to corporation tax (see above under ‘Capital gains“).
Holding company regime – See ‘Participation exemption,“ above.
Incentives – An enhanced tax deduction is available for certain R&D expenditure of 225% for small or medium-sized companies and 130% for large companies. For qualifying expenditure incurred on and after 1 April 2013, companies can claim an ‘above the line“ R&D credit at a rate of 10%. A patent box regime was introduced with effect from 1 April 2013 that ultimately will allow companies to elect to apply an effective 10% rate of corporation tax to all profits attributable to qualifying patents, whether paid separately as royalties or embedded in the sales price of products. The relief is being phased in over five years.
Withholding tax:
Dividends – There typically is no withholding tax on dividends paid by UK companies under domestic law, although a 20% withholding tax generally applies to distributions paid by a REIT from its tax- exempt rental profits (subject to relief under a tax treaty).
Interest – Interest paid to a nonresident is subject to a 20% withholding tax, unless the rate is reduced under a tax treaty or the interest is exempt under the EU interest and royalties directive. Reduction under a tax treaty is not automatic and advance clearance must be granted by the UK tax authorities
Royalties – Royalties paid to a nonresident are subject to a 20% withholding tax, unless the rate is reduced under a tax treaty or the royalties are exempt under the EU interest and royalties directive. Advance clearance is not required to apply a reduced treaty rate.
Technical service fees – No
Branch remittance tax – No
Other taxes on corporations:
Capital duty – No
Payroll tax – No
Real properly tax – The national nondomestic rate is payable by occupiers of business premises. Local authorities collect the tax by charging a uniform business rate, which is deductible in computing income subject to corporation tax. Council tax applies to the occupation of domestic property.
Social security – Employers are required to make pay-related social security contributions, together with employee payroll deductions (see ‘Other taxes on individuals“ below).
Stamp duty – A 0.5% rate, payable by the transferee, applies on the transfer of UK shares. Stamp Duty Land Tax (SDLT) is charged on transfers of UK real property. For residential property, the rates are between 0% and 7%, depending on the value of the property. The rates for nonresidential property are 0% to 4%. A 15% rate applies to purchases of residential property valued at more than GBP 2 million by companies and certain other vehicles. In certain cases, transfers within a Lax group may be free from stamp duty ISDLT.
Transfer tax – See ‘Stamp duty” above.
Other – Shipping companies may elect to pay tonnage tax in lieu of the normal corporation tax.
Anti-avoidance rules:
Transfer pricing – Comprehensive transfer pricing provisions apply to transactions with both domestic and foreign companies. The UK transfer pricing rules follow OECD principles This includes a requirement to prepare documentation to demonstrate compliance with the arm’s length standard. Advance pricing agreements are possible in certain situations. Thin capitalization – The arm‘s length principle applies. There are no safe harbor provisions. Advance thin capitalization agreements are available. (See ‘Taxable income,“ above, for debt cap rules.)
Controlled foreign companies – CFC provisions are applicable where, broadly, a UK company has an interest (direct or indirect) of at least 25% in a nonresident company that is controlled by UK resident. New rules apply for accounting period beginning on or after 1 January 2013, which are more specifically targeted at situations where profits have been artificially diverted from the UK. The regime operates on an income stream basis and there is a “gateway” test and a number of provision that may apply to exempt a company from the rules. Where the CFC rules do apply, the relevant profit of the CFC are computed as though it were UK resident and its UK shareholder is subject to tax accordingly. In addition, an overseas finance company can be fully or partially exempt from a CFC charge on profits derived from certain overseas group financing arrangement. The partial exemption works by taxing 25% of the finance company profits at the main corporate tax rate (which will result in an effective rate of 5.75%, based on the main rate of 23% that is effective until 1 April 2014).
Other -There are many specific anti-avoidance rules. A general anti-abuse rule (GAAR) applies for arrangement entered into on or after 17 July 2013. The GAAR applies across a wide range of taxes, including corporation tax, income tax, capital gains tax and stamp duty. The legislation gives the UK tax authorities power to potentially apply the GAAR to counteract tax advantages arising from mx arrangement that are abusive.
Disclosure requirement – Certain tax arrangement that result in a UK tax advantage and fall within described hallmarks must be disclosed to the UK tax authorities by, for example, a promoter, and the user must note the use of such arrangement on the tax return. Separately, certain transactions valued at more than GBP 100 million, involving, for example, the issue of shares or debentures by, or the transferor permitting the transfer of shares or debentures of, a foreign subsidiary of a UK company, also have to be reported to the UK tax authorities within six months of the transaction. There is a list of excluded transactions that do not need to be reported.
Administration and compliance:
Tax year – The tax year is the shorter of 12 months or the period for which the account are prepared.
Consolidated returns – All companies file separate tax returns. However, losses may be ‘group relieved” between UK group companies (broadly, where one is a 75% subsidiary of another or both are 75% subsidiaries of the same corporate parent in terms of share ownership, rights to income and rights on a winding up, taking account of direct and indirect holdings). There also are other group rules that apply to capital gains that allow, for example, assets to be transferred intragroup at no gain/no loss for tax purposes no gains/no losses to be transferred between the members of the group.
Filing requirements -The UK operates a self-assessment regime. Large companies pay tax in quarterly installments starting in month seven of their financial year. The tax return is due to be filed within 12 months of the period end. Mandatory online filing of all company tax returns applies.
Penalties – Companies are liable to a fixed penalty of GBP 100 for failure to file a tax return by the due date, plus an additional GBP 100 file the return is not submitted within three months of the due date. Further penalties may apply to returns filed at least six months late. Tax-geared penalties can be sought for matters such as tax returns that are carelessly or deliberately incorrect although such penalties can be reduced depending on the taxpayer’s behavior (e.g. voluntary disclosure, cooperation with tax enquiries, etc.). Interest is paid on late paid tax.
Rulings – UK tax legislation includes a number of anti-avoidance provisions for which advance statutory clearance may be sought. Also, under a non-statutory clearance procedure, the UK tax authorities’ view of the tax consequences of specific transactions can be sought, on a named basis, with full disclosure, where there is both commercial significance and material uncertainty.
Personal taxation:
Basis – Individuals who are resident and domiciled in the UK are subject to tax on their worldwide income and gains. Different treatment may apply where a person, although resident, is not domiciled in the UK.
Residence – A new ‘statutory residence test” (SRT) applies as from 6 April 2013. The SRT is based on a combination of physical presence and connection factors with the UK and other jurisdictions. Domicile is a distinct concept from residence. An individual’s domicile status may be determined by the domicile of his/her parents or can be acquired by choice. UK resident, but non-domiciled taxpayers can enjoy favorable tax treatment in respect of income and assets outside the UK.
Filing status – Individuals file tax returns separately, irrespective of marital status.
Taxable income – Individuals who are UK resident under the SRT and domiciled in the UK are subject to UK tax on their worldwide income. Residents who are not domiciled in the UK may make a claim for the remittance basis of taxation to apply to overseas income, in exchange for an additional tax liability of GBP 30,000 per annum for taxpayers who have been UK resident for seven out of the past nine years, and rising to GBP 50,000 once resident for 12 out of the last14 tax years. The remittance basis also may apply without the requirement to make a claim, if (broadly) the unremitted overseas income (and overseas capital gains) is less than GBP 2,000.
Capital gains – Individuals who are domiciled and resident in the UK are subject to capital gains tax on all chargeable assets, regardless of where they are situated. Similar to the rules for overseas income, an individual who is not domiciled in the UK may make a claim for the remittance basis of taxation to apply to any capital gains on non-UK assets (see ‘Taxable income”, above). An annual exemption is available to reduce capital gains (GBP 10,900 for2013/14), except in tax years where a claim for the remittance basis is made. Where individuals who leave the UK to become nonresident realize gains in a tax year after their departure, such gains are not-chargeable to UK capital gains tax, unless the individuals are absent from the UK for less than five tax years and they acquired the asset before they left.
Deductions and allowances – Individuals are given a personal allowance deduction from total pre-tax income (GBP 9,440 for 2013/14). A higher allowance is available to individuals aged 65 and over. The basic personal allowance for income tax is gradually reduced to nil for individuals with ‘adjusted net income” above GBP 100,000.
Rates – Income tax is charged at progressive rates. Income in excess of GBP 150,000 is charged at 45% (the “additional rate,” charged on all income except dividends) or 37.5% (the ‘dividend additional rate” charged on dividends). For 2013/14, taxable income between GBP 32,011 and GBP 150,000 is charged at 40% (the ‘higher rate”) or 32.5% (the “dividend upper rate”). Income below GBP 32,011 (for 2013/14) is charged at rates between 10%-20%, depending on the type and amount of income. Dividends from UK companies and many non-UK companies attract a non-payable fix credit. (The credit is not available where the individuals holding in a non-UK company is 10% or more and the company is located in a territory that has not concluded an appropriate tax treaty with the UK.) The rate of capital gains tax is determined by the total of capital gains and income. Capital gains mx is payable at a rate of 28% where an individual is liable to pay income tax at the higher rate or the dividend upper rate. For 2013/14, W taxable income is less than GBP 32,011, the rate of capital gains tax is 18%, except to the extent the gains, when added to income, would be in excess of the GBP 32,010 limit. In that case, the excess is taxed at 28%. Entrepreneurs‘ relief reduces the rate of capital gains tax to 10% for certain business assets, subject to a lifetime limit of GBP 10 million of gains per individual. No tax is payable on gains up to the annual exempt amount (GBP 10,900 for 2013/14).
Other Taxes on individuals:
Capital duty – No
Stamp duty – A charge is imposed at 0.5% on the transfer of UK shares. Stamp Duty Land Tax is charged on transfers of UK real property (residential and nonresidential) – see “Stamp Duty‘ under “other taxes on corporations“ above.
Capital acquisitions tax – No
Real property tax – The national nondomestic rate is payable by individual occupiers of business premises. Local authorities collect the mx by charging a uniform business rate, which is deductible in computing taxable income. Council tax applies to the occupation of domestic property.
Inheritance/estate tax – Inheritance tax is charged on property passing on death, certain gills made within seven years of death and some lifetime transfers (e.g. to a discretionary trust). Where due, inheritance tax is payable on assets in excess of GBP 325,000 (2013/14 and 2014/15) at a rate of 40% (20% for certain lifetime transfers). Transfers between spouses, in lifetime or upon death, generally are exempt from inheritance tax unless only the do not spouse has a UK domicile. For non-domiciled individuals, only UK property is subject to inheritance tax, although long-term residence can result in deemed UK domicile (for inheritance tax purposes only) once an individual has been UK’s resident in 17 out of the last 20 tax years.
Net wealth/net worth tax – No
Social security – National Insurance Contributions (NIC) are payable by employers, employees and self-employed individuals. For example, for2013/14, weekly paid employees pay NIC at a rate of 12% on weekly income between GBP 149 and GBP 797 and 2% on income exceeding this amount. For employers, NIC is payable at a rate of 13.8% on all income in excess of GBP 148 per week (for 2013/14). For 2013/14, self-employed individuals pay NIC at a rate of 9% on annual income between GBP 7,755 and GBP 41,450 (for2013I14) and 2% on the excess, together with a fixed charge of GBP 2.70 per week (for 2013/14).
Administration and compliance:
Tax year – The tax year is 6 April to 5 April of the following year.
Filing and payment – Tax on employment income is withheld by the employer under the Pay As You Earn (PAYE) system and remittance to the tax authorities. Tax on income not subject to PAYE and capital gains tax are self-assessed. If an individual is required to file a tax return, ‘t must be filed by 31 October (or 31 January, if filing online) alter the tax year. Payment of tax is due by 31 January alter the tax year. Payments on account of tax may be required (on 31 January in that tax year and 31 July in the following tax year).
Penalties – Individuals are liable to a penalty of GBP 100 for failure to file a tax return by the due date. The penalties escalate if the return is filed more than three months after the due date. Tax-geared penalties also can be sought for matters such as late payment of tax and tax returns that are carelessly or deliberately incorrect. interest is paid on tax paid late.
Value added tax:
Taxable transactions – VAT applies to most sales of goods, the provision of services and imports.
Rates – The standard VAT rate is 20%, with a reduced rate of5% for certain items. There also are some specific zero/rated relief and exemptions.
Registration – Registration is compulsory for businesses whose taxable supplies exceed GBP 79,000 (for 2013/14) in any given year or where a business expects that its taxable supplies will exceed this threshold within the next 30 days. Voluntary registration is possible for businesses making taxable supplies below this threshold. Deregistration is possible if taxable supplies fall below GBP 77,000 (for2013/14). If a business does not have a place of business in the UK, the registration threshold does not apply. The registration date will be the earlier of the date the business makes taxable supplies in the UK or the date the business expects it will make taxable supplies in tl1e next 30 days. Filing and payment – VAT returns generally are due on a quarterly basis (taxable persons are allocated one of three VAT return periods). A taxable person also may be allowed to complete returns on a monthly basis. If the VAT return is not filed by the due date or the VAT due is not paid, a taxable person may be liable to a surcharge.
Source of tax law: Income and Corporation Taxes Act 1988, Taxation of Chargeable Gains Act 1992, VAT Act 1994, Income Tax (Earnings and Pensions) Act 2003, Income Tax (Trading and Other Income) Act 2005, Income Tax Act 2007, Corporation Tax Act 2009, Corporation Tax Act 2010, Taxation (International and Other Provisions) Act 2010, Inheritance Tax Act 19M and annual Finance Acts Tax treaties: The UK has concluded approximately 125 tax treaties.
Tax authorities: HM Revenue & Customs
International organizations: OECD, EU, WTO