The United Kingdom offers a “pro-business” low tax environment in which to operate, with numerous valuable tax incentives available to help support companies operating there. It has, over many years, developed and maintained a wide-ranging double taxation treaty network and acts as a natural bridge into Europe as a whole.
Branch or subsidiary?
An overseas company can operate in the UK through either a UK company or a subsidiary. From a tax perspective, there is little difference: the profits arising from the UK branch will be subject to UK corporation tax, as will the worldwide income of the UK company.
Furthermore, where the profits of a branch can be repatriated to the parent company tax-free, the UK does not levy any withholding taxes on dividends paid by a subsidiary.
However, most businesses choose to operate through a UK company. This is primarily to give the business a greater sense of substance and also to ring-fence the commercial risks of operating in the UK from the rest of the worldwide business.
Companies incorporated in the UK are required to prepare accounts annually and file these with the Registrar of Companies, normally within nine months of their accounting period end. Companies are exempted from being required to have their accounts audited, provided they satisfy at least two of the following conditions:
- Annual turnover below £10.2 million
- Assets worth less than £5.1 million
- 50 employees or fewer
An Annual Return of directors’ and shareholders’ details is filed separately. New regulations require companies to disclose individuals with more than a 25% beneficial interest in the company.
Overseas entities may instead operate in the UK through a branch which must similarly be registered at Companies House. The use of limited liability partnerships is also permitted in the UK.
We are able to arrange for a new company or partnership to be registered within 24 hours at very low cost.
A copy of the accounts, together with a corporation tax return and computation, must be filed electronically with HM Revenue & Customs, generally within twelve months of the company’s accounting period end.
Corporation tax, at a rate of 19%, is normally payable nine months after the company’s accounting period end.
However, companies with large profits, i.e. in excess of £1.5 million (reduced by reference to the number of worldwide group companies), can be required to pay their corporation tax by quarterly instalments due 6½ months, 9½ months, 12½ months and 15½ months after the start of the accounting period.
A modified version of this applies to companies with very large profits, i.e. in excess of £20 million (again reduced by reference to the number of worldwide group companies), can be required to pay their corporation tax by accelerated quarterly instalments due 2½ months, 5½ months, 8½ months and 11½ months after the start of the accounting period.
Seven tax incentives for businesses
- A generous Annual Investment Allowance of 100% is available on capital expenditure of up to £1,000,000 on a wide range of plant and machinery and other assets. Any qualifying expenditure in excess of this annual amount will attract allowances of 6% or 18%, depending on the nature of the asset, on a reducing balance basis.
- Significant reliefs are available to companies for revenue expenditure on qualifying “research and development”. The rate of relief is dependent on whether the company is a small or medium-sized enterprise or a large company and whether the R&D is undertaken by the company itself or subcontracted, but an additional deduction of up to 130% of the qualifying expenditure can be available. Where losses are made (after taking account of the additional deduction), losses can be surrendered to HMRC in exchange for a tax credit of 14.5% of the amount surrendered. We have more information on R&D tax reliefs here.
- A reduced rate of corporation tax applies to company profits from the exploitation of patents developed in-house which are registered either with the UK or European Patent Office (or certain other EEA countries). Such profits are subject to a rate of corporation tax of 10%.
- Capital gains accruing to qualifying trading companies/groups on the disposal of shares in another trading company are not chargeable to corporation tax, provided at least 10% of that other company’s shares are held for at least a year.
- While transactions between related companies are subject to transfer pricing provisions to ensure that they are taxed on an arm’s length basis, small and medium sized companies (i.e. companies with fewer than 250 employees and annual turnover below €50 million or balance sheet total below €43 million) are exempted.
- Corporation tax is not chargeable on dividends if they are received from other UK companies or entities which are resident broadly in any non-tax haven territory.
- The UK has the largest treaty of double taxation agreements in the world, thereby reducing withholding taxes and providing greater certainty of tax treatment. In particular, it should be noted that the UK does not levy any withholding taxes on dividends (with the sole exception of distributions made by Real Estate Investment Trusts).
The UK thus provides an excellent holding company location for international businesses looking to expand into Europe, irrespective of Brexit.
Companies deduct income tax (PAYE) and National Insurance contributions (NICs) from their employees and account for this to HMRC, usually on a monthly basis. Employer’s NICs are payable by the company at 13.8% of the employee’s gross salary, i.e. before deduction of the PAYE and NIC that is accounted for to HMRC.
Share option schemes are available that enable companies to incentivise key employees by the award of options on shares in the company that can escape an income tax charge on exercise, with the capital gains on the disposal of the shares acquired not liable to capital gains tax.
Non-UK domiciled employees becoming resident in the UK in order to work for a company can claim to be taxed on a “remittance basis”, so that they are taxed on their UK source income and gains together with any non-UK income and gains brought into the UK rather than their worldwide income. A charge applies, starting at £30,000 (per annum), if an individual wishes to continue to the remittance basis once they have been resident in the UK for seven out of nine tax years.
However, non-UK domiciled individuals now acquire a deemed UK domicile once they have been UK resident for fifteen out of twenty tax years.
How BKL can help
BKL can provide a full range of accountancy and business services from the auditing of annual accounts to tax, corporate finance advice and mortgage services.
Our international support is strengthened by BKL’s membership of AGN, an association of independent accounting, tax and advisory businesses spanning over 80 countries. This enables us to build connections with fellow professionals overseas to ensure we can meet your cross-border requirements.
For more information, please get in touch using our enquiry form.