Corporate Income Tax Rate                        (%)19(a)(b)(c)

Capital Gains Tax Rate                                 (%)19(d)

Branch Tax Rate                                            (%)19 

Withholding Tax                                            (%)  

Dividends                                                        0 

Interest                                                            20(e)(f)

Royalties                                                         20(e)

Branch Remittance Tax                                0 

Net Operating Losses                                  (Years)  

Carryback                                                       1 

Carryforward                                                 Unlimited(g)

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(a)The rate of corporation tax is 19% for both large and small companies. Legislation has been enacted to decrease the rate of corporation tax to 17%, effective from 1 April 2020. The main rate of corporation tax for ring-fence profits (that is, profits from oil extraction and oil rights in the United Kingdom and the UK continental shelf) is 30% (small profits rate of 19%). The rates for ring-fence profits are not scheduled to change.

 

(b)The small profits rate of 19% for ring-fence profits applies in certain circumstances if taxable profits are below GBP300,000. This benefit is phased out for taxable profits from GBP300,000 to GBP1,500,000. These limits are reduced if associated companies exist.

 

(c)An additional 8% surcharge is levied on the profits of banks in excess of GBP25 million (before the offset of losses carried forward).

 

(d)Capital gains are subject to tax at the normal corporation tax rate. See Section B for details concerning the taxation of capital gains derived by nonresidents.

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(e)This tax applies to payments to nonresidents and non-corporate residents.

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(f)A 45% rate applies to compound interest received from the UK tax authorities in certain cases.

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(g)The amount of annual profits that can be relieved by losses carried forward is limited to 50% from 1 April 2017, subject to an allowance of GBP5 million per group.

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TAXES ON CORPORATE INCOME AND GAINS

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Corporate income tax. Companies that are resident in the United Kingdom are subject to corporation tax on their worldwide profits, but several exemptions have the effect of focusing corporation tax on UK-related activities. Tax is imposed on the total amount of income earned from all sources in the company’s accounting period, including any chargeable capital gains. However, a company can elect to exempt non-UK branch income and losses from UK corporation tax, subject to transitional rules that govern entry into the regime. This election is irrevocable and takes effect from the accounting period after the one in which the election is made.

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Nonresident companies are generally subject to UK corporation tax only if they carry on a trade in the United Kingdom through a permanent establishment (however, such companies should also consider any potential diverted profits tax issues; see Section E). A permanent establishment arises either from a fixed place of business in the United Kingdom through which the nonresident company carries on its business, or from an agent exercising authority to do business in the United Kingdom on behalf of the nonresident company. The amount of profit attributable to a permanent establishment is computed in accordance with the separate enterprise principle. However, from 2016, a corporation tax charge is also imposed for nonresidents disposing of UK land in the course of a property dealing or development trade. Companies are now subject to UK corporation tax with respect to trading profits arising from the sale of UK land, regardless of the existence of a UK permanent establishment and regardless of the residence of the entity.

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A company is resident in the United Kingdom if it is incorporated in the United Kingdom or if the central management and control of the company is exercised there. However, companies regarded as resident under domestic law, but as nonresident under the tie-breaker clause of a double tax treaty, are regarded as nonresident for all corporation tax purposes.

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Rates of corporation tax. The main rate of corporation tax for both large and small companies is 19%, effective from the financial year beginning 1 April 2017. The rate will be reduced to 17%, effective from the financial year beginning 1 April 2020. The rate is 30% for companies with ring-fence profits (that is, profits from oil extraction and oil rights in the United Kingdom and the UK continental shelf). If an accounting period does not coincide with the financial year, the profits for the accounting period are time-apportioned and the appropriate rate is applied to each part.

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For ring-fence profits, a company may claim the small profits rate of corporation tax, which is 19%, if its taxable profits for an accounting period are less than GBP300,000. For the financial year beginning 1 April 2015, the effective marginal rate for companies with ring-fence profits between GBP300,000 and GBP1,500,000 is 32.75%. These limits are divided by one plus the number of associates if a company has associated companies (subsidiaries or fellow subsidiaries), regardless of whether they are in or outside the United Kingdom.

An additional 8% surcharge is levied on the profits of banks in excess of GBP25 million (before the offset of losses carried forward), effective from 1 January 2016.

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A special rate of corporation tax of 45% applies on restitution interest, which is compound interest received from the UK tax authorities on the repayment of tax (either by agreement or an order of a court) originally collected in breach of law, which applies to awards determined on or after 21 October 2015.

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Capital gains. Gains on chargeable assets are subject to corporation tax at the corporation tax rate. For UK tax purposes, a capital gain is usually the excess of the sale proceeds over the original cost plus any subsequent qualifying capital expenditure incurred on the chargeable asset being disposed of. If chargeable assets acquired before 31 March 1982 are disposed of, only the portion of the gain after that date is usually taxable. An allowance is available for inflation up to 1 January 2018; the amount of the reduction is based on the increase in the retail price index. This indexation allowance may be used only to eliminate a gain; it may not be used to create or increase an allowable loss.

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The Substantial Shareholdings Exemption (SSE) broadly exempts from UK tax any capital gain on disposals made by trading companies or trading groups with substantial shareholdings (at least 10%) in other trading companies or groups. The following three sets of conditions must be satisfied:

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• The substantial shareholding requirement

• Conditions relating to the “investing” company or group

• Conditions relating to the “investee” company or subgroup

 

Before 1 April 2017, broadly both the investing company and the investee company were required to be a trading company, group or subgroup for 12 months before the disposal and immediately afterward.

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For disposals after 1 April 2017, the investing company trading requirement is removed and the requirement for the investee company to be trading post-disposal is significantly reduced in scope. Also, the period over which the 12-month substantial shareholding requirement must be satisfied is lengthened from two years to six years. For disposals after 1 April 2017, a new exemption is introduced for share disposals by companies owned by Qualifying Institutional Investors (QIIs) that has no investee or investing company trading requirement and an additional substantial shareholding threshold of GBP20 million.

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Tax on capital gains is not generally levied on nonresidents; consequently, no tax is currently levied on a gain on the sale of shares in a UK subsidiary by the foreign nonresident parent company. However, gains on the sale of assets situated in and used in a trade carried on by a permanent establishment in the United Kingdom are subject to corporation tax at the corporation tax rate. The UK government is also proposing that from 1 April 2019, UK tax will be chargeable on gains derived by nonresidents on the direct or indirect disposal of all types of UK immovable property. This will apply regardless of the nature of the property or the residence of the disposing entity.

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Currently, capital gains tax at a rate of 28% may be charged on the disposal of residential property by companies (both UK and non-UK resident) worth over GBP500,000 that is within the Annual Tax on Enveloped Dwellings (ATED) charge. The ATED charge is an annual charge levied on companies, both UK and non-UK resident, holding residential property worth over GBP500,000 (see Section D for the rates of the ATED). The ATED and the ATED-related capital gains tax charge are designed to prevent tax avoidance through the wrapping of residential property in corporate or other “envelopes.” Several reliefs are available to reduce the impact of this tax on genuine business transactions. In addition, from 6 April 2015, capital gains tax at a rate of 20% may instead be charged on the disposal of residential property by non-UK resident closely held companies if the disposal is not subject to the 28% ATED-related capital gains tax charge mentioned above.

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Special provisions permit the deferral of the capital gains charge on qualifying business assets if the sales proceeds are reinvested. There are numerous other special rules relating to capital gains.

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Capital losses are offset against capital gains of the same accounting period and, if an excess exists, they may be carried forward indefinitely (to be set off against chargeable gains of future accounting periods), but may not be carried back. Capital losses may not be used to reduce trading profits.

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Administration. Tax returns, accounts and computations must be filed within 12 months after the end of the accounting period.

Large companies must make quarterly installment payments of their corporation tax. The first installment is due six months and thirteen days after the first day of the accounting period, and the last installment is due three months and fourteen days after the end of the accounting period. These payments are based on the estimated tax liability for the current year. Fewer payments may be required for shorter accounting periods.

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All other companies must pay estimates of their corporation tax liability within nine months after the end of their accounting period.

Companies not complying with the filing and payment deadlines described above are subject to interest and penalties.

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A self-assessment system requires companies to assess correctly their tax liabilities or face significant penalties. In addition, the tax authority (HMRC) has extensive investigative powers.

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Large businesses must publish annually their UK tax strategy. Those businesses that fail to do so correctly and in time are liable to a penalty. The first online UK tax strategy report is required before the end of the first accounting period that began after 15 September 2016 (and thereafter, one each year, within 15 months of the last one being published). The tax strategy report should include the approach of the UK group to tax governance and risk management, as well as its attitude to tax planning and its approach to dealing with HMRC. In broad terms, the following entities are required to publish a tax strategy:

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• UK subgroups of and subsidiaries and permanent establishments of multinational groups with EUR750 million global turnover (that is, those that fall within the Country-by-Country Reporting [CbCR] requirement)

• UK-headed groups, some specific UK subgroups and stand-alone UK entities (including companies and partnerships) with at least either GBP200 million of turnover or a balance sheet total exceeding GBP2 million.

 

A key point is that no de minimis level is set for UK entities that are part of a EUR750 million turnover group. A UK company, subgroup or permanent establishment that is part of such a multinational group must publish a strategy, even if the level of activity in the UK is minimal.

Inward Investments Support. Significant inward investors can apply under HMRC’s Inward Investments Support service for written confirmation of the UK tax treatment of specific transactions or events. In this context, “significant” is regarded as an investment of GBP30 million or more, but smaller investments are considered if they are potentially of importance to the national or regional economy.

Dividends. Dividends paid by UK resident companies are not subject to withholding tax. For dividends received by UK resident companies, the United Kingdom has a dividend exemption regime. A dividend or other income distribution received on or after 1 July 2009 is generally exempt from UK corporation tax if all of the following conditions are satisfied:

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• The distribution falls within an exempt class or, if the recipient is a “small” company, the payer is resident in the United Kingdom or a qualifying territory.

• The distribution is not of a specified kind.

• No deduction is allowed to a resident of any territory outside the United Kingdom under the law of that territory with respect to the distribution.

 

Until April 2016, UK resident shareholders other than companies were subject to income tax on the distribution received plus a deemed tax credit. The deemed tax credit attaching to dividends equaled 1/9 of the net dividend. Under several of the United Kingdom’s double tax treaties, a foreign shareholder in a UK company could claim payment of part or all of this deemed tax credit that would have been available to a UK individual. However, in most cases, the benefit was eliminated or reduced to a negligible amount. Effective from 6 April 2016, the deemed tax credit was abolished for UK individuals, and therefore, the treaty benefit is denied in full.

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Interest. Interest payments on “short loans” (loans with a duration that cannot exceed 364 days) may be made without the need to account for withholding tax. All interest payments by UK resident companies may be made without the imposition of withholding tax if the paying company reasonably believes that the interest is subject to UK corporation tax in the hands of the recipient. See Section E for a summary of the UK’s rules on tax deductions for interest payments.

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Foreign tax relief. Foreign direct tax on income and gains of a UK resident company other than that relating to a non-UK branch for which an exemption election has been made (see Corporate income tax) may be credited against the corporation tax on the same profits. The foreign tax relief cannot exceed the UK corporation tax charged on the same profits.

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If a company receives a dividend from a foreign company in which it has at least 10% of the voting power, it may also obtain relief for the underlying foreign tax on the profits out of which the dividend is paid. Foreign tax relief does not apply if the dividend satisfies the conditions for the dividend exemption, unless an election is made (see Dividends).

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To continue reading, and to obtain the full publication, please visit: https://www.ey.com

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The content is based on information current as of 1 January 2018, unless otherwise indicated in the text of the chapter. Changes to the tax laws and other applicable rules in various countries covered by this publication may be proposed. Therefore, readers should seek independent tax advice from their local and international firms to obtain further information.

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This publication contains information in summary form and is sourced from the Ernst & Young Worldwide Corporate Tax Guide, and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Aston & Willson LLP  or EYGM Limited nor any other member of an organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.