This guide provides a brief overview of the UK tax system. For a businesses operating in the UK through a corporation.
This guide does not cover tax treatment for businesses operating in the UK. Through alternative business structures such as partnerships, sole proprietorships, or joint venture arrangements.
The guide covers general profit, social security, and VAT issues. That can arise for a business as well as some of the tax issues investors in a business may have to consider.
UK Taxes are administered by HM Revenue & Customs (HMRC).
Part 1 – Business Management
A UK company will be subject to the UK corporation tax on income, profits, and capital gains. The corporate tax rate for all companies is currently 19%. This rate will increase to 25% by April 2023 for businesses with profits over £50,000. Marginal relief will be available to businesses with profits between £50,000 and £250,000.
Corporate tax is payable nine months after the approx. end of the accounting period. Or, for companies with profits over £1.5 million. That is paid in equal four installments, due in the seventh and tenth months of the year. Current accounting period and the first or fourth months after the ending of the accounting period. Of the accounting year. Companies with annual taxable profits of £20 million or more. Such are required to make payments in the third, sixth, ninth, and twelfth months of the accounting period. When a company is a member of a group, the threshold is divided by the number of companies in the group.
For tax purposes, business profit is calculated by deducting certain deductions/grants and all expenses. That incurred entirely and exclusively for business purposes. From the sum of all transaction revenue. Business profits are taxed on an accrual basis and are generally consistent with the accounting treatment. Capital gains are usually taxed on exercise.
Trading losses may be deducted from other profits and profits. Which might include capital gains. That are realized in the same or the previous Accounting and Finance period. Or carried forward and deducted from profit. Future transactions arise from the same transaction. Capital losses can only be offset against capital gains realized in the same or subsequent periods.
Companies can deduct business losses carried forward from profits from different sources of income. And groups can deduct one company’s losses from the profits of another in the group. However, companies with profits above £5 million can only cover 50% of their profits for losses carried forward in a tax year.
Under certain anti-evasion rules, interest paid by a UK company is deducted when calculating that company’s profits. Deductions are widespread on an accrual basis. The fixed-rate rule limits the ability of businesses to deduct certain interest payments from their taxable profits. Generally, the rule limits corporate tax deductions on net interest expenses to 30% of a group’s profits in the UK before interest, tax, depreciation, and amortization (EBITDA). This rule only applies to groups with more than £2 million in UK net interest expenses.
The UK is Limited in Reducing Corporate Interest Rates
Additional tax breaks are available for eligible research and development (R&D) expenses. The rate of the tax relief available and the manner in which it is provided depends on whether the business is a small and medium-sized enterprise (SME) or a large enterprise, and in each case, certain conditions must be met. Small and medium enterprises are entitled to a subsidy (total) of 230%. If the business loses, it can claim a tax credit of 14.5% of the enhanced deduction.
Large companies that make eligible R&D spending can apply for an “above” credit known as the R&D Expenditure Credit (RDEC).
RDEC is then calculated directly as a percentage of the company’s R&D costs. The credit can be credited to the company’s account as a reduction in R&D expenses – that is, “above” the tax line. RDEC is mainly taken into account as a formula for trading, increasing profits, or reducing losses. From April 1, 2020, the cost credit is 13%. It is then credited to the certain company and can be offset against the company’s tax liabilities, transferred to another company in the group, or reimbursed. At a corporate tax rate of 19%, RDEC equates to 9.5% of qualified R&D spending.
Commercial advantage and intellectual property (IP) rights:
Tax treatment of intangible assets, such as goodwill and intellectual property, is generally subject to their accounting treatment. As a result, in certain cases, tax breaks on the depreciation of intangible fixed assets may be available. However, there is only limited relief to goodwill and customer-related intangibles obtained upon the acquisition of the property.
The “patent box” gives companies the option to apply a reduced corporate tax rate to all profits derived from qualifying patents.
Patent box mode (applicant since July 1, 2016).
Royalties payments made by a UK company are generally deductible for corporate tax purposes, provided they do not exceed market rates. A redirected profit tax may limit or prevent deductions . UK companies may have to deduct tax at the base rate (20%) from certain royalty payments to non-UK residents. UK businesses are required to withhold tax on payments made to trademarks and brand names in addition to copyrights, design rights, and patent royalties. From April 6, 2019, income tax is charged directly to non-UK residents, who are also not residents of a jurisdiction with which the UK has a double taxation treaty, which contains a non-discrimination provision for gross intangible asset income held in the lower tax jurisdiction to the extent of income related to sales in the United Kingdom.
However Depreciation of fixed assets is not allowed for corporate tax purposes. Instead, businesses receive a fixed capital expenditure allowance for certain capital expenditures such as plant and machinery costs. The Annual Investment Allowance (AIA) is available to each business, providing full tax relief on qualifying plant and machinery spending. AIA is £1 million until March 31, 2023. When a company is a member of a group, only one AIA is available to the group.
From April 1, 2021, to March 31, 2023, the 130% “superannuation allowance” is for new plant and machinery that would otherwise qualify for the 18% “primary rate” of the benefit. capital expenditures.
Spending on “special rate” properties that would otherwise qualify for a subsidy at the lower 6% rate would qualify for a 50% subsidy in the first year. Properties for which a superannuation deduction or 50% allowance for special prorated expenses has been claimed are subject to an immediate balance charge upon disposal.
A structure and construction grant is available for capital expenditure incurred on certain buildings and constructions. A 2% annual allowance is available for a period of 50 years.
UK transfer pricing law allows HMRC to adjust the profits of a UK company for corporate tax purposes if it pays more or less than the market price for goods or services offered by or to companies without arms.
Dividends are paid from after-tax profits. A corporation pays no taxes when it pays dividends. Individuals are entitled to an annual allowance on dividends. It is currently at £2,000, and dividend income up to this amount will be tax-free. The income tax payable on dividend income in excess of this allowance is 7.5% for taxpayers at the base rate, 32.5% for taxpayers at the higher rate, and 38 .1% for taxpayers at the additional rate.
Redirected Profit Tax (DPT):
The DPT is designed to increase taxes on multinational companies operating in the UK. Under certain circumstances, DPT may limit or prevent tax withholding on royalties or other monies paid to a foreign affiliate.
The tax regime for distributed profits.
Not paying taxes:
The General Rule Against Abuse (GAAR) was introduced in 2013. This allows HMRC to combat “aggressive” tax planning.
Every business with directors and employees must operate a Pay As You Earn (PAYE) system. This is the mechanism used to collect income tax and National Insurance contributions (NIC) on the remuneration of employees and directors. Businesses are required to run PAYE properly and to return monthly to HMRC the PAYE number deducted from the employee.
Income tax is payable at three levels:
The base level (20%), increment (40%), and supplemental level (45%). There is a threshold for each ratio. Employee NICs are paid at 12% of income between the main threshold and upper-income limit and 2% above the upper-income limit. Employer NICs are paid at 13.8% above the supplementary income threshold. There are thresholds for each of these ratios.
There will be a temporary 1.25% increase in employer and employee NICs for the tax year 2022-23. From April 2023, the NIC rate will fall back to the tax rate of 2021-22, and a new 1.25% healthcare and social services tax will apply.
However It is essential that correct tax treatment is given for expense payments to employees and directors and that any in-kind benefits conferred on employees or directors be communicated to HMRC. In-kind benefits include accommodation, private health insurance, and a car. Income taxes and NICs arising from certain employment-related securities and the exercise of unapproved stock options may also be collected through PAYE.
Value Added Tax (VAT)
VAT is payable on the supply of most goods and services in the UK by a specific taxable person (a person who is or should be registered for VAT purposes). In the UK, the standard VAT rate is currently 20%.
Some deliveries are exempt from VAT. The most important of which are related to Finance and Accounting, insurance, education, healthcare, and certain land allocations. A business that has supplied taxable supplies of more than £85,000 in the last 12 months. Or is expected to generate taxable supplies of more than £85,000 in the next 30 days. Must register for VAT and report it to HMRC. A VAT-registered business is required to charge VAT on the taxable supplies it produces (“output tax”). In conclusion But may refund the VAT charged on supplies supplied to the business. Such business (“input tax”) to the extent of the amount of VAT paid for the purpose of taxable supplies. However, VAT will be a real cost for businesses that supply tax-exempt supplies.