Corporate and Personal Taxes in the UK (1)

These are the highlights if you want to know the essential of Corporate Law and personal taxes in the UK. This entry was drafted by  McCarthy Denning Law Firm for”E-IURE COMPENDIUM” 2018. Link to e-IURE Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case “McCarthy Denning” is an excellent option in the United Kingdom.

The following information is based on UK tax law and HM Revenue and Customs (“HMRC”) practice currently in force in the UK. Such law and practice (including, without limitation, rates of tax) is in principle subject to change at any time. The information is correct as at today’s date but may be subject to change following the imminent publication of the clauses of the Finance Bill (No 2) 2017 and the draft consultation clauses for the Finance Act 2018.

The UK’s post-Brexit relationship with the EU has yet to be defined and there are a number of areas of uncertainty. EU-derived law applies or has been implemented in the UK across a wide range of areas, including tax and it is unclear when, how and to what extent UK law in these areas will in future diverge from European rules and regulation.

1.- Corporate Residence

A company is regarded as tax resident in the UK if it is incorporated in the UK or if its central control and management is exercised in the UK. A company incorporated in the UK can also be treated as not resident in the UK under an applicable double tax treaty. It is possible for a company to be dual resident.

2.- Rates of Corporation Tax

Corporation tax is chargeable on a company’s worldwide income and chargeable gains. The rate for the financial year ended 31 March 2018 is: 19% (previously 20%) and will remain at 19% for 2018/19 and 2019/20 after which it will be reduced to 17% for 2020/21.

3.- Non-resident Companies

Companies that are not resident in the UK are only subject to UK corporation tax if they carry on a trade in the UK through a permanent establishment. If this applies, the company will be subject to UK corporation tax on all business profits wherever arising which are attributable to that permanent establishment. The profits attributable to the permanent establishment are trading income, income from property held by the establishment and chargeable gains on UK assets used for the purposes of the permanent establishment. Typically, the business profits article of a double tax treaty will limit the corporation tax charge to the profits that are attributable to a permanent establishment in the UK. The profits for corporation tax purposes are then determined as if the establishment were a distinct and separate enterprise, dealing wholly independently with the non-resident company and assuming that it has the same credit rating as the non-resident company, and that its equity and loan capital are reasonable in the context of its independence.

4.- Transfer Pricing

Transfer pricing rules apply to both international and domestic transactions. The basic rule may apply for transactions if an actual provision has been made between any two affected persons and one of them was directly or indirectly participating in the management, control or capital of the other or a third person was participating in the management, control or capital of both the affected persons. The basic rule requires the actual provision to be compared to an arm’s length provision (which would have been made between independent enterprises) and, if the actual provision confers a potential UK tax advantage on one or both the affected persons, an adjustment (to bring the profits up to what they would have been if the arm’s length provisions had applied) is to be made to the taxable profits of the advantaged persons.

The UK transfer pricing legislation refers to the Organisation for Economic Co-operation and Development’s (‘OECD’s) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (‘OECD Guidelines’). With the continued globalisation of business, transfer pricing has become an issue of increasing importance and was one of the key areas of focus for the OECD initiative to counter Base Erosion and Profit Shifting (‘BEPS’) practices by multinational corporations.

The OECD Guidelines provide detailed guidance on how the arm’s length principle should be applied in relation to related-party transactions, incorporating revisions made as part of BEPS Actions. The OECD Guidelines contain amended and further guidance on applying the arm’s length principle, commodity transactions, transaction profit split methods, intangibles, low value-adding intra-group services and cost contribution agreements. The UK legislation has been amended so that it refers to the latest version of the OECD Guidelines.

5.- Controlled Foreign Companies

The Finance Act 2012 enacted a new regime for controlled foreign companies (‘CFCs’) for accounting periods beginning or on after 1 January 2013. A CFC is a non-UK resident company that is controlled by a UK resident person or persons. A CFC charge will arise if all of the following apply:

•  A company resident outside the UK for tax purposes is controlled by a UK resident person or persons;
• A chargeable company (i.e. a UK resident company that has a sufficient interest in the CFC);
• The CFC has chargeable profits that pass through ‘gateway’ tests (that is profits of a specified type that are regarded as sufficiently connected to the UK); and
• The CFC is not entitled to the benefit of one or more of the entity-level exemptions. (the exempt period exemption, excluded territories exemption, low profits exemption, low profit margin exemption, tax exemption).

There are three alternative tests to determine control:

• Legal Control (namely the power to ensure the company’s affairs are conducted in accordance with the holder’s wishes either through holding of shares, possession of voting rights or by virtue of other constitutional documents);
•  Economic rights (i.e. entitled to the majority of proceeds on a disposal of a company’s shares, or income on a distribution of its income, or the company’s assets available for distribution on a winding up); and
• Accounting (the ‘parent undertaking’ or ‘parent’ control test for the purposes of Financial Reporting Standard (FRS 2) provided that at least 50% of the non-UK resident company’s chargeable profits would be apportioned to the UK company parent).

A UK resident may also have control if the company is at least 40% controlled by a UK person and at least 40% (but no more than 55%) controlled by a non-UK person (the 40% test).

Where a company is a CFC and does not satisfy any of the entity-level exemptions, then the total chargeable profits of the CFC and any creditable tax are apportioned among persons with a relevant interest in the CFC. A sum equal to corporation tax on the apportioned chargeable profits of the CFC (less the CFC’s creditable tax on those apportioned chargeable profits) is charged to each chargeable company.

Action 3 of BEPS is aimed at developing recommendations for the design and strengthening of the CFC rules although the Government does not intend to make any further amendments to our domestic CFC rules.

6.- Group Taxation

For corporation tax purposes, a group relationship exists between two companies if one company holds not less than 75% of the other’s ordinary share capital or if both companies are 75% subsidiaries of a third company. In addition, a company which is to be included in a corporation tax group must also be an effective 51% subsidiary of a principal company. For group relief purposes, the requirement for a 75% shareholding relationship is extended so that the company owning the shares must also be beneficially entitled to 75% or more of the profits available for distribution to equity shareholders and of assets available for distribution in a winding-up. It is possible to surrender current year trading losses and other amounts eligible for group relief to a profit making company within the same group. In many cases a payment for group relief is made by the claimant company to the surrendering company as consideration for the surrender. Consortium group relief is also available where a company is owned by a consortium where 75% or more of the ordinary share capital is beneficially owned by several companies between them none of which owns beneficially less than 5% of that capital.

It is possible both for non-UK resident companies to be members of a group for group relief purposes and to trace the ownership of one UK resident company by another through a non-UK resident company. Previously, a non-UK resident company could not be the surrendering company or the claimant company unless it carried on a trade in the UK through a permanent establishment. However, in 2006 provisions were introduced that in theory allow group relief for a non-UK resident company’s losses but such relief is dependant on various tests which in practice are rarely satisfied.

For accounting periods beginning on or after 1 April 2017, the Government intends that the types of corporation tax loss that may be surrendered to another company will be extended, subject to restrictions.

7 .-Tax Depreciation (Capital Allowances)

Tax allowances, called capital allowances, on certain purchases or investments can be claimed. The general rate is 18% per annum calculated on a reducing balance basis. This means a proportion of these costs can be deducted from taxable profits in order to reduce the tax charge. Capital allowances are available on items such as plant and machinery, buildings and fixtures. The amount of the allowance depends on what is being claimed for. In some cases, the rates are different in the year you make the purchase from those in subsequent years.

Under the Finance (No. 2) Bill 2017, legislation will be introduced to provide first year allowances for electric vehicle charging points.

8-. Inter-company Domestic Dividends

Corporation tax is not normally chargeable on dividends and other distributions of a company resident in the UK, nor are such dividends or distributions taken into account in computing income for corporation tax. This rule also applies to dividends received by the UK permanent establishment of a non-UK resident company.

9.- Substantial Shareholding Exemption

Capital gains arising from disposals of trading companies in which a trading company has at least a 10% shareholding held for an uninterrupted period of at least one year in the two years preceding the date of disposal are in certain circumstances free of corporation tax on chargeable gains.

10.- Tax Incentives

Tax incentives are available for investment in unquoted trading companies providing income tax relief and capital gains tax relief.

11.- Corporation Tax

Administration For companies with taxable profits of £1.5m or less, corporation tax is generally payable nine months after the end of the accounting period but large companies (those with taxable profits of over £1.5m) are required to pay in instalments.
Under the Finance (No. 2) Bill 2017, the Government’s Making Tax Digital (‘MTD’) project will replace annual returns with digitised tax compliance, quarterly returns and end of year statements. Digital tax accounts were made available for small businesses from 2016-17. The new rules were due to apply to corporation tax from April 2020, subject to certain exemptions. However, the Government announced on 13 July 2017 that April 2020 is the earliest date that the new rules may apply and that they will not apply until MTD has been shown to work.

12.- Double Tax Treaties

The UK has a large number of double tax treaties a list of which is provided. Relief from double taxation can be by way of treaty, by unilateral relief or by deduction.