A Quick Guide to the UK Corporate Tax System

Posted by: Jay Redman
Category: Tax & Accounting
uk tax system

The United Kingdom (UK), like every other country in the world, has a tax regime that it applies to incorporated companies and other bodies that includes clubs and associations. The UK corporate tax regime is not applicable to trusts as well as partnerships and individuals. 

At present, it does not apply to foreign or non-resident companies as well as landlords that receive rental profits from the property they own in the UK. Instead, they are subject to income tax rules. 

This corporation tax regime in the UK can be described as a self-assessment regime, which means that taxpayers are responsible for calculating their taxable profits as well as reliefs, which may be applicable in any period. Similarly, rules on tax adjustments are necessary rules on anti-avoidance rules from Her Majesty’s Customs and Revenues (HMRC). 

There are some specific tax benefits as well as specific rules that may apply to a group of companies. Meanwhile, each entity is required to prepare a tax return in order to calculate its tax liability. It is not currently possible to submit the ‘groups’ tax return. 

Who is included in the UK tax regime?

Companies that fall within the UK corporate tax regime are regarded as tax residents in the UK, provided that they are permanently established. A tax resident is used to refer to a company that is incorporated in the UK. This is the case in the absence of a treaty that allows double taxation for the company in another country. Specific tax advice should be sought in such circumstances.

Rules on permanent establishments

Companies that are non-resident in the UK are equally subject to corporation tax, provided that they have activities in the UK, which are the same as that of a UK establishment. It equally takes into account double taxation. Corporation tax is imposed on permanent establishments in the UK, but this is limited to profits that are derived explicitly from the UK.

Calculation UK corporation tax

Corporation tax is usually designed to ensure companies pay the right amount of tax for the accounting period, based on their financial statements. However, there are usually exceptions for when a company starts its operations or if there is a change to the accounting system. For accounting periods that exceed 12 months, HMRC requires more than one tax return.

How the UK Scheduler system works

Under the scheduler system, a company’s worldwide profits are subject to UK tax, and tax reliefs are available in part or for all of its foreign income. The current system of taxation identifies a number of sources of income, and there are subtle differences at times.

These sources include but are not limited to income from trading activities, property business activity as well as non-trading profits or losses that could result from a loan relation, for example, the interest banks receive. Meanwhile, expenses from management and dividends are equally included in this category.

UK tax incentives and tax deductions

Each budget tends to have a range of tax incentives to ensure that businesses can operate properly and support domestic economic activity. They include tax credits and allowances for Research and Development.

Under such a scheme, the relief the company can claim is contingent on its size as well as its activities. The SME scheme allows for deductions for up to 130% of the qualifying R&D expenditure. 

So, if the company spends £100, it will receive £230 worth of tax relief. Meanwhile, not all investments in R&D are productive or lead to marketable products in the marketplace. Sometimes, such R&D investments may result in losses, which are calculated at 14.5% of the loss in question. As a result, the total R&D credit can be up to 33.5%. You can find more information here.

HMRC is currently consulting on how to merge the R&D tax from SMEs as well as large companies. In the past, both schemes were separate, but it is judged to be inefficient. The consultation in question is used to determine the viability of the scheme and ensure that only businesses that are innovating in the UK can benefit from such as scheme. 

Corporation Tax: Patent Box 

The patent box enables companies to apply for a lower rate of corporation tax on their profits, which may arise from exploiting the dividends or payouts from patented innovations in the UK or across the world. These rules were first phased in from 2013 as well as April 2017, where the relevant rate is set at 10%. This is considered a generous relief as its definition is quite drawn to include a range of activities. 

Tax reliefs for the creative industry

Such reliefs are described as solely designed for the creative industry and enable qualifying companies to reclaim a larger deduction on possible tax repayments in a manner similar to the R&D relief cited above. There are seven reliefs that are available to businesses, and this can be found here.

How do you pay corporation tax?

Companies are required to settle their corporation tax liability electronically, and there are currently a number of options that are available to them. They include setting up direct debits, BACs, and CHAPS. There is more information on the HMRC’s Making Tax Digital as well as penalties.

FAQs:

What are CFC (Controlled Foreign Company) rules?

The CFC rules have been in place for a number of years and were equally revised as part of the corporation tax road map reforms, from January 2013. A CFC can be described as a non-resident company that is subject to UK corporation tax.

What is Diverted profits tax?

This is a separate tax from the UK corporation tax. The rules are intended to prevent profit shifting from the UK to other jurisdictions. They are equally designed to prevent tax evasion for companies with no UK presence.

What is Transfer Pricing legislation?

The transfer pricing regulation in the UK applies to transactions between two or more connected persons and requires calculations of profits and loss to be calculated at arm’s length. Any tax advantage must be accounted for and included in the company’s corporation tax calculations.

Author: Jay Redman