United Kingdom: Overview of Tax Regime

The UK Government’s goal is to make the UK the best place in the world to locate an international business; it has one of the most open economies globally, a highly skilled workforce, access to capital markets, a first-class infrastructure, and a highly competitive corporate tax system.

UK tax policy is simpler, more transparent, and better suited to a globalised trading world and to modern business practice than ever before, and the corporate tax system improves the business environment and helps to attract multinational companies and investment.

The corporation tax rate is currently 20%, the lowest it has ever been in the UK, as well as being the lowest in the G7 and joint lowest in the G20. The Patent Box reduces the cost of commercially exploiting intellectual property, and the UK offers generous and flexible credits against the cost of Research & Development (R&D).

A Territorial Tax System

The UK has moved from a system of worldwide taxation for UK companies to a broadly territorial tax system, where the focus is on taxing profits earned in the UK. The key planks for this new approach are a dividend exemption, an elective branch exemption, and a reformed Controlled Foreign Company (CFC) regime.

The purpose of the UK’s CFC rules is to protect the country from the artificial diversion of UK profits to overseas companies that are controlled from the UK and located in low-tax jurisdictions. The UK’s CFC rules exempt profits earned in controlled overseas companies from UK tax, unless they have been artificially diverted from the UK.

Special rules apply to overseas finance profits earned by a CFC from loans to overseas companies. In broad terms, the rules allocate 25 per cent of the net profit to the UK, giving an effective tax rate of five per cent from 2015. In certain circumstances, full exemption will apply, for example where the overseas finance company was financed through a rights issue of shares, or where the funds used to make loans were generated outside the UK. Multinationals moving to the UK are able to make use of a one-year exemption, to allow any restructuring necessary for them to be able to take advantage of the other available exemptions.

The UK as a holding company location

The tax changes in the UK over the last few years mean that the country is now a highly attractive location for a headquarters or holding company; it offers an attractive corporation tax rate, combined with dividend and capital gains exemptions. Moreover, the UK is unusual in not having an outbound dividend withholding tax and, under the country’s wide treaty network, withholding taxes on interest and royalties are often reduced to zero. In addition, HM Revenue & Customs (HMRC) can support taxpayers in agreeing Advance Pricing Agreements (APAs) with other fiscal authorities for complex transfer pricing issues, or in agreeing them unilaterally with HMRC.

International taxation

The UK has one of the largest networks of treaties in the world, covering over 100 countries and treaty policy over many decades has been to reduce withholding taxes on interest and royalties to zero wherever possible. At the same time, the UK is keen to negotiate a wide range of tax information exchange agreements, or provisions in full double tax treaties. The UK participates actively in the OECD, and is well used to negotiating with other countries under the ‘competent authority’ provisions in relation to transfer pricing adjustments. The OECD Transfer Pricing Guidelines have been included in UK transfer pricing law and thus govern the UK’s approach to transfer pricing. There is no dividend withholding tax in the UK, irrespective of the location of the recipient.

Statutory Residence

There is a statutory residence test, which has been designed to ensure greater certainty to all individuals, including those with more complex living and working arrangements. The test is simple to use and takes into consideration both the number of days spent in the UK and the ties an individual has to the country, such as accommodation, family and employment.

Non domicile

An individual’s domicile status can also affect their UK tax liability, and a person is usually domiciled in the country that they regard as their permanent home. Individuals who are resident but not domiciled in the UK can elect to pay tax on the remittance basis of taxation, which means that they pay income tax on income from the UK and capital gains tax on gains arising in the UK, and only pay UK tax on their overseas income and capital gains if they are brought into the UK.

Indirect taxes

The principal indirect tax is Value Added Tax (VAT), which applies in all countries in the EU, of which the UK rate of 20% is broadly in line with the average EU standard rate and is applied to both goods and services. Certain supplies are exempt from VAT (no VAT on the supply, but no refund of the VAT incurred on the costs of supply), while others are at a reduced rate (5%). Uniquely, the UK also has a broad range of zero-rate supplies, which means VAT on the supply is 0% but input VAT may be reclaimed. VAT is primarily a tax on consumption, so as a general rule should not affect a business that is not an end consumer and, to the extent that a business makes VAT-able supplies, it should normally be able to recover any VAT incurred.

Stamp taxes

Stamp taxes apply to transfers of property, of which there are three types:

* Stamp duty – a flat rate of 0.5% on instruments that transfer stock or marketable securities.

* Stamp Duty Reserve Tax (SDRT) – a flat rate of 0.5% that applies to transfers of UK shares and related securities (including options, interests and unit trusts) where no instrument of transfer is executed. Loan stock is generally exempt from both stamp duty and SDRT and there are special rules where UK shares are effectively traded on non-UK stock markets.

* Stamp Duty Land Tax (SDLT) – this applies to acquisitions of UK land (both freehold and leasehold) and is payable by the purchaser.

Other business taxes

There are local property taxes known as Business Rates, which are set by central government and collected by local authorities to pay for local services. They depend on the value of the property that is used for business purposes. There are no other local trade or turnover taxes and the UK does not have a wealth tax.

You should please note that this guide is for general information only and is based on our understanding of current taxation, legislation and HM Revenue & Customs practice as at April 2015, all of which are liable to change without notice. The impact of taxation (and any tax reliefs) will depend upon your individual circumstances and you should contact us before taking any action. Planned Succession is not authorized by the Financial Conduct Authority to give investment or protection advice.