If your company is based in the UK, you’ll be liable to pay taxes on your worldwide profits, subject to an opt-out if you are a non-UK permanent establishment.
Non-resident companies have to pay UK corporation tax on their trading profits as a UK permanent establishment.
Trading profits includes profits regarding the development and possession of UK land (even if you’re a non-UK PE), financial gain from a property in the UK and rental business profits made from a UK property.
You will also be expected to pay UK company taxation on all other income from within the UK.
Corporation tax in the UK can be confusing if you’re not familiar with the system and how it works.
We’re taking an in-depth look at the different types of UK company taxation that you’ll be expected to pay as a business that resides and is registered in the UK.
Corporation Tax Rates
From April 2017, the general rate of corporation tax in the UK is 19%.
If your taxable profits come from work relating to patents, you will likely pay a lower effective tax rate of 10% as a result.
These profits can include trading profits from the direct sales of a product relating to a patent, along with profit made from income generated by royalties.
Tax Regimes for Special Corporations
There are four specific exceptions made for the general rate of corporation tax of 19%.
Outside of these four exceptions, there are no special taxation regimes for businesses of a defined size or type.
You will still pay the same corporation tax rate as a small business as that paid by a larger company in the same industry with more employees.
There are tax relief programmes available for businesses of certain sizes.
These programmes usually come with a particular financial incentive, including for research and development.
If you are a larger company, you will have to abide by additional requirements regarding compliance and reporting of your revenue and profit.
When you’re looking at the organisational structure provided by Her Majesty’s Revenue and Custom (HMRC), you’ll see that certain elements are specific to businesses of a determined size.
These policies typically revolve around ensuring compliance of UK company taxation rules with initiatives like the Large Business Strategy.
The four special corporations that have specific tax regulations are:
If you operate within the banking sector and have a profit margin above £25 million, you’ll be subjected to a supplementary tax of 8% on top of your standard tax.
Loss utilisation within the banking sector is restricted, meaning that you can carry trading losses forward. You can set these losses against 25% of your profits during this period.
Companies that offer life insurance are subjected to a special tax regime as a result of the nature of their business. There are various levels of corporation tax rates applied to life insurance companies, alongside special rules involving how profits are quantified.
Oil and Gas Companies
If you’re a company within the oil and gas industry, you’re subjected to a different level of UK corporation tax. Profits that are made from the extraction or right to oil or gas are subjected to various rates.
Ring-fence profits, known as the UK Continental Shelf, are subjected to UK tax rates set in 2006 at a full rate of 30% and 19% at a small profit rate.
The oil and gas regime can allow for 100% capital allowances on most of the capital expenditure made by companies in these industries. Ring fence profits also face a 10% supplementary tax charge, alongside the traditional corporation tax rate.
Revenue tax for petroleum is currently set at 0% due to historical and technical reasons involving oil fields.
If your business operates qualifying ships which you commercially and strategically manage in the UK, you may be subjected to tonnage tax in place of corporation tax.
This system is an alternative way of calculating your profits for corporation tax. It works by basing the calculation on the net tonnage of your operational ships.
It’s essential to know that your profits under a tonnage tax system replace the tax-adjusted profit and loss regime used in shipping.
Any profits that your business makes outside of this system will be taxable under that standard corporation tax rate of 19%.
Non-Resident Companies and Income Tax
If you are a non-resident company, you will be subject to UK corporation tax on trading profits made in the UK. This system is regardless of whether you are a UK permanent establishment or not.
Trading profits include those attributed to deals involving UK land and any income that is received from holding property in the UK.
Outside of property, you will still have to deal with UK company tax.
Any other income that a non-resident company receives from the UK is subject to the basic rate of tax.
You will usually not receive any allowance as a result unless there is relief offered from a double tax treaty. This system typically arises with non-resident landlords instead of companies as they are dealing with rental income earned from a UK property. These landlords can take advantage of the double tax treaty.
Before April 2020, this was within the scope of the standard income tax rate.
If you are a non-resident landlord (known as NRL), there is a specific government scheme that you have to deal with. The NRL system requires tenants or letting agents to withhold the 20% income tax at the source.
The only exception is when the non-resident landlord has received approval from the scheme and is allowed to receive the gross rent and profits.
Although NRLs are now subject to the standard scope of corporation tax, with regards to profits on a rental property, the NRL system is still ongoing.
Corporation Tax on UK Property Rental Business Income for Non-Resident Companies after 6 April 2020
Before April 2020, a non-UK resident company was subject to paying UK income tax on their property rental income within the UK.
This tax was paid either through direct assessment or withholding the 20% income rate.
The exception occurred if the business was a UK permanent establishment that also traded alongside their property work.
After a policy change, all non-UK resident companies that have a property interest are within the scope for UK company tax.
This policy applies to all profits made by the business following 6 April 2020.
For UK company tax, the profits made do not take into consideration any debits or credit from contacts or loans carried by the business.
A non-resident UK company that has a property business will also have to pay corporation tax on the debits and credits concerning loan relationships.
Following the change in corporation tax in April 2020, there are several other differences made concerning tax rates. The most significant change for businesses is the difference in payment requirements, paperwork deadlines, and tax filings for corporation tax.
There will be, amongst other things, additional restrictions on the deductibility of interest (interest capping), deductions related to hybrid mismatches, restrictions on the number of losses brought forward from earlier periods that can be offset and other provisions relating to the taxation of loan relationships and derivative contracts.
In addition, there are late payment restrictions that can apply where interest is not paid within 12 months of the year-end to certain connected recipients.
DPT – Diverted Profits Tax
In April 2015, the UK government introduced the Diverted Profits Tax (DPT) regime to meet the changing business environment.
This change occurred on the recommendation of the BEPS reports issued by the OECD.
The DPT sits separately from the standard corporation tax.
DPT is levied at the rate of 25%. This rate is 55% with regards to ring-fence operations in the UK, such as oil extraction services.
The Diverted Profits Tax is applied on capital categorised as diverted profits and applies in two circumstances.
- DPT is applied when a tax benefit is taken advantage of through third-party entities or transactions without economic substance. These situations involve the tax outcome being unsatisfied and there being insufficient economic substance to the deal between the parties.
- It is also applied when a foreign company operates in the UK and deliberate orchestrates its activities to ensure that they fall into another tax category. If the company is considered to meet the conditions for tax avoidance and insufficient economic substance, they fall into the DPT qualification.
There are circumstances where the DPT will not be applied as they are outside of the scope of the specific policy.
The two circumstances above are the general guidelines.
Here are some typical transactions and scenarios where diverted profit tax will not be applied:
- The parties involved in the transaction are small or medium enterprises (SMEs).
- The mismatch of tax arises as a result of the loan relationships entered into by the company.
- Transactions that involve the company receiving payments from pension funds, those with sovereign immunity, charities, and specified investment funds.
In the second scenario above – where DPT rules are applied – the following evokes an exception to the rules:
- The total UK-related sales revenue amounts to less than £10 million for the period in question.
- The total UK-related expenses amount to less than £1 million for the period in question.
If a company falls within the scope of the DPT policy – even if they do not believe they will have to pay DPT – they will need to inform HMRC. They may not need to pay DPT due to credit relief.
The notification must be paid to HMRC at least three months before the end of the accounting period where the DPT qualification is met.
The regulations around DPT can be confusing and complicated. If your company falls into this UK company tax rate, it’s advised to speak to a tax consultant.
They can help you understand your situation so that you don’t have any nasty surprises. You may fall into the DPT category without realising as the policy has a wide scope.
HMRC launched the Profit Diversion Compliance Facility in January 2019.
It is targeted at multi-national companies who use arrangements that DPT hopes to rectify but are not within its current scope.
HMRC introduced the Profit Diversion Compliance Facility to encourage businesses that may be impacted by DPT to review their tax policies.
The hope is that these organisations will utilise the facility to make appropriate changes. These businesses can submit a proposal to the facility to pay any additional charge (including taxes or penalties) that are due.
The benefit of using the Profit Diversion Compliance Facility is that it allows companies to make relevant changes to bring their tax systems in line with policy.
The facility enables this to happen without the direct involvement of HMRC, making it quicker and more streamlined.
Income Taxes Across the UK
The UK is made up of four regions – England, Scotland, Wales, and Northern Ireland. At this time, there are no localised or provincial taxes applied to income.
The only area where this appears possible is in Northern Ireland, where the Assembly has been given legislative power. In the future, Northern Ireland may have a lower rate of corporation tax if legislated on by the Assembly.
It remains uncertain if or when any corporation tax changes may be made in Northern Ireland – especially in light of Brexit. For now, all UK company tax policy is applied uniformly across the four regions of the UK.
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