United Kingdom – Open for Business
By Gareth Winstone, Haines Watts
Despite the economic issues around the world, it has never been a better time to set up business in the UK. Many global companies have a presence or headquarters in the UK because of the well established legal and regulatory framework and the highly skilled workforce.
The main forms a business can take in the UK are as a permanent establishment of a non-UK resident company or as a standalone company (including a subsidiary of an overseas company).
It is very easy to set up a business in the UK and takes very little time. Registration is required with Companies House to set up a company or register a branch, and HM Revenue & Customs need to be notified for corporation tax, payroll tax and VAT.
Companies are subject to tax on their worldwide profits and gains, permanent establishments are only subject to tax on the UK profits and gains related to the permanent establishment.
The current rate of tax in the UK is:
- 24% for profits above £1,500,000 (expected to decrease to 23% and 22% over the next few years).
- 20% for profits below £300,000
- 25% on profits between £300,000 and £1,500,000
Where there are active associated companies, including overseas companies, all these limits are reduced, in effect spreading the limit across all active companies.
For companies paying tax at the lowest rates, the liability is due nine months and a day after the year end, for companies paying at the full rate, tax is payable by instalments, two in the accounting period and two after.
Qualifying capital assets purchased for use in the trade can be written off against profit. The deduction is called capital allowance and takes the place of commercial depreciation charged in accounts. The first £25,000 of assets purchased in a year get 100% deduction, the excess expenditure gets 18%/8% deduction per year on a reducing balance basis depending on the type of expenditure.
The UK is focused on innovation and provides large tax breaks for expenditure on research and development (R&D). Currently, a 225% deduction is allowed for qualifying expenditure on R&D, for every £100 spent there is a deduction of £225.
Subject to OECD based transfer pricing rules, Interest paid to money lenders both third party and other group companies is deductible against profits but may be subject to a withholding tax. The UK does have worldwide debt cap rules which can also restrict the deduction for interest if it exceeds the worldwide interest expense of the group.
Extraction of funds
The UK does not withhold tax on the payment of dividends, therefore after tax profits of the UK company can be paid as a dividend to the parent company without suffering tax.
If the UK company is used as a holding company, the receipt of dividends from subsidiaries is generally exempt from corporation tax, subject to certain rules designed to limit abuse..
The payment of interest from the UK company to an overseas company on a loan will have withholding tax at 20%, but double tax agreements can be used to reduce or eliminate this tax.
In a similar vein, royalties paid to overseas intellectual property rights holders will also suffer withholding tax at 20% and again this can be reduced depending on the double tax treaty available.
No tax will generally arise on the sale of the shares in the UK company by the overseas parent company (unless the shares are held through a UK permanent establishment), because UK capital gains tax is only chargeable on UK residents.
If the UK company is used as a holding company, the sale of shares in subsidiaries may be exempt from tax on the UK company due to the substantial shareholding exemption. This requires the shareholding in the subsidiary to be at least 10% and have been held for at least 12 months. The company being sold and the company making the sale must be trading both before and after the disposal.
If the business is a UK permanent establishment then upon disposal of UK assets used in the UK trade taxable gains may arise which are charged to corporation tax.
The UK has one of the most extensive tax treaty networks in the world and there is generally the ability to reduce withholding rates and eliminate double taxation when transacting from a UK company.
As the UK is part of the EU, it provides an excellent gateway to Europe and benefits from the EU cross boarder reliefs for freedoms of movement to allow ease of trade.
The UK follows the OECD guidance on transfer pricing and uses the arm's length principle. Small and medium size groups are generally exempt from transfer pricing. UK companies of a large group must keep sufficient records in line with OECD recommendations to justify pricing between group members both within the UK and internationally.
Residence and domicile
An individual will definitely be resident if physically in the UK for 183 days or more, a day is counted if present at midnight. It is possible to be resident if in the UK for less days but the rules are far more complicated. New rules are expected to come into force from April 2013 which will bring a welcome certainty to this area.
Liability to tax
An individual that is resident and domiciled in the UK is taxable on his/her worldwide income, a UK resident that is non UK domiciled may choose each tax year to be taxed in the same way as a UK domicile or on the "remittance basis".
The remittance basis allows for overseas income/gains to only be taxed if brought into the UK. However, there are penalties for choosing this method, such as the loss of tax free allowances and potentially a charge to tax of up to £50,000 depending on the number of year's resident in the UK. Therefore it is necessary to review the income and gains every year to choose which method is preferable for that tax year.
A remittance is not limited to cash but also covers assets and the repayment of UK liabilities from overseas (e.g. UK credit card or loan).
To promote overseas investment in the UK, a remittance will not be taxed if it is used for the purposes of commercial investment in a UK business.
Residents of the UK and some non-residents depending on their nationality and residence receive a tax free allowance of £8,105. The next £34,370 of income is taxed at 20% (10% for dividends), income above this is taxed at 40% (32.5% for dividends) and above £150,000 at 50% (42.5% for dividends). If income is above £100,000 then the tax free allowance is reduced by £1 for every £2 over.
Capital gains tax is charged at 18% for 20 per cent rate tax payers and 28% for higher rate tax payers. The first £10,600 is tax free. If the gain relates to a disposal of certain business assets the rate is 10% subject to lifetime limits of £10,000,000.
Arriving in the UK
If a non-domiciled individual moves to the UK and uses the remittance basis, there are steps that can be taken before arrival to ease the potential tax liabilities while in the UK.
To find out more about investing in the UK, download the Haines Watts guide at www.hwca.com/investinguk.
Gareth Winstone, Tax Partner
Haines Watts, 55 offices in all major towns and cities throughout the United Kingdom