Resident companies are taxable in the United Kingdom on their worldwide profits (subject to an opt-out for non-UK permanent establishments [PEs]), while non-resident companies are subject to UK corporation tax on the trading profits attributable to a UK PE, or the trading profits attributable to a trade of dealing in or developing UK land (irrespective of whether there is a UK PE), and on the direct and certain indirect disposals of UK property, plus UK income tax on any other UK-source income and on gains on direct or indirect disposals of UK immovable property. In practice, for many companies, the application of a wide range of tax treaties, together with the dividend exemption, makes the UK corporation tax system more like a territorial system.
General corporation tax rates
The normal rate of corporation tax is 19% for the year beginning 1 April 2019. It is proposed that this rate will fall to 17% for the year beginning 1 April 2020.
Where the taxable profits can be attributed to the exploitation of patents, a lower effective rate of tax applies. The rate is 10%. Profits can include a significant part of the trading profit from the sales of a product that includes a patent, not just income from patent royalties.
Special corporation tax regimes
Apart from the four specific exceptions noted below, there are no special regimes for particular types or sizes of business activity; in general, all companies in all sectors are subject to the same corporation tax rates and rules. However, certain treatments and reliefs do vary according to size, including transfer pricing, research and development (R&D) credits, and some targeted anti-avoidance rules.
For large companies, there are some additional compliance and reporting requirements. Some elements of Her Majesty’s Revenue and Customs’ (HMRC’s) organisational structure and approach to avoidance and compliance are arranged by size of business (e.g. Large Business Strategy).
Oil and gas company regime
Profits that arise from oil or gas extraction, or oil or gas rights, in the United Kingdom and the UK Continental Shelf ('ring-fence profits') are subject to tax in the United Kingdom in accordance with rates applicable in 2006, i.e. a full rate of 30% and a small profits rate of 19%. Such activities also attract 100% capital allowances on most capital expenditure. A supplementary tax charge of 10% applies to 'adjusted' ring fence profits in addition to normal corporation tax.
Petroleum revenue tax is now set at 0% but is retained for technical and historic reasons in relation to certain old oil fields.
Life insurance company regime
Life insurance businesses are also taxed under a special regime, which effectively includes different corporation tax rates as well as special rules for quantifying profits.
Tonnage Tax regime
Companies that are liable to corporation tax and operate qualifying ships that are strategically and commercially managed in the United Kingdom can choose to apply Tonnage Tax in the place of corporation tax. Tonnage Tax is an alternative method of calculating corporation tax profits by reference to the net tonnage of operated ships. The Tonnage Tax profit replaces the tax-adjusted profit/loss on a shipping business and certain related activities, as well as the chargeable gains/losses made on Tonnage Tax assets. Any other profits are taxable under the normal corporation tax regime.
A supplementary tax is applicable to companies in the banking sector at 8% on profits in excess of GBP 25 million. Also, loss utilisation is restricted; carried forward trading losses can be set against only 25% of profits in a period.
Income tax for non-resident companies
A non-resident company is subject to UK corporation tax only on the trading profits of a UK PE or the trading profits attributable to a trade of dealing in or developing UK land (irrespective of whether there is a UK PE) and, from 6 April 2019, on the direct disposal and certain indirect disposals of UK property. Any other UK-source income received by a non-resident company is subject to UK income tax at the basic rate, currently 20%, without any allowances (subject to any relief offered by a DTT, if applicable). This charge most commonly arises in relation to UK rental income earned by a non-resident landlord (NRL). The United Kingdom therefore operates an NRL scheme that requires the NRL's letting agent or tenants to withhold the appropriate tax at source unless they have been notified that the NRL has applied for and been given permission to receive gross rents.
With effect from April 2019, non-resident companies are liable to UK tax on the direct disposal and certain indirect disposals of UK property; and, with effect from April 2020, income and gains that non-resident companies receive from UK property will be chargeable to corporation tax.
Diverted Profits Tax (DPT)
DPT is separate from other corporate taxes. It is levied at 25% (or 55% in the case of UK ring fence operations, i.e. broadly oil extraction operations) on diverted profits (as defined) and may apply in two circumstances:
- where groups create a tax benefit by using transactions or entities that lack economic substance (as defined), and/or
- where foreign companies have structured their UK activities to avoid a UK PE.
Companies are required to notify HMRC if they are potentially within the scope of DPT within three months of the end of the accounting period to which it relates (extended to six months for the first year). The legislation is complex and subjective in places, and has the potential to apply more widely than might be expected.
In January 2019, HMRC launched a new initiative, the Profit Diversion Compliance Facility which is aimed at multinationals using arrangements targeted by DPT who are not currently under a DPT or TP enquiry.
The new Facility is designed to encourage businesses potentially impacted, to review their tax policies, change them as appropriate and use the Facility to submit a report with a proposal to pay any additional tax, interest or penalties due. This enables the business to bring their tax affairs up to date efficiently and without intervention from HMRC.
Local income taxes
There are no local or provincial taxes on income, although legislative powers are in place to introduce a reduced rate of corporation tax in Northern Ireland. It is not clear when the reduced rate will be introduced or at what rate.