Value-added tax (VAT)
The standard VAT rate of 20% applies to most goods and services, apart from domestic fuel and power and certain other reduced-rate supplies, which are subject to VAT at 5%.
Certain small traders (supplies less than GBP 150,000 per annum) with a limited range of expenses may adopt a special flat-rate scheme, which computes VAT at a sector-specific flat rate.
Most exports, most food, most public transport, most books and publications (including, from 1 May 2020, e-publications), and certain essential goods and services are zero-rated. Some supplies are exempt, the main categories being the grant of certain interests in land, insurance, financial services, betting and gaming, education, certain sports services, cultural services, and health and welfare. Zero-rating is preferable to exemption because the VAT on costs incurred in making a zero-rated supply can be recovered while that incurred in making an exempt supply cannot.
VAT is chargeable on the supply of most goods and services made in the United Kingdom by 'taxable persons' in the course of business, when their taxable turnover exceeds the registration thresholds. Taxable persons include individuals, companies, partnerships, clubs, associations, or charities.
Taxable persons who are not normally resident in the United Kingdom, do not have a business establishment in the United Kingdom, and, in the case of companies, are not incorporated in the United Kingdom, but who make taxable supplies, sales to unregistered persons in the United Kingdom, or acquisitions of goods in the United Kingdom above the relevant limits, may be required to register and account for VAT in the United Kingdom.
If the value of taxable supplies is over a specified limit, registration for VAT is compulsory unless the taxable supplies made are wholly or mainly zero-rated, in which case it is possible to apply for exemption from registration. A zero VAT registration threshold applies for businesses not established in the United Kingdom.
The rules applying to VAT and territoriality are different to those applying to direct tax in that they derive from the principles of the place of supply in EU law, as enshrined in European Commission (EC) VAT Directives. Having determined that a supply of goods or services has taken place, the second condition to be determined, if the transaction is to fall within the scope of UK VAT, is whether the supply takes place within the United Kingdom. The place of supply rules are different for goods and for services. A person or business belonging outside the United Kingdom, with no place of business in the United Kingdom, may, nevertheless, be liable to UK VAT registration where the place of supply of those goods or services is in the United Kingdom.
For goods, the basic rule is that a supply of goods is taxable in the territory where those goods are physically located at the time of supply. Hence, if goods are supplied in the United Kingdom by a non-established taxable person, there will still be a liability for VAT purposes, and the person must register for VAT in the United Kingdom if the taxable supplies exceed the current UK VAT registration thresholds. A zero VAT registration threshold applies for businesses not established in the United Kingdom.
For services, the basic rule is that services are treated as made where the customer 'belongs' or is established for VAT purposes, and the customer is responsible for accounting for the VAT due via the reverse-charge procedure. However, this is subject to a number of special rules and exceptions. Determining where a business is established for VAT purposes is based on EU law criteria.
For business-to-consumer (B2C) supplies, the basic rule is that services are treated as made where the supplier 'belongs' or is established for VAT purposes. B2C supplies of telecommunications, broadcasting, and electronic services are taxed where the customer is located or is normally resident.
VAT returns and payments
VAT returns must be completed at pre-set intervals (usually every three months). Larger companies may be required to file monthly returns or make monthly payments on account. All businesses are required to file VAT returns online and make electronic payments. Smaller enterprises can apply for annual returns. VAT returns are usually required to be filed 30 days after the end of the period.
With effect from 1 April 2019, businesses with taxable turnover above the UK VAT registration threshold are required to keep and preserve digital records and provide VAT returns using compatible software. This is done via an ‘application programming interface’ (API), which enables taxpayers to communicate electronically with HMRC. With effect from 1 April 2022, this requirement applies to all VAT registered businesses.
Annual accounting is available for taxable persons with annual turnover (taxable supplies, excluding VAT) not exceeding GBP 1,350,000.
Cash accounting is available for taxable persons with annual turnover (taxable supplies, excluding VAT) not exceeding GBP 1,350,000.
In addition, a flat rate scheme operates for small businesses and is intended to simplify VAT accounting procedures.
Digital Services Tax (DST)
Pending international agreement on how to address the tax challenges of the digitalisation of the economy, in particular the OECD’s two-pillar approach, the United Kingdom has introduced a DST as an interim measure to address these tax challenges. From April 2020, this new DST applies at a rate of 2% to the revenues of certain digital businesses to reflect the value they derive from the participation of UK users, pending an appropriate international solution. The tax applies to annual UK revenues above GBP 25 million from activities relating to Internet search engines, social media platforms, and online marketplaces (of businesses with in-scope annual global revenues of more than GBP 500 million). Loss-makers are exempt, and businesses with very low profit margins are subject to a reduced effective rate. The intention is that this will be disapplied once the OECD's appropriate global solution is in place.
Customs and excise duties
Many goods imported into the United Kingdom from outside the European Union are subject to customs duties. The rates of duty are provided by the EU's Common Customs Tariff and vary widely.
Excise duties are chargeable on most hydrocarbon oil products, alcoholic drinks, and tobacco products imported into or produced in the United Kingdom. Examples include the following:
|Products||Excise duty (GBP)|
|Road fuels||0.5295 per litre|
|Cigarettes||262.90 per 1,000 cigarettes plus 16.5% of retail price|
|Tobacco (hand rolling)||302.34 per kg|
|Wines (5.5% to 15%)||2.98 per litre|
|Spirits||28.74 per litre of pure alcohol included|
Soft drinks industry levy (SDIL)
The government has introduced legislation with effect from April 2018 to encourage the reformulation of drinks that are high in added sugar by levying a unit charge on UK producers and importers of such drinks. There is an exemption for smaller producers. For drinks that contain at least 5 grams (but less than 8 grams) of sugar per 100 millilitres of prepared drink, the SDIL will be charged at the rate of GBP 0.18 per litre of prepared drink; where the drink contains at least 8 grams of sugar per 100 millilitres, the SDIL will be charged at the rate of GBP 0.24 per litre of prepared drink.
Stamp duty is charged at 0.5% on instruments effecting sales of shares. Agreements to sell shares usually attract stamp duty reserve tax (SDRT) at 0.5%. The liability to SDRT may be cancelled by paying the stamp duty due on a stock transfer form (or other transfer instrument) executed in pursuance of the agreement. Stamp duty is not usually charged on an issue of shares. Issues or transfers of shares to clearance services or depositary receipt systems that are not an integral part of an issue of share capital may attract SDRT at 1.5% (stamp duty at 1.5% may be payable on instruments effecting transfers of shares to such services or systems). Transfers of bearer shares also attract stamp duty at 1.5%.
Acquisitions of non-residential or mixed land and buildings in England and Northern Ireland are charged stamp duty land tax (SDLT) at rates of up to 5%. Acquisitions of residential property by companies and similar non-natural persons and by individuals acquiring second homes are charged at rates of up to 15% (whereas acquisitions by individuals who do not own any other properties or who are replacing their main residence are capped at 12%). An additional 2% surcharge also applies to the acquisition of residential property by non-resident purchasers from 1 April 2021. As a result of COVID-19, there was an SDLT ‘holiday’ for certain acquisitions of residential property with an effective date from 8 July 2020 to 30 June 2021 for consideration up to GBP 500,000. Grants of new commercial leases are charged SDLT at 1% of the net present value (NPV) of the rents payable in excess of GBP 150,000 up to GBP 5 million and 2% of the NPV in excess of GBP 5 million. SDLT is also payable at up to 5% on any premium paid. Grants of residential leases are charged at 1% of the NPV of the rents payable in excess of GBP 125,000 plus up to 15% on any premium paid.
Purchases of land and buildings in Scotland from 1 April 2015 are subject to Land and Buildings Transactions Tax (LBTT). Residential rates are graduated up to 12%, which applies for the portion of the consideration exceeding GBP 750,000. The Additional Dwellings Supplement (ADS) may also apply in respect of the purchase of second homes or buy-to-let properties, as well as certain acquisitions of residential interests by 'non-natural' persons. ADS applies to add a 4% surcharge to each consideration 'band'. In respect of non-residential interests, rates are graduated up to 5%; the top rate applies to the portion of the consideration exceeding GBP 250,000. Acquisitions of non-residential leases are chargeable to LBTT based on the NPV of rents over the term of the lease (calculated with reference to the first five years of the lease) as well as any premium payable. Rates are graduated up to 2% for any rents exceeding GBP 2 million. The tax due on the premium is calculated with reference to the non-residential freehold rates. Separate rates apply to calculate the tax due on the NPV of rents payable.
Land and buildings in Wales are subject to Land Transactions Tax (LTT) from 1 April 2018. Rates are graduated up to 12%, which applies to the portion of the consideration exceeding GBP 1.5 million. The higher rates of LTT apply to add a 4% surcharge to each consideration band in respect of purchases of second homes and buy-to-lets as well as certain residential acquisitions by 'non-natural' persons. As a result of COVID-19, there was an LTT ‘holiday’ for certain acquisitions of residential property with an effective date from 27 July 2020 to 30 June 2021 for consideration up to GBP 250,000. In respect of non-residential interests, rates are graduated up to 6%; the top rate applies to the portion of the consideration exceeding GBP 1 million. The acquisition of non-residential leases is chargeable to LTT based on the NPV of rents over the term of the lease (calculated with reference to the first five years of the lease) as well as any premium payable. Rates are graduated up to 2% for any rents exceeding GBP 2 million. The tax due on the premium is calculated with reference to the non-residential freehold rates.
Annual tax on enveloped dwellings (ATED) and related capital gains tax charge
An annual tax on enveloped dwellings is charged on the acquisition and holding of high-value residential properties (property over GBP 500,000) through a company or other 'non-natural' person. Until April 2018, this was based on the 1 April 2012 value, in bands starting at GBP 500,000 and increasing to GBP 20 million. From April 2018, it is based on the 2017 value. The charge on a property worth GBP 20 million or more cannot exceed GBP 244,750 per annum from April 2021. The minimum charge is GBP 3,800 from April 2021 for a property valued at GBP 500,000.
There are certain exemptions from the charge, including where the residential property is let to third parties on a commercial basis or is part of the stock of a property trading company.
In addition, a disposal of such a property or an interest in such a property by a company or other non-natural person was, until 5 April 2019, subject to UK tax on any gains. For non-UK companies, however, the ATED gains regime has been abolished from 6 April 2019 on the introduction of the broader non-resident gains regime applying to immovable property. The historic non-resident capital gains tax (NRCGT) regime, which charged capital gains tax at 28% on any gains accruing after 5 April 2013 (subject to relief for most property used for commercial, charitable, or public use), has been consolidated into the broader regime, which taxes all UK immovable property gains realised by non-residents.
Other than employers’ national insurance contributions (NICs) (see below), there are no other payroll taxes, the burden of which falls on the employer. Employers are, however, responsible for deducting the employees’ income tax liability at source, through the pay-as-you-earn (PAYE) system. The employer may also be required to deduct other amounts from pay (e.g. court orders).
Employers' national insurance contributions (NICs)
Employers are obligated to pay NICs based on a percentage of each employee's earnings. For the year ending 5 April 2022, the rate is 13.8% on all earnings above GBP 184 per week.
On 23 March 2022 the UK Government announced at Spring Statement 2022 an increase in National Insurance thresholds for the 2022 to 2023 tax year.
For tax year 6 April 2022 to 5 April 2023 - Employer Class 1, employee Class 1, Class 1A, Class 1B and Class 4 National Insurance contributions will increase, for one year, by 1.25 percentage points.
From 6 April 2023 - The National Insurance contribution rates will go back down to 2021 to 2022 levels, and the levy will become a separate new tax of 1.25%.
When employers will not have to pay the extra 1.25%
If your employees fall into one of the following categories and earns less than £50,270 (or £25,000 for Freeport employees) per year, existing reliefs will apply for:
- apprentices under the age of 25
- employees under the age of 21
- armed forces veterans
- employees in Freeports
Employers are required to pay 0.5% of their total payroll in excess of GBP 3 million to create a fund to support apprenticeships.
Pension protection fund levy
All defined benefit pension schemes pay a levy, based on pension fund liabilities and the financial risk of the employing company. This levy funds a compensation fund for pensioners and employees of failed schemes.
A bank levy takes the form of an annual tax on certain liabilities of most UK-based banks and building societies. The tax is levied at the following annualised rates (for 2021):
- 0.10% of a bank's short-term relevant liabilities.
- 0.05% of long-term equity and liabilities.
The levy is not charged on the first GBP 20 billion of chargeable liabilities and is not deductible for corporation tax purposes. From 2021, it no longer applies to overseas branches and subsidiaries held by the UK business.
Bank profits are also subject to an 8% supplementary corporation tax charge on profits above GBP 25 million.
The Finance Act 2022 enacted measures to reduce the rate of the supplementary corporation tax charge to 3% on profits above GBP 100 million from April 2023.
Insurance premium tax (IPT)
IPT at the standard rate of 12% applies to premiums for most general insurance, such as for buildings and contents and motor insurance, where the insured risk is in the United Kingdom. Life assurance and other long-term insurance remain exempt, though there are anti-avoidance rules surrounding long-term medical care policies. As an anti-avoidance measure, a higher rate of 20% applies to insurance sold by suppliers of specified goods or services, e.g. mechanical breakdown insurance, travel insurance (irrespective of supplier), insurance sold with TV and car hire, and 'non-financial' guaranteed asset protection (GAP) insurance sold through suppliers of motor vehicles or persons connected with them. Further anti-avoidance rules affect administration or similar fees connected with contracts of insurance, charged under separate contracts by brokers and other intermediaries.
Airport passenger duty
Individuals leaving the United Kingdom by air are obligated to pay a duty, which, in practice, is invariably included in the cost of the air ticket. Typically, such taxes are borne by employers in respect of employee’s business travel. Further, significantly higher rates apply for travel in certain 'executive jets'.
There are several environmental taxes, including the following.
The landfill tax is a tax on waste disposal in landfill sites. The standard rate increased to GBP 96.70 per tonne from 1 April 2021 (increasing to GBP 98.60 from 1 April 2022 and GBP 102.10 from 1 April 2023). The reduced rate for inert waste is GBP 3.15 from 1 April 2022.
Climate change levy
The climate change levy is a tax on energy used in the United Kingdom, such as electricity, gas, coal, etc., and is charged at rates that depend on the nature of the fuel used. There are reduced rates and exclusions from the charge, e.g. supplies to domestic or charitable users, renewable source energy, and energy-intensive sectors committing to specific emissions/energy-saving measures.
The aggregates levy is a tax on the extraction or importation of sand, gravel, and crushed rock for commercial exploitation in the United Kingdom. The rate of tax is GBP 2.00 per tonne.
Carbon Reduction Commitment
The Carbon Reduction Commitment is a mandatory scheme for large businesses with financial, reputational, and behavioural drivers aimed at improving energy efficiency.
Plastic packaging tax
The government introduced a tax on the production and import of plastic packaging from 1 April 2022. This tax applies to plastic packaging that does not contain at least 30% recycled plastic. The rate of tax is GBP200 per tonne.
Local municipal taxes
Local taxes are not based on income, but rather are levied on the occupiers of business property by reference to a deemed annual rental (or 'rateable') value for the property concerned. These taxes (known as 'business rates') are administered by regional local government authorities rather than central government. The amounts paid are deductible for corporation tax purposes, provided they meet all the usual requirements for deductibility.
Offshore Receipts in Respect of Intangible Property tax
The ‘Offshore Receipts in Respect of Intangible Property’ tax, introduced with effect from 6 April 2019, taxes UK-derived intangible property receipts arising to non-UK resident persons.
In overview, it imposes a 20% income tax charge on the gross amount of capital and revenue arising in respect of the enjoyment or exercise of rights that constitute intangible property (broadly defined) where the enjoyment or exercise of those rights enables, facilitates, or promotes UK sales of goods, services, or other property, if:
- the recipient is not resident (as specifically defined for this purpose) in either the United Kingdom or a territory with which the United Kingdom has a full tax treaty (again, as specifically defined for this purpose), and
- none of the exemptions apply.
This wording would appear sufficiently broad to catch receipts paid under almost any licence but not outright sales of intangible property or pre-existing licences.
The legislation now includes (following the introduction of regulations in November 2019, which will be effective from 6 April 2019), the following exemptions:
- Exclusion of companies for which the associated UK sales of goods, services, or other property in the tax year are less than GBP 10 million.
- Exclusion of companies where the tax levied in the country of residence on the relevant income is at least half of the UK tax (but note that UK tax is on gross receipts, so this test may be hard to meet).
- Exclusion of companies when the creation, development, and maintenance activities, and the activities undertaken for the purpose of generating receipts for the company in question, have always been undertaken in the company's territory of residence and the intangible property has not been acquired or derived from a related party.
- Exclusion of companies resident in territories with which the United Kingdom does not have a full tax treaty if the company is resident in a territory on an excluded territories list and meets certain other conditions. This excluded territories list has not yet been published.
- UK sales that are promoted, enabled, or facilitated to only an insignificant extent by a person’s intangible property will not need to be taken into account where those sales are made by an unconnected person (e.g. if a group makes a non-UK sale of a low value component and the unrelated buyer then makes a UK sale of a high value product that includes that component).
- Where intangible property is licensed through a chain of related companies, a form of credit relief will (subject to certain conditions) be available to reduce or eliminate economic double taxation under the offshore receipts regime.
Special rules exist to deal with situations in which the overseas recipient of the income or capital concerned is a partnership.