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.
All businesses 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.
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.
While the United Kingdom is no longer part of the European Union, under the Northern Ireland Protocol (NIP), Northern Ireland (NI) remains part of the single market and will continue to follow the rules for intra-Community supplies and acquisitions so that goods moving between Great Britain (GB) and Northern Ireland are treated as though they are imports/exports and goods arriving into Northern Ireland from the European Union will be subject to ‘Northern Ireland acquisition VAT’. Goods entering Great Britain from Northern Ireland are therefore subject to VAT as though they were imports, and relevant UK legislation applies. Goods entering Northern Ireland from Great Britain are also subject to VAT as though they were imports, and relevant EU or UK legislation applies as appropriate.
‘Distance sales' of goods from GB to EU consumers (B2C transactions) are no longer subject to the distance selling thresholds set by member states, and GB suppliers are required to comply with the rules on imported goods and local supplies in each of the EU member states (including local 'low value consignment relief' rules).
Businesses identified for VAT purposes under the NIP are subject to existing rules in respect of distance sales of goods to consumers (B2C) in EU member states, and EU businesses are able to supply goods to NI consumers under existing distance selling arrangements.
Following the withdrawal of 'low value consignment relief', import VAT is no longer due at the border for most consignments valued below GBP 135. From 1 January 2021, overseas businesses selling direct to UK consumers are required to register and account for VAT in the United Kingdom where the value of any consignment is GBP 135 or less. However, 'low value consignment relief' from import VAT for consignments not exceeding GBP 15 continues to apply in Northern Ireland (although not in respect of goods that are ordered remotely).
For movements of own goods from Great Britain to Northern Ireland, output VAT will need to be accounted for on the VAT return; this may also be reclaimed as input VAT (on the same VAT return), subject to the normal rules. For movements of own goods from Northern Ireland to Great Britain, no VAT will need to be accounted for unless the goods have been subject to a sale or supply to a customer.
UK VAT groups continue to operate largely as they did before the NIP came into force. The exceptions are:
- Where goods are supplied by members of a VAT group, and those goods move from Great Britain to Northern Ireland, VAT will now be due in the same way as when a business moves its own goods.
- Where supplies of goods are made between members of a VAT group, those goods are located in Northern Ireland at the time that they are supplied, and one or both members only have establishments in Great Britain, VAT must be accounted for by the representative member but may be reclaimed, subject to the normal rules.
In February 2023, the United Kingdom and the European Union agreed wide ranging amendments to the Northern Ireland Protocol, titled the Windsor Framework, in order to smooth the flow of trade between Great Britain and Northern Ireland. The Northern Ireland Protocol, reached as part of the Brexit Withdrawal Agreement, aimed to prevent a hard border on the Island of Ireland and stipulated that Northern Ireland remained subject to certain EU customs, VAT, and regulatory rules. The implementation of the Protocol has led to numerous issues for businesses operating in and with Northern Ireland and has therefore been subject to continuous negotiations.
The amended agreement aims to remove these issues by:
- Creating ‘Green Lanes’ enabling goods that are transported from Great Britain to Northern Ireland that are destined to stay in Northern Ireland to be transported with minimal checks and paperwork.
- Amending the text of the Protocol to ensure that UK VAT and excise changes will apply to Northern Ireland and not just Great Britain.
- Implementing a new ‘Stormont Brake’ that will give the Northern Ireland Assembly the ability to block certain new EU laws from applying in Northern Ireland.
Further details will be released in due course, and the agreement will be subject to ratification through the UK's and EU’s respective legislative processes.
Supplies of services between the United Kingdom and the European Union are treated, with effect from 1 January 2021, as supplies of services to a third country. The UK VAT rules determine the place of supply, whether the supply is subject to UK VAT, and whether input VAT incurred in making the supply is recoverable in the United Kingdom.
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 (note that the duty structure for alcoholic drinks is due to be reformed from 1 August 2023):
|Products||Excise duty (GBP)|
|Road fuels||0.5295 per litre|
|Cigarettes||The higher of 16.5% of retail price plus 294.72 per 1,000 cigarettes or 393.45 per 1,000 cigarettes.|
|Tobacco (hand rolling)||351.03 per kg|
|Wines (5.5% to 15%)||2.98 per litre|
|Spirits||28.74 per litre of pure alcohol included|
Following the end of the Brexit transitional period on 31 December 2020, goods moving between Great Britain and the European Union are treated as imports and exports. Under the provisions of the NIP, Northern Ireland has a special status in regards to customs.
EU goods imported into the United Kingdom by entering Northern Ireland are treated as domestic goods and will not be chargeable to import duty. However, anti-avoidance provisions apply in circumstances where goods are moved via Northern Ireland specifically to avoid paying UK duties that would have applied if the goods had moved directly from the European Union to the United Kingdom. Non-EU goods imported into the United Kingdom by entering Northern Ireland are subject to duty charged in accordance with EU customs legislation.
See Brexit above (under VAT) for more information regarding amendments to the Northern Ireland Protocol.
Rules allow UK-established traders to use a duty deferment account without holding a Customs Comprehensive Guarantee, upon grant of a guarantee waiver by HMRC.
VAT-registered traders choosing not to, or not eligible to, defer their import declarations will still be able to use postponed VAT accounting if they choose to do so.
The United Kingdom has lost access to the intra-EU reporting functionality within the Excise Movement and Control System (EMCS). EMCS remains operational in the United Kingdom, but now operates solely for internal UK duty-suspended movements, including movements between the importer or exporter’s warehouse and the port.
Importers wishing to move goods under excise duty suspension need to be approved as a Registered Consignor (or seek the services of one) to declare goods to EMCS from the port of import. An excise movement guarantee must be in place (if required) for duty-suspended imports to cover the movement from the port to the warehouse.
Traders using the Common Transit Convention to import and export need to follow all transit procedures from 1 January 2021.
Soft drinks industry levy (SDIL)
The government 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 progressive rates of up to 5%; the 5% rate applies for the portion of the consideration exceeding GBP 250,000. 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%). Companies and non-natural persons are subject to the 15% rate where the consideration exceeds GBP 500,000 and the company is not using the property for one of certain specific business purposes. Individuals and trusts will be subject to the 15%/12% where the consideration exceeds GBP 1.5 million. An additional 2% surcharge also applies to the acquisition of residential property by non-resident purchasers from 1 April 2021. 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 6% 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). 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. 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. LTT is not charged on the NPV of the rents payable on the grant of a residential lease.
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. From 1 April 2023, this is based on the value of the property at 1 April 2022. The charge on a property worth GBP 20 million or more cannot exceed GBP 269,450 per annum from April 2023. The minimum charge is GBP 4,150 from April 2023 for a property valued at GBP 500,000.
There are certain reliefs that may be claimed to reduce the charge to nil, 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. There are also some complete exemptions from the regime, including charitable companies and public bodies.
In addition, a disposal of any 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 gains. However, the ATED gains regime has been abolished from 6 April 2019 on the introduction of the broader non-UK resident gains regime applying to immovable property. The historic ATED-related gains 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-UK 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 2024, the rate is 13.8% on all earnings above GBP 175 per week.
On 6 November 2022, the government repealed its Health and Social Care Levy, which was due to be introduced from 6 April 2023. In addition, the additional 1.25% Class 1 NIC rate in force from 6 April 2022 was also reversed for the remainder of the 2022/23 tax year.
Where NIC is payable on an annual basis, the blended rates applying for the 2022/23 tax year, in order to deliver a similar economic effect, are as follows:
- Directors pay primary Class 1 NIC at 12.73% at the main rate and 2.73% thereafter, and their employers pay 14.53% secondary Class 1 NIC.
- Class 1A NIC and Class 1B NIC are payable at 14.53%.
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 any periods on or after 1 January 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 a 3% supplementary corporation tax charge on profits above GBP 100 million for accounting periods beginning on or after 1 April 2023. Prior to this date, the rate of supplementary corporation tax charge was 8% on profits above GBP 25 million. Companies with accounting periods straddling 1 April 2023 must time-apportion their profits for the purpose of calculating the amount of surcharge.
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 from GBP 98.60 per tonne to GBP 102.10 per tonne from 1 April 2023. The reduced rate for inert waste increased from GBP 3.15 to GBP 3.25 from 1 April 2023.
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 and is due to increase to GBP 2.03 per tonne from 1 April 2024.
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 increased from GBP 200 per tonne to GBP 210.82 per tonne from 1 April 2023.
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 includes (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.