United Kingdom

Taxable period

Companies are assessed by reference to tax accounting periods. Normally, the accounting period is the period for which the company makes up its statutory accounts. However, a tax accounting period for corporation tax purposes cannot exceed 12 months, so companies preparing statutory accounts for longer than 12 months need to prepare more than one corporation tax return. Note that the maximum period that statutory accounts can be made up for is 18 months.

For non-resident companies subject to corporation tax on capital gains in respect of certain direct or indirect disposals of UK immovable property, there may be a one-day accounting period and special rules apply (including the tax payment date).

Tax returns

Companies must file their tax return within one year from the end of the accounting period; the return must include a self-assessment of the tax payable, eliminating the need for assessment by HMRC (though HMRC retains assessing powers for certain cases where it is not satisfied with the return, or where the company fails to make a return).

Electronic filing requirements

Returns must be filed online, and such returns must be filed in a specified format that is machine readable by the tax authorities. The accompanying accounts must also be in iXBRL format.

Payment of tax

For smaller companies, corporation tax is payable nine months and one day after the end of the accounting period to which it relates (i.e. before the return must be filed). For larger companies and groups, a system of quarterly payments on account (based on estimated profits) is in place, with the first payment being due in the seventh month of the accounting period concerned. A company will generally be considered large for this purpose in any accounting period in which it has taxable profits in excess of GBP 1.5 million (that limit being reduced by reference to the number of companies under common control, where relevant).

For accounting periods beginning on or after 1 April 2019, the companies with profits over GBP 20 million (that limit being reduced by reference to the number of companies under common control, where relevant) will have earlier quarterly payments dates, with tax due in the third, sixth, ninth, and 12th months of the period concerned.

Penalties

The UK tax system can impose numerous penalties for failing to adhere to the self-assessment system. These include penalties for late filing of returns, failing to maintain appropriate records, submitting an incorrect return, making errors in certain documents sent to HMRC, unreasonably failing to report errors in assessments by HMRC, and failing to respond to a formal notice of information requested from the tax authorities within the specified time limit.

New provisions were introduced by Finance Act 2022 for 'electronic sales suppression' (ESS) to create new penalties for the possession, making, supplying, or promotion of tools that facilitate ESS. There are also new ESS-specific information powers. ESS is where businesses manipulate electronic records of sales data, either during or after the point of sale, in order to hide or reduce the value of individual transactions. This is done to reduce the recorded turnover of the business and corresponding tax liabilities, whilst providing what appears to be a credible and compliant audit trail.

Other filing requirements

Large companies (those with turnover greater than GBP 200 million or balance sheet assets over GBP 2 billion) are required to notify HMRC of the identity of their ‘Senior Accounting Officer’ (SAO), who then must certify annually that the accounting systems are adequate for the purposes of accurate tax reporting. Penalties are chargeable on the officer and the company for careless or deliberate failure to meet these obligations, and on a failure to notify HMRC who is the SAO. Large companies (as defined above) and groups within CbC reporting must also publish online annually a statement of their UK tax strategy. Again, penalties are chargeable on the responsible company for failure to meet these obligations.

Certain tax planning and structuring transactions and arrangements must be disclosed to HMRC either before or on implementation of the transaction under the Disclosure of Tax Avoidance Schemes (DOTAS) regime or the Disclosure of Avoidance Schemes for VAT and Other Indirect Taxes (DASVOIT) regime. These schemes cover most taxes and are reporting systems only, with responsibility placed on taxpayers, advisors, or promoters to report. HMRC are not required to respond to the reporting, and this is not an advance clearance or approval process. It is a reporting mechanism only, and, on occasions, new legislation has been introduced to block specific arrangements reported.

Under the EU Mandatory Disclosure Regime (EU MDR), from 25 June 2018, certain cross-border transactions need to be reported to HMRC. The Directive broadly relates to all direct taxes, and specifically excludes most indirect taxes. The rules require all arrangements that meet certain conditions to be reported. Following the agreement of the EU/UK Trade and Cooperation Agreement in December 2020, the obligation to report an arrangement to HMRC has been limited to cross-border arrangements meeting the Category D hallmarks. These hallmarks relate to arrangements that may have the effect of undermining reporting obligations under the Common Reporting Standard (CRS) or which involve ownership structures where the beneficial owners are made unidentifiable, and are consistent with the OECD’s model MDR rules. Penalties will be imposed for failure to comply with the reporting obligation. These penalties can range from GBP 5,000 to GBP 1 million or more depending on the circumstances and conduct of the intermediary or taxpayer.

As noted above, a consultation was launched on 30 November 2021 on the proposed replacement of EU MDR with regulations that broadly follow the OECD model. On 24 November 2022, HMRC published a summary of the responses received and confirmed that regulations implementing OECD MDR will come into force in the first half of 2023 and regulations implementing EU MDR will be repealed. The consultation document had proposed that pre-existing arrangements entered into since 29 October 2014 would be reportable under OECD MDR. However, HMRC has now confirmed that reporting of pre-existing arrangements will only be required from 25 June 2018 (the date of commencement of EU MDR) and that any arrangements reported under EU MDR will not be reportable under OECD MDR. Any reports will have to be made online, and there will not be a manual reporting system.

Starting from 1 April 2022, large businesses (corporates and partnerships) need to disclose to HMRC ‘uncertain tax treatments' (UTTs) in partnership, corporation tax, VAT, and PAYE returns due to be filed on or after this date. The stated objective of the new rules is to reduce the legal interpretation portion of the annual ‘tax gap’ estimated by the government between taxes the government says are due and taxes collected. The UTT regime works by the business flagging, at an early stage, particular uncertain areas that may not be apparent from tax returns, such as where there is an accounting provision or where the tax treatment applied is not HMRC’s known position on the particular point. The rule applies where the tax amount involved is more than GBP 5 million, subject to a number of exemptions.

Tax audit process and governance

The UK corporation tax process is one of self-assessment. Following filing of the tax return, HMRC has a period of (usually) 12 months in which to raise formal enquiries. These can range from simple information requests to detailed technical challenges over treatments adopted in the tax return.

These enquiries are often settled between the taxpayer company and HMRC by exchange of information and correspondence. Where agreement cannot be reached, arbitration or litigation may be necessary.

HMRC has certain powers to demand information and, in some circumstances, to enter premises to obtain documents, etc. These powers are rarely used, and there are no routine visits by HMRC officials to taxpayer premises.

Corporate criminal offences (CCOs)

The CCOs were introduced in September 2017. This legislation outlines the failure to prevent the facilitation of tax evasion, with the rules applying to all companies and partnerships in the United Kingdom and also foreign entities with a UK nexus.

The offences can only be committed by a 'relevant body', which means only incorporated bodies and partnerships. The offences cannot be committed by natural persons. ‘Associated persons’ under the legislation are those acting for or on behalf of the organisation and can include employees, agents, or third-party service providers, as well as other group companies. The consequences of committing an offence under this legislation could include criminal prosecution, an unlimited financial penalty, ancillary or confiscation orders, and severe reputational damage.

Senior Accounting Officer (SAO) and tax strategy publication

Large companies (those with aggregated turnover greater than GBP 200 million or balance sheet assets over GBP 2 billion) are required to notify HMRC of the identity of their SAO. Each year, the SAO must personally certify to HMRC that there are ‘appropriate tax accounting arrangements’ in place as part of their main duty to ensure the accuracy of those arrangements. Penalties of GBP 5,000 each are chargeable on the officer and the company for careless or deliberate failure to meet these obligations, including failure to meet the main duty requirement. 

Large companies and groups must also publish online a statement of their UK tax strategy, which should be reviewed and updated annually. Penalties are chargeable on the responsible company for failure to meet these obligations. In addition to the thresholds for SAO above, a UK company or group that is part of an MNE group that meets the OECD’s CbC reporting framework threshold of global turnover over EUR 750 million also needs to publish a strategy. 

The recent Transfer Pricing Records Regulations 2023 and HMRC’s guidance indicate that maintaining the specified transfer pricing records is part of the SAO responsibilities. See 'Transfer pricing documentation' in the Group taxation section for further details.

Notification of uncertain tax treatments (UTTs)

With effect from April 2022, large businesses (as defined above), including partnerships, must comply with a new requirement to disclose to HMRC UTTs (as defined above) in corporation tax, VAT, and PAYE returns due to be filed on or after 1 April 2022. 

A notification is required where there is an uncertain tax treatment that has a tax advantage of more than GBP 5 million for each relevant period. The penalty amount varies according to whether it is:

• a first failure, resulting in a penalty of GBP 5,000, where the company or partnership has not, in any of the preceding three financial years, been assessed to a notification penalty in respect of the same relevant tax
• a second failure, resulting in a penalty of GBP 25,000, where the company or partnership has been assessed to a first failure notification penalty and not already incurred a second penalty in the preceding three financial years in respect of the same relevant tax, or
• a further failure, resulting in a penalty of GBP 50,000, where the company or partnership has been assessed to a second penalty or further failure penalty in the preceding three financial years in respect of the same relevant tax.

The stated objective of the new rules is to reduce the legal interpretation portion of the tax gap by flagging, at an early stage, uncertain areas that may not be apparent from tax returns. HMRC estimates that GBP 3.2 billion of the estimated GBP 5.8 billion of the 2019/20 tax gap is attributable to large businesses.

Tackling promoters of tax avoidance

On 25 February 2022, further measures to clamp down on 'promoters' of tax avoidance were introduced by the Finance Act 2022. The legislation grants HMRC various new powers to tackle tax avoidance, including: (i) ability to freeze a promoter’s assets so that the penalties they are liable for are paid, (ii) deter offshore promoters by introducing a new penalty on the UK entities that support them, (iii) provide for the closing down of companies and partnerships that promote tax avoidance schemes, and (iv) support taxpayers to steer clear of avoidance schemes or exit avoidance quickly by sharing more information on promoters and their schemes.

General anti-abuse rule (GAAR)

The GAAR applies to income tax, corporation tax, capital gains tax, petroleum revenue tax, diverted profits tax, apprenticeship levy, inheritance tax (IHT), SDLT, and ATED, but not VAT. It is targeted at changing behaviour of taxpayers who enter what might be considered to be abusive tax avoidance arrangements. The process includes a quasi-judicial review of the arrangements, the outcome of which must be used as evidence in any related tax litigation.

The government has stressed that the GAAR is only intended to apply to abusive tax avoidance arrangements, which are measured by reference to various indicators, some of which are subjective.

Statute of limitations

For companies that are members of medium or large groups, there is generally a period of one year after the statutory filing dates for the tax authorities to start an enquiry into any aspect of the return. For other companies, enquiries can be started up to 12 months after the date of actual filing. These periods are extended for returns submitted after the filing deadline, that are amended by the taxpayer, or where an issue is subsequently discovered that was not sufficiently disclosed within the standard period. Longer periods apply in the event of inadequate disclosure or deliberate misfiling.

Large businesses tax administration

Following a consultation process, on 30 November 2021, the government announced its response to the review of large businesses’ experiences of UK tax administration, including the degree to which it provides businesses with early certainty where appropriate, ensures the efficient resolution of disputes in accordance with the law, and promotes a collaborative and constructive approach to compliance with the law. The review explored current challenges and areas for improvement, with a particular focus on tax risk and certainty, compliance, enquiries and disputes, and the co-operative compliance and customer compliance manager (CCM) model. As a result of this review, the government announced some actions to improve tax administration for large businesses and make the United Kingdom an easier place to do business in three main areas: (i) mitigating uncertainty through new guidelines for compliance and improved guidance, (ii) changes to help address long-running enquiries with reference made to particular challenges faced in transfer pricing enquiries, and (iii) improving the co-operative compliance experience. In 2022, HMRC launched workstreams in these three areas in order to address these issues.