United Kingdom

Corporate - Tax credits and incentives

Last reviewed - 12 January 2021

Foreign tax credit

The United Kingdom has an extensive network of DTTs. Unilateral relief is generally available, in any event, to credit overseas tax paid on non-UK source profits against the UK tax on the same profits; while the relevant treaty might sometimes extend that relief, their main function for UK companies is to limit overseas WHTs that would otherwise be payable on passive income.

The United Kingdom has a complex regime allowing 'underlying' tax relief in respect of foreign dividends, so that tax suffered at lower levels can be relieved (at least in part) where dividends flow to the United Kingdom via a chain of companies. However, that relief is only available where the dividend concerned is subject to tax. It is therefore of limited application because most foreign dividends are exempt from tax.

Enhanced capital allowances

A variety of tax incentives are given in the form of enhanced tax depreciation allowances (known as capital allowances, see Depreciation and amortisation in the Deductions section). Some of these incentives are given by reference to the expenditure concerned and others by reference to the size of the company incurring that expenditure.

Annual investment allowance

All businesses, regardless of size, can claim an annual investment allowance of 100% on the first GBP 1 million (from 1 January 2019, previously GBP 200,000) tranche per annum of capital expenditure incurred on most qualifying expenditure. This is restricted to a single allowance for groups of companies or associated businesses. The increased annual investment allowance is available for a three year period from 1 January 2019.

Research and development (R&D) incentives

SMEs, as defined, are entitled to a deduction equal to 230% of the qualifying expenditure on R&D in the year in which it is incurred, which can be surrendered for a cash payment (at a rate of GBP 33.35 for each GBP 100 of qualifying R&D spend) by companies that are trading at a loss or have not yet started to trade. To counter perceived abuse of the R&D regime, draft legislation has been published to be introduced in Finance Bill 2021 to restrict the amount of this cash payment that a loss making SME can receive in a tax year to three times the company’s total PAYE and NIC tax liability. The cap will  be effective for expenditure incurred on or after 1 April 2021.

Large companies are granted an R&D 'above the line' tax credit of 13% (increased from 12% from 1 April 2020) of their qualifying expenditure.

Patent box

Where the taxable profits can be attributed to the exploitation of patents, a lower effective rate of corporation tax applies. For 2020/21, 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. This scheme closed to new entrants from June 2016 (but will continue until 2021 for existing taxpayers), when a new arrangement was introduced. The new scheme retains several of the features of the earlier scheme, but focuses more on UK-based activities and meets revised OECD principles.

Other incentives

A deduction equal to 150% of the qualifying expenditure on the remediation of contaminated or derelict land is given in the year incurred, which can be surrendered for a cash payment (at a rate of GBP 24 for each GBP 100 of qualifying land remediation spend) by companies that are trading at a loss.

There are special tax reliefs available for certain expenditure on UK film production, high-end television, animation, video games, theatres, orchestras, and museum and gallery exhibitions.

There are no tax holidays and no foreign investment incentives in the United Kingdom.