United Kingdom

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.

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).

Annual investment allowance (AIA)

All businesses, regardless of size, can claim an AIA 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 AIA has become permanent at GBP 1 million.

Research and development (R&D) incentives

Relief for expenditure of a revenue nature on R&D that is related to a company’s trade and is undertaken by the company or on its behalf is wholly allowable as a tax deduction. In certain circumstances, either enhanced relief is available or a credit is available that is offset against R&D costs in the company’s profit and loss account.

Expenditure of a capital nature on R&D related to a company’s trade is also wholly allowable as a tax deduction (i.e. 100% capital allowances are available). This covers capital expenditure on the provision of laboratories and research equipment; however, no allowance is available for expenditure on land.

There were significant changes that apply for accounting periods commencing on or after 1 April 2023, including:

• A company is required to pre-notify that they are making a claim if they are a first-time claimant or if they have not made claims in the past three years. The notification must be made by six months after the end of the period in which they intend to make a claim. HMRC have indicated that late notifications will not be accepted, so companies will need to be planning much further ahead when considering whether to make claims.
• It is mandatory for claimants to share certain information when making a claim. The key documentation that needs to be shared with HMRC includes:
• a description of the R&D undertaken
• a breakdown of qualifying costs
• details of any agent who has advised on the R&D claim, and
• sign off from a senior officer of the company.

• Cloud and data costs have become qualifying cost types; however, these costs need to clearly align with direct R&D and cannot be included in R&D claims where these costs only relate to indirect supporting activities.

• Pure maths research is now within the scope of the R&D relief, which is likely to benefit those undertaking data science or artificial intelligence-based R&D activities.

In addition, there are further significant changes that apply for accounting periods commencing on or after 1 April 2024, including:

• A new merged scheme (merger of the below SME and RDEC schemes), which has restrictions on eligible overseas costs and complex rules regarding subcontracting and the eligible company that may claim the R&D relief (see below).

R&D relief: SMEs

Certain companies incurring R&D expenditure of a specific nature are entitled to claim R&D tax relief.

A standalone company (or the group where the UK company is part of a global group) must be an SME, as defined by the European Union. The company (broadly together with any company of which it owns 25% or more or that has more than 25% interest in it, subject to some exceptions) should have fewer than 500 employees and either an annual turnover not exceeding EUR 100 million or an annual balance sheet total not exceeding EUR 86 million.

The R&D may be undertaken by the company or directly on its behalf. The R&D must be related to the company’s trade. R&D that is deemed to be funded or subcontracted to the company may only be claimed under the large companies RDEC scheme (see below).

Detailed below are the types of expenditure that may be included within claims.

Enhanced R&D tax relief is given by increasing the deduction for qualifying SME R&D in a company’s corporation tax computation from a 100% deduction to 230% deduction for qualifying expenditure. This rate was reduced to 186% deduction from 1 April 2023.

One of the ways HMRC is tackling abuse in the SME regime is through the SME cap that applied from 1 April 2021. The amount of payable tax credit a qualifying loss-making business can receive is capped at three times the company’s total PAYE and NICs liability for that year. There is a threshold of GBP 20,000, so that the smallest claims are uncapped (i.e. a company receiving a payable credit of below GBP 20,000 for a 12-month period will not be impacted by the cap). There are also rules that attempt to limit the impact of the cap on some businesses with genuine R&D and IP substance in the United Kingdom.

R&D tax credits

Where an SME company has a ‘surrenderable loss’ it may claim an R&D tax credit. Generally, a surrenderable loss arises where the company incurs a trading loss.

The surrenderable loss is the lower of the unrelieved trading loss or 230% of the qualifying research and development expenditure. This reduced to 186% from 1 April 2023.

The cash payment is 10% of the amount of losses surrendered. This equates to a cash repayment of up to 18.6% (being 186% at 10%) from 1 April 2023. Where the R&D tax credit is claimed, the trading loss carried forward is reduced by the amount of the surrendered loss.

From 1 April 2023, for loss-making, R&D-intensive SME businesses, a higher credit rate is available providing a higher cash benefit, as follows:

• Credit rate of 14.5%.
• Cash benefit of 27%.

This credit is intended for R&D-intensive businesses that are considered to need additional support. The R&D-intensive definition is met if at least 40% of the total group expenditure is on qualifying R&D expenditure. This threshold is reduced to 30% for accounting periods commencing on or after 1 April 2024.

R&D Expenditure Credit (RDEC)

Relief under RDEC is available to large companies (unless subcontracted to the claimant company by a UK SME) and SME companies where expenditure has been funded or subsidised (by grant income, customer funding, or otherwise).

This credit is different to the payable credit referred to above for SMEs. Companies may claim to receive a taxable credit payable at 20% (13% prior to 1 April 2023). The credit is brought into account ‘above the line’ and reflected in the operating profits of the company, similar to a grant. The credit itself is taxable and so taking a 25% corporation tax rate into account, the net benefit to the company of the credit is 15%. The net benefit was previously 10.5% prior to 1 April 2023 (taking a corporation tax rate of 19%).

Merged scheme

A merged ’RDEC for all’ regime came into effect for accounting periods starting on or after 1 April 2024. This brings together the incentives regimes for SMEs and large companies for the first time (with the exception of the additional regime for R&D-intensive SMEs).

• The merged regime generates a gross taxable credit of 20%.
• The rate at which tax is deducted from the repayable credit for loss-making companies is reduced from 25% to 19% resulting in a 16.2% repayable rate compared to 15% for profitable companies. This means large loss-making companies will have an increase in rate from 15% to 16.2%. SMEs, however, will see a further reduction in benefit from 21.5%/18.6% to 15%/16.2% for profitable / loss-making SMEs, respectively. The higher credit rate scheme for R&D-intensive loss-making SMEs will continue and run in parallel to the merged scheme.
• There is a significant change on who can claim for subcontracted R&D under the merged scheme. This is the main area of change and complexity for both large companies and SMEs. In the main, where a principal company contracts a third party to undertake work connected with their R&D project, the principal company may claim the qualifying R&D costs of that contract.The company contracted to do that work may not claim for R&D activities that deliver the project outcome for another company’s R&D project. However, if a company is contracted to do work for another company, but the work does not form part of the R&D for the customer (i.e the customer has no knowledge that R&D is required) and was instead initiated by the contractor, then the contractor may be able to claim relief for their work if it is eligible R&D. This is a complex area and advice should be sought from R&D specialists. In addition, where a UK subcontractor undertakes R&D work for an overseas principal or a government body, the subcontractor will still be eligible to make a claim.
• Loss-making companies not paying corporation tax will be able to claim a repayable credit, and the potential PAYE cap on this will mirror the current SME cap. This will benefit large loss-making companies where their spend on non-staffing costs is significantly higher than their staffing costs.
• Overseas costs restrictions are included under the merged regime, limiting the eligibility of overseas subcontracted R&D or payments to externally provided workers that do not meet specific eligibility criteria.

Patent box

Where the taxable profits can be attributed to the exploitation of patents, a lower effective rate of corporation tax applies. For 2024/25, the rate is 10%. The Nexus scheme requires companies to stream their IP income and the application of a fraction to relevant IP profits based on the proportion of R&D undertaken by itself. The Nexus scheme meets revised OECD principles and limits the qualifying IP profits based on the proportion of R&D undertaken by the company, by applying ‘the R&D fraction’.

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. 

Some significant changes have been made to the UK creative industry tax reliefs, including film, TV, and video game tax reliefs. The audio-visual tax reliefs are now above-the-line expenditure credits similar to the current RDEC.

The Video Games Expenditure Credit (VGEC) replaces the Video Games Tax Relief, and the audio-visual expenditure credit (AVEC) replaces:

• Film Tax Relief.
• High-End TV Tax Relief.
• Animation Tax Relief.
• Children’s TV Tax Relief.

Key changes include: 

• A taxable credit rate of 34% applies to film, high-end TV, and video games, and a higher credit rate of 39% applies to animated film and TV and children’s TV. This equates to a net cash credit of approximately 20.4% for film, high-end TV, and video games, and 23.4% for animated film and TV and children’s TV.

• The expenditure credits are available for expenditure incurred from 1 January 2024. New productions must claim under the new expenditure credits rules from 1 April 2025.

• The mechanism for the credits is very similar to the RDEC, although there is no PAYE cap applicable to these credits. 

• The qualifying criteria and other rules for the current reliefs will mostly be carried across into AVEC and VGEC unchanged, including the 80% cap on qualifying expenditure. Qualifying expenditure will still be calculated on a cumulative basis.

• There are transitional rules for film or TV productions and video games that continue after 1 January 2024. Existing productions / games can continue under the existing rules up to March 2027, or the new expenditure credit can be claimed. From 1 April 2025, claims for new productions and games must be made under the expenditure credits system. For accounting periods starting on or after 1 April 2027, all productions will need to be claimed under the new rules.

• Akin to R&D claims, companies claiming creative tax reliefs are now required to complete and submit an online information form at the same time as making a claim in the tax return. 
• Expenditure potentially eligible for R&D credits (irrespective of which scheme) is now excluded from claiming under the VGEC or AVEC, whether or not an R&D credits claim is actually made.
• A new additional tax credit relief for independent films will also be introduced for 2025.

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