Resident companies are taxable in the United Kingdom on their worldwide profits (subject to an opt-out for non-UK PEs), while non-resident companies are subject to UK corporation tax on the trading profits attributable to a UK PE, the trading profits attributable to a trade of dealing in or developing UK land (irrespective of whether there is a UK PE), on gains on the direct and certain indirect disposals of UK property, and on UK property rental business profits plus UK income tax on any other UK-source income. In practice, for many companies, the application of a wide range of tax treaties, together with the dividend exemption, makes the UK corporation tax system more like a territorial system.
General corporation tax rates
The normal rate of corporation tax is 19% for the year beginning 1 April 2020.
Where the taxable profits can be attributed to the exploitation of patents, a lower effective rate of tax applies. 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.
Special corporation tax regimes
Apart from the four specific exceptions noted below, there are no special regimes for particular types or sizes of business activity; in general, all companies in all sectors are subject to the same corporation tax rates and rules. However, certain treatments and reliefs do vary according to size, including transfer pricing, R&D credits, and some targeted anti-avoidance rules.
For large companies, there are some additional compliance and reporting requirements. Some elements of Her Majesty's Revenue and Customs' (HMRC’s) organisational structure and approach to avoidance and compliance are arranged by size of business (e.g. Large Business Strategy).
Oil and gas company regime
Profits that arise from oil or gas extraction, or oil or gas rights, in the United Kingdom and the UK Continental Shelf ('ring-fence profits') are subject to tax in the United Kingdom in accordance with rates applicable in 2006, i.e. a full rate of 30% and a small profits rate of 19%. Such activities also attract 100% capital allowances on most capital expenditure. A supplementary tax charge of 10% applies to 'adjusted' ring fence profits in addition to normal corporation tax.
Petroleum revenue tax is now set at 0% but is retained for technical and historic reasons in relation to certain old oil fields.
Life insurance company regime
Life insurance businesses are also taxed under a special regime, which effectively includes different corporation tax rates as well as special rules for quantifying profits.
Tonnage Tax regime
Companies that are liable to corporation tax and operate qualifying ships that are strategically and commercially managed in the United Kingdom can choose to apply Tonnage Tax in the place of corporation tax. Tonnage Tax is an alternative method of calculating corporation tax profits by reference to the net tonnage of operated ships. The Tonnage Tax profit replaces the tax-adjusted profit/loss on a shipping business and certain related activities, as well as the chargeable gains/losses made on Tonnage Tax assets. Any other profits are taxable under the normal corporation tax regime.
A supplementary tax is applicable to companies in the banking sector at 8% on profits in excess of GBP 25 million. Also, loss utilisation is restricted; carried forward trading losses can be set against only 25% of profits in a period.
Income tax for non-resident companies
A non-resident company is subject to UK corporation tax on the trading profits of a UK PE and, irrespective of whether there is a UK PE, the trading profits attributable to a trade of dealing in or developing UK land, and income received from UK property.
Any other UK-source income received by a non-resident company is subject to UK income tax at the basic rate, currently 20%, without any allowances (subject to any relief offered by a double tax treaty [DTT], if applicable). This charge has most commonly arisen in relation to UK rental income earned by a corporate non-resident landlord (NRL), which, until 5 April 2020, was within the scope of UK income tax. The United Kingdom operates an NRL scheme that requires the NRL's letting agent or tenants to withhold income tax at 20% at source unless they have been notified that the NRL has applied for and been given permission to receive gross rents. The NRL scheme is continuing, notwithstanding that corporate NRLs are now within the scope of corporation tax in respect of the profits of their property rental business.
Non-resident companies within corporation tax on UK property rental business income from 6 April 2020
Prior to 6 April 2020 non-UK tax resident companies were subject to UK income tax on UK property rental income (either through withholding or by direct assessment) unless the income was in relation to a UK permanent establishment through which they were also carrying on a trade.
From 6 April 2020, all non-UK tax resident companies which carry on a UK property business have been brought within the scope of corporation tax in respect of the profits of that business from that date.
Since profits of a UK property business (for corporation tax purposes) do not take into account debits or credits from loan relationships or derivative contacts, a non-UK tax resident company which carries on a UK property business is also chargeable to corporation tax in respect of its debits or credits that arise from loan relationships or derivative contracts that the company is a party to for the purpose of that business.
In addition to the difference in the tax rates which apply (the income tax rate is 20% and the corporation tax rate is 19%), there are other changes as a result of the move to corporation tax. The corporation tax filing and payment requirements and deadlines will be different.
There will be, amongst other things, additional restrictions on the deductibility of interest (interest capping), deductions related to hybrid mismatches, restrictions on the amount of losses brought forward from earlier periods that can be offset and other provisions relating to the taxation of loan relationships and derivative contracts. In addition, there are late payment restrictions which can apply where interest is not paid within 12 months of the year end to certain connected recipients.
Diverted Profits Tax (DPT)
Diverted Profits Tax (DPT), introduced in April 2015, is part of the UK’s response to the shifting tax environment, most notably highlighted in the OECD’s BEPS reports. DPT is separate from other corporate taxes. It is levied at 25% (or 55% in the case of UK ring fence operations, i.e. broadly oil extraction operations) on diverted profits (as defined) and may apply in two circumstances:
- where groups create a tax benefit by using transactions or entities that lack economic substance (as defined), involving an effective tax mismatch outcome and the insufficient economic substance condition being met; and/or
- where foreign companies have structured their UK activities to avoid a UK PE involving an effective tax mismatch outcome and the insufficient economic substance condition being met and/or the tax avoidance condition being met.
There are several situations or types of transactions that are not within the scope of the DPT rules.The following are not within the scope of the DPT rules in both circumstances outlined above:
- the parties are both small or medium-sized enterprises;
- where the tax mismatch arises from loan relationships (and derivatives hedging loan relationships);
- transactions involving the receipt of payments by the following types of bodies:
- pension funds,
- person with sovereign immunity,
- certain investment funds,
The following are not within the scope of the DPT rules in the second circumstance only;
- total UK-related sales revenue is less than £10m for the period; or
- total UK-related expenses are less than £1m for the period.
Companies are required to notify HMRC if they are potentially within the scope of DPT (even if it is anticipated there will be no DPT payable, e.g. due to credit relief) within three months of the end of the accounting period to which it relates. The legislation is complex and subjective in places, and has the potential to apply more widely than might be expected.
In January 2019, HMRC launched the Profit Diversion Compliance Facility, which is aimed at multinationals using arrangements targeted by DPT who are not currently under a DPT or transfer pricing enquiry.
The Facility is designed to encourage businesses potentially impacted to review their tax policies, change them as appropriate, and use the Facility to submit a report with a proposal to pay any additional tax, interest, or penalties due. This enables the business to bring their tax affairs up to date efficiently and without intervention from HMRC.
Local income taxes
There are no local or provincial taxes on income, although legislative powers are in place to introduce a reduced rate of corporation tax in Northern Ireland. It is not clear when the reduced rate will be introduced or at what rate.