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 main rate of corporation tax is 25% for the financial year beginning 1 April 2023 (previously 19% in the financial year beginning 1 April 2022).
In addition, from 1 April 2023, a 19% small profits rate of corporation tax was introduced for companies whose profits do not exceed GBP 50,000.
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 six 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 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 the enjoyment of oil or gas rights, in the United Kingdom and the UK Continental Shelf ('ring-fence profits') are subject to tax in the United Kingdom at a full rate of 30%. In addition, a supplementary charge to tax (SCT) of 10% applies to 'adjusted' ring-fence profits.
Whilst taxed at a higher rate, ring-fence profits do benefit from a number of enhanced incentives not available under the general corporation tax regime, including:
- 100% capital allowances on most capital expenditure
- extended loss carryback rules on decommissioning expenditure (not available against the Energy Profits Levy [EPL]), and
- investment allowances providing relief against supplementary charge for capex incurred.
Petroleum revenue tax (PRT) is now set at 0% but is retained for technical and historic reasons; however, PRT refunds are subject to corporation tax and SCT in the period received.
Effective 26 May 2022, a new 25% EPL on the profits of oil and gas companies has been implemented, which seeks to tax all profits arising in the period from that date until 31 December 2025. Whilst relief is not available through historic losses carried forward as at 26 May 2022 for decommissioning expenditure incurred, a new investment allowance designed to encourage investment in the UK North Sea provides additional relief against EPL profits at a rate of 80% of qualifying expenditure. The new investment allowance is generated from ring-fence capital expenditure and certain ring-fence operating expenditure and results in total relief (including 100% first year allowances) of 180% of every pound spent.
In November 2022, the government announced changes to the EPL regime. Changes include the following:
- An increase in the rate to 35%.
- A reduction in the investment allowance to 29%. The investment allowance will be retained at a rate of 80% for expenditure related to decarbonisation, which is broadly powering oil and gas production from non-fossil fuel sources, and reduction or elimination of flaring and venting of greenhouse gases.
- The sunset clause has been extended to 31 March 2028.
These changes came into effect from 1 January 2023.
On 9 June 2023, it was announced that a new Energy Security Investment Mechanism (ESIM) is to be introduced, which would have the following impact on the application of EPL:
- EPL would not apply should oil and gas prices remain at or below USD 71.40/bbl and GBP 0.54/thm, respectively, for two consecutive quarters.
- Timing of applicability of the ESIM is unclear, but it is likely to apply from 9 June 2023 (i.e. the date of the announcement).
- Detailed guidance and draft legislation are awaited.
Finally, on the same day, the government also announced a review of the UK oil and gas fiscal regime and will be consulting with industry and interested parties during the remainder of 2023.
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 elect (subject to certain conditions) 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.
Various amendments to the Tonnage Tax regime were enacted in Finance Act 2022 and took effect from 1 April 2022.
A Tonnage Tax election must, broadly, be made within 12 months from the day that the company became eligible to enter the regime. However, in the 2023 Budget, the government announced a new window for entry into the Tonnage Tax regime for eligible companies from 1 June 2023 to 30 November 2024. This election window was implemented by a Statutory Instrument made on 9 May 2023. Other changes to the Tonnage Tax regime were announced in Budget 2023 with effect from 1 April 2024, which will be legislated for in Finance Bill 2024.
A supplementary tax is applicable to companies in the banking sector at 3% on profits in excess of GBP 100 million with effect for accounting periods commencing on or after 1 April 2023. Prior to this date, the rate of supplementary corporate tax charge was 8% on profits above GBP 100 million.
Loss utilisation is restricted; pre-1 April 2015 carried forward trading losses can be set against only 25% of profits in a period, and post-1 April 2015 carried forward trading losses are subject to the general loss restriction.
Real estate investment trust (REIT) regime
A UK REIT is, broadly, a UK resident company or a group of companies of which the principal company is UK tax resident carrying on a property investment business, with property let to third-party tenants. Subject to the satisfaction of a number of conditions, REITs are taxed under a special regime.
A UK REIT is exempt from UK tax on both rental income and gains relating to its qualifying property rental business, and, since 6 April 2019, gains on the sale of shares in qualifying UK property-rich companies.
Profits from activities of the REIT other than the property rental business (the ‘residual business’) are subject to corporation tax in the normal way.
Qualifying asset holding company (QAHC) regime
The QAHC regime was introduced with effect from April 2022 in order to mitigate the tax road blocks that prevent the use of a UK company to act as a holding company/intermediate holding company.
A QAHC must be at least 70% owned by diversely owned funds managed by regulated managers, or certain institutional investors, and exists to facilitate the flow of capital, income, and gains between investors and underlying investments. There are a number of detailed provisions relating to the regime, but broadly, in terms of the benefits, it is allowed tax exemption/benefits in respect of:
- Gains on the disposal of certain shares and non-UK property.
- The profits of an overseas property business.
- The obligation to deduct income tax at the basic rate on payments of interest.
- Modified rules in relation to deductions for interest and other finance costs on debt funding the QAHC.
Also, there is capital (as opposed to income) treatment of payments in the hands of investors made where a QAHC redeems, repays, or repurchases its own shares, and an exemption from stamp duty/stamp duty reserve tax (SDRT) on repurchases by a QAHC of share and loan capital.
Residential Property Developer Tax (RPDT)
A UK RPDT has been introduced with effect from 1 April 2022. It applies to a company or corporate group that holds or has held interests in land/property as trading stock in the course of a trade and is subject to corporation tax on trading profits from residential property development activity. The tax applies at a rate of 4% to annual profits exceeding GBP 25 million (on a group basis, where relevant).
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, as well as profits from a UK property rental business. Non-resident companies are also subject to UK corporation tax on gains on the direct and certain indirect disposals of UK property (see ‘Capital gains on disposal of UK immovable property by non-UK residents’ in the Income determination section).
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 (see ‘Non-resident companies within corporation tax on UK property rental business income from 6 April 2020' in the Income determination section).
Diverted Profits Tax (DPT)
DPT, introduced in April 2015, is part of the United Kingdom’s response to the shifting tax environment, most notably highlighted in the OECD’s Base Erosion and Profit Shifting (BEPS) reports. DPT is separate from other corporate taxes. The usual rate of DPT charged on diverted profits (as defined) was increased from 25% to 31% from 1 April 2023, with apportionment provisions for accounting periods straddling the commencement date. This increase was made in order to maintain the differential between the rate of DPT and corporation tax, which was also increased by 6% from that date. The rate of DPT charged on diverted profits that are UK ring-fenced profits or notional ring-fence profits (broadly oil extraction operations) remains 55%. The rate of DPT charged on taxable diverted profits that would have been subject to the bank surcharge remains unchanged at 33%.
DPT 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 is 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 is met and/or the tax avoidance condition is 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 either of the circumstances outlined above:
- transactions where the parties are both SMEs
- situations where the tax mismatch arises from loan relationships (and derivatives hedging loan relationships), and
- transactions involving the receipt of payments by the following types of bodies:
- pension funds
- person with sovereign immunity
- certain investment funds, and
The following are not within the scope of the DPT rules in the second circumstance only:
- total UK-related sales revenue is less than GBP 10 million for the period, or
- total UK-related expenses are less than GBP 1 million for the period.
Companies are required to notify HMRC if they are potentially within the scope of DPT (even if it is anticipated that there will be no DPT payable, e.g. due to credit relief) within three months of the end of the accounting period to which the notification would relate. The legislation is complex and subjective in places, and it 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.
Finance Act 2022 (FA22) introduced three changes to the rules. It inserted a new subsection (101C FA2015) that provides that a final closure notice may not be issued in relation to an open enquiry where the review period for a DPT charging notice remains open. This is clearly a response to the First-tier Tribunal (FTT) decision in Vitol Aviation Ltd v HMRC, in which the FTT found that HMRC was in possession of sufficient information on the transfer pricing aspects to close their corporation tax enquiries and despite the DPT review period still being open, the FTT directed HMRC to close their corporation tax enquiries. This is an important immediate change to the legislation, resulting in DPT still being the 'stick' to encourage the resolution of transfer pricing disputes. This change has effect in relation to any relevant tribunal direction that is given on or after 27 October 2021, unless the application for the direction was made before 27 September 2021.
In addition, FA22 also:
- Extended the ability to amend tax returns under s101 A / B to the last 30 days of the review period instead of the first 12 months of the review period. Practically, this gives taxpayers an additional two months to agree to a corporation tax resolution to a DPT enquiry.
- Introduced a measure to allow relief against DPT to be given where it is necessary to give effect to a decision reached in a Mutual Agreement Procedure (MAP). This is a significant reversal of HMRC’s earlier position that DPT was 'treaty-proof' and will be a welcome development for taxpayers subject to DPT enquiries.
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.