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Overseas traders may find it challenging to understand the UK’s corporate tax system, especially if they are unfamiliar with it. However, proper comprehension and adherence to tax regulations can significantly influence a company’s profitability while also helping avoid legal complications.
The Structure of Your Business: If you’re an overseas trader planning to enter the UK market, one of your first decisions is setting up a branch or subsidiary in the country. This choice will impact your taxes, profitability, and legal obligations in the UK.
A subsidiary is a separate legal entity from its parent company and is subject to the UK Corporation Tax. This means that any debts or liabilities incurred by the subsidiary are solely its responsibility and do not affect the parent company. However, the subsidiary’s profits are subject to the UK Corporation Tax.
A branch, also called a ‘permanent establishment’, is not a distinct legal entity from its parent company. Instead, it is an extension of the parent company in a foreign country. Generally, branches are subject to the tax laws of their home country. However, if a branch’s activities in the UK meet the criteria of a ‘permanent establishment’ according to UK tax law or the applicable double taxation agreement, it will be responsible for paying UK Corporation Tax on its profits linked to the UK. Branches may not be eligible for certain UK tax incentives, such as R&D tax credits, which are reserved for companies incorporated in the UK. Nevertheless, depending on the respective tax laws, branches could benefit from lower tax rates in the parent company’s country of origin.
Understanding Corporation Tax: Corporation Tax in the UK is a levy charged on the profits made by companies. This includes profits from everyday business operations, termed ‘trading profits’, and gains from selling assets for more than they cost, known as ‘chargeable gains’. If your company is based outside the UK but has an office or branch in the country, you will only pay Corporation Tax on profits from your UK activities.
The taxation period for Corporation Tax, the ‘accounting period’, is typically 12 months long. This period usually aligns with the company’s financial year but can be shorter in certain cases, such as in the first year or if the company stops trading.
UK’s Corporation Tax rate stands at 19% for companies with profits between £50,000 and £250,000, reduced by a marginal relief.
Corporation Tax and Brexit: The implications of Brexit on the UK’s tax landscape, particularly Corporation Tax, have been a topic of much speculation and uncertainty. Despite Brexit, the UK government had reaffirmed its commitment to maintaining the Corporation Tax rate competitively low to attract foreign investment in the past. However, the broader impacts of Brexit have resulted in changes to the UK’s tax rules, affecting resident and non-resident companies. Some areas of potential change could be in the interpretation of ‘permanent establishment’ or the administration of tax reliefs and incentives. In addition, changes to the customs regime have indirectly impacted Corporation Tax by affecting trading profits.
Taxation of Non-UK Resident Companies: Non-UK resident companies in the UK or which earn income from properties or investments are liable to pay UK Corporation Tax. These businesses are taxed on their trading profits and chargeable gains from the UK. The tax rate for these non-resident companies is currently the same as that for resident companies—19% and 25% with profits of more than £250,000. However, companies are only liable for profits attributable to their UK activities, so properly allocating global profits to UK operations is crucial.
Double Taxation Treaties: To avoid the burden of double taxation—taxation of the same income in two countries—the UK has signed Double Taxation Treaties (DTTs) with many countries. These treaties provide mechanisms to avoid income being taxed twice, which could occur when a company resident in one country has income or gains in another.
DTTs often offer reduced tax rates or exemptions on certain types of income. They can also clarify how specific types of income or entities should be taxed and can significantly impact a company’s tax planning strategy.
Corporation Tax Across Different Industries: The impact and administration of Corporation Tax can vary across different sectors, as specific industries have unique tax considerations. Property rental businesses, oil and gas companies, shipping companies, investment companies, and closed companies all have specific rules.
For instance, shipping companies can take advantage of the tonnage tax regime—a system of taxing shipping companies based on the tonnage of their vessels rather than their actual profits. On the other hand, investment companies can claim the exemption for capital gains on the sale of shares, provided certain conditions are met.
In conclusion, gaining a firm grasp on the UK Corporation Tax system is vital for overseas traders planning to venture into the UK market. However, seeking professional advice is advisable to navigate this complex landscape effectively. This can help ensure compliance with all tax obligations, optimise your tax strategy, and, ultimately, reduce your overall tax liability.
If you are an overseas trader and need help with your tax planning or corporation tax return, reach out to our tax advisors for a consultation to determine the most suitable tax planning for your specific needs.