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The United Kingdom: Taxation of Companies

The UK tax system is highly developed but relatively straightforward and efficient compared with many of its West European counter-parts. The UK also has some of the most developed company focused anti-avoidance provisions but nonetheless is still one of the most corporate friendly locations in Europe bettered only by countries such as the Republic of Ireland.

Basic Facts

In synopsis, the corporate tax rate in the United Kingdom is as follows:

Standard Company Rates of Tax

(From 1st April, 2015)

20 % for companies with taxable profits up to £300,000.00 For companies with taxable profits between £300,000.00 and above will be taxed at a rate of 21% up to March 2015 and thereafter at 20%.

Capital Gains Tax

The rate of capital gains tax for individuals and trusts is 28% or 10% where Entrepreneurs’ Relief can be claimed. Basic tax rate individuals only pay 18% capital gains tax.

Value added Tax

As with all other European Union member states, the United Kingdom employs a value added tax system. In simple terms, VAT is a tax levied upon consumer expenditure. It does not, at least for VAT registered undertakings; apply to transactions carried out in the course of business. However, to ensure the extraction of the tax, all suppliers of applicable goods and/or services must charge VAT which can then be reclaimed by the receiving VAT registered entity. If further sales are made, then the process is simply extrapolated until, if appropriate, an end consumer is found. Unlike many other countries the UK only has a standard rate of 20% together with a large number of zero rated goods. VAT on fuel and power is 8%. In addition, there are also exempted items which are totally outside the ambit of the tax. The point being that the latter do not, on the assumption that all the goods and/or services dealt with are exempt, require the establishment of a VAT input and output system. On the one hand, this circumvents unnecessary bureaucracy but on the other it means that VAT cannot be reclaimed on purchases. In the case of zero-rated goods however it is necessary to establish such a VAT input and output system but of course the VAT will be reclaimable on purchases. Thus, it is quite possible that a firm selling zero rated goods will, on the basis that some of its purchases are subject to the normal 20% rate, receive rebates from the appropriate Customs & Excise office (the administrating body for VAT). Of course, in reality most firms will find that they will have exempted, zero and full rate inputs and outputs requiring the creation of two different recording methods. Finally, it should be noted that VAT is not chargeable on goods exported outside of the European Union and that, under the current provisions, VAT need not be charged where the recipient of the good and/or service is another VAT registered entity located in one of the member states of the EU. All that is required is that there is an exchange of VAT numbers

Example Exempted Items

  1. Most domestic land & building transactions.
  2. Most banking services
  3. Government duty on registering a limited company.
  4. Most direct and indirect insurance related services.
  5. Most form of betting including the national lottery.
  6. Services provided by the Post Office

THE FIRST BEING FOR EXEMPTED AND THE SECOND FOR ZERO AND STANDARD RATE GOODS AND/OR SERVICES

Example Zero Rated Items

  1. Most food items save those sold through catering establishments except ice cream and confectionery.
  2. Most domestic water and sewerage supplies.
  3. All books, periodicals, magazines and newspapers.
  4. Prescription drugs.
  5. Children's clothing, and shoes
  6. Charities.

Other Taxes

Apart from corporation tax, VAT and social welfare contributions, the only other major outgoings to be faced by a British undertaking would be commercial rates which are generally quite reasonable and under the direct control of the Central Government and certain stamp duties. These normally relating to property acquisition and the registration of securities

Major Legal Entities

The principal legal entities in the United Kingdom are limited and public limited companies, companies limited by guarantee, partnerships, limited liability partnerships (LLPs) and trusts. For the purposes of this website, companies limited by guarantee are not relevant as they are non-profit making and are generally used by charities and various associations.

A Limited Liability Company

A British resident company is one both registered and managed and controlled in the United Kingdom. Non-resident companies have not existed since 1988 but Limited Liability Partnerships (LLPs) can be structured as non-resident entities and are very popular with those seeking British prestige without exposure to British taxes. The Companies Act 2006 (c 46) is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. As in most other European countries the liability of a shareholder is strictly limited to his or her initial investment. However, a director or secretary may find himself or herself personally liable if they have acted 'ultra vires' to the company's stated objectives, have breached their fiduciary duty and/or, in very simple terms, have acted in a reckless or fraudulent manner as adjudged, normally, by objective standards

FORMATION PROCEDURE: Most British companies and annual submissions are now formed electronically at Companies House in Cardiff (For England & Wales), Edinburgh (Scotland) or Belfast (Northern Ireland).

DIRECTORS: Under British law, every company must have at least one director, which may be either an individual or a corporate body. There are no nationality requirements and a director need not be resident in the United Kingdom.

THE SECRETARY: either an individual or a corporate body can hold the post of company secretary. Under British law, a company secretary need not be of British nationality or residence. However, for management and control reasons an indigenous body will especially where the directors are foreign, normally hold this post - Company secretaries owe a fiduciary duty to the shareholders/subscribers.

SUBSCRIBERS: Current UK law allows full equity ownership to rest with one legal entity. However, it is still quite common to have two initial subscribers. Subscribers to a British company can be individuals or corporate bodies of British or foreign nationality. Theoretically, a British company can be capitalized with as little as UK£1.00. However, generally the initial agent will have issued two fully paid up shares. The balance or nominal share capital, will normally be between 1,000 and 100,000 shares with either a par or non-par value. It should be noted, that on the allotment of a company's shares it is not necessary that they be fully paid up.

REGISTERED OFFICE: All British companies must at all times maintain a registered office within the jurisdiction of the United Kingdom. At such an office, a combined register must be kept outlining all current directors, the secretary, subscribers and charges/debentures registered against the entity. The registered office (which does not have to equate with the place of business/trading), is required for service of process and receipt of official government and court papers. It is customary to use a solicitor, accountant or registration agent to act on behalf of a company.

THE COMPANY'S SEAL: Under S.130 (3) of the Companies Act, 1989, it is no longer necessary for British companies to adopt an official company seal. However, most companies still use this device to give added emphasis to particular transactions. TAXABLE BASE: A British resident company is taxed on its worldwide income whether or not such income arises from activities in or outside of the United Kingdom

COMPANY ACCOUNTS: All British companies are required to maintain full and proper accounts. The detailed requirements being as follows:

For more information on the UK Tax System please contact one of our tax planning consultants.