TAX

The factors covered are:

• International tax comparisons

• Tax treaties

• Corporate tax rates

• Transfer pricing

• Value added tax

• Tax credits for research and development

• Employer social security costs

• Approved and tax-favoured share plans

• Personal taxation

• Capital gains tax

• Further information

The UK is a low tax economy with several key advantages for businesses and individuals, including:

• one of the lowest main corporate tax rates in the European Union,

• low personal taxes plus low social welfare contributions,

• generous tax allowances (such as the availability of research and development tax credits) and no local taxes on profits or surpluses,

• the most extensive network of double taxation treaties in the world, and

• no exchange controls to prevent profits from being paid overseas.

1. International tax comparisons

Figure 1 details an index of various types of taxation in European Union countries. The index is based on the top marginal rate in each of the categories shown and demonstrates that the UK is a highly competitive location for taxation.

2. Tax treaties

The UK has concluded over 100 tax treaties for the avoidance of double taxation and has the largest network of treaties globally (Source: HM Revenue & Customs, 2008). An important feature of many treaties is a reduced rate for withholding tax on the payment of dividends, interest and royalties.

A full list of treaties can be found at: www.hmrc.gov.uk/international/treaties1.htm

3. Corporate tax rates

The “standard” or “main” rate of corporation tax in the UK is 28 per cent and applies to both resident and non-resident companies.

If a company is a UK resident, it pays corporation tax on its worldwide profits, which are adjusted for tax purposes. This includes capital gains tax on profits from the sale of assets. A company qualifies as a UK resident if it is incorporated in the UK or if its central management and controls are in the UK. Any foreign income on which a company pays tax abroad is liable to tax in the UK. However, any overseas tax paid can usually be credited against a company’s tax bill.

Figure 2 shows that the UK’s main corporate tax rate is competitive, not only in Europe, but also worldwide.

Figure 2: Main corporate tax rates international comparison*

Source: Deloitte, 2008

*Note: Effective corporate tax rates. The rates do not reflect payroll taxes, social security taxes, net wealth taxes, turnover/sales taxes and other taxes not levied on income.

** For non-resident companies.

The specific rates for UK corporation tax are detailed in Figure 3.

Figure 3: UK corporation tax rates 2008/09

Source: HM Revenue & Customs 2008

Marginal relief is applied to profits between the various rates. This eases the transition between the small companies’ rate and the main rate.

If an overseas company sets up a branch in the UK, the trading profits of the branch’s activities in the UK will be liable to tax. The rate applied will usually be 28 per cent. This may be reduced for a company that is part of a group or has associated companies.

For further information please see: www.hmrc.gov.uk/rates/corp.htm

4. Transfer pricing

Transfer pricing relates to the terms that connected parties use when conducting business with each other. The UK requires trading and financial transactions between affiliated entities to be conducted according to the “arm’s length standard”. This means the terms and pricing of such transactions undertaken in the course of conducting business (such as the sale and purchase of goods and services) and in the provision of finance (borrowing and lending) should be the same as if the transactions were between completely independent parties.

When determining the “arm’s length price”, the transfer pricing guidelines of the Organisation for Economic Co-operation and Development are applied. Companies must maintain sufficient documentation to support prices used and any adjustments made. Further details can be found at: www.oecd.org

Recent legislation has extended the UK’s transfer pricing rules to include transactions between related enterprises when both are in the UK. The legislation also exempts most small and medium-sized enterprises (SMEs) from transfer pricing provisions for transactions with other UK companies and companies in countries which have a tax treaty with a “non-discrimination” article. For further information see:

http://www.hmrc.gov.uk/international/

5. Value added tax

Value added tax (VAT) is due on supplies of goods and services which are made in the UK by a taxable person who is registered for VAT, and also on the importation and acquisition of goods and some services (other than exempt supplies).

In the UK, VAT is a charge that companies need to make to customers if:

• they supply goods or services in the UK or Isle of Man, and the taxable turnover is above, or expected to be above, the registration threshold, which is currently £67,000.

The levels of VAT in the UK are competitive in comparison with other European countries, as is highlighted in Figure 4.

There are three rates of UK VAT:

• the “Standard Rate” (17.5 per cent) applies to most goods,

• the “Reduced Rate” (5 per cent) applies to fuel and power used in the home and by charities, and

• the “Zero Rate” (0 per cent) applies to a limited range of goods and services (including most food, books and clothing for young children).

Once a company is VAT-registered, it will be able to claim back any VAT charged to it on business-related goods or services.

Some business supplies are not subject to any VAT. These exempt supplies do not form part of a company’s taxable turnover. Examples include:

• selling, leasing and letting land and buildings (except lettings of garages, parking spaces or hotel and holiday accommodation),

• insurance,

• betting, gambling and lotteries providing credit,

• selected education and training activities, and

• subscriptions to selected membership organisations.

There are VAT regulations specifically related to the supply of “electronically supplied” services. These include certain types of software or information services, web-hosting or online entertainment services. Generally, the regulations suggest that the location of the recipient or customer of the services is deemed to be the jurisdiction for VAT purposes.

Further help and advice on VAT is available at the HM Revenue & Customs website: www.hmrc.gov.uk

6. Tax credits for Research and Development

Research and development (R&D) tax credits are available for large corporations and SMEs investing in R&D:

• • • Large corporations R&D

In addition to the normal 100 per cent deduction, large companies are entitled to a further deduction from their taxable income of 30 per cent of their current spending on qualifying R&D. For example, if a company spends £100,000 on qualifying R&D, it will be able to deduct £100,000 from its taxable income under ordinary tax rules and an additional £30,000 under the R&D tax credit.

• • • SMEs R&D

In addition to the normal 100 per cent deduction, SMEs (those companies employing up to 250 people) are entitled to a further deduction from their taxable income of 75 per cent of their current spending on qualifying R&D.

Guidelines on the meaning of research and development for tax purposes are available at: www.berr.gov.uk/files/file13258.pdf

Further information on R&D tax credits, including details of claim procedures can be found at: www.hmrc.gov.uk/randd/

7. Employer social security costs

Employers pay less social security contributions in the UK than in most other European countries (see Figure 5).

For 2008/09, the rate for an employer’s “National Insurance Contributions” (NIC) on the earnings of each individual employee (earning over £105 per week) is 12.8 per cent, with no upper limit.

Employees pay NIC on the part of their earnings which falls between £105.01 and £770 per week at a rate of 11 per cent, while employees paid more than £770 per week will pay NIC at 1 per cent on all earnings above that figure, with no upper limit.

For further information on NIC please see:

http://www.hmrc.gov.uk/employers/

8. Approved and tax-favoured share plans

The UK Government actively supports small companies, entrepreneurs and an innovative business environment by encouraging the granting of stock/share options. There are several specific schemes employers can utilise to reward employees, such as:

• the Enterprise Management Incentive,

• the Share Incentive Plan,

• Save as You Earn, and

• Approved Company Share Option Plans.

Please see Appendix A for more information about each of these schemes.

9. Personal taxation

UK residents typically pay tax on all worldwide income. An individual qualifies as a UK resident if:

• they spend 183 days or more in the UK in any tax year (the tax year runs from 6 April to 5 April),

• they have an intention to stay in the UK for at least two years, or

• they make regular visits to the UK, averaging at least 91 days per tax year over a maximum of four years.

Individuals resident but not domiciled in the UK only pay tax on overseas income if it is brought into the UK. The exception is income arising in the Irish Republic, which is taxable regardless of whether it is brought into the UK. Individuals not resident in the UK only pay UK tax on their UK income.

All UK residents are entitled to the “basic personal allowance”. This is an amount of income on which an individual does not have to pay any tax. For 2008/09, the basic personal allowance is £6,035. Other reliefs and allowances may be available, depending on individual circumstances. The income tax payable above the level of the basic personal allowance is shown in Figure 6.

Figure 6: Taxable bands above the basic personal allowance 2008/09

Source: HM Revenue & Customs, 2008.

The UK’s higher personal tax rate is one of the most competitive in Western Europe (see Figure 7).

Figure 7: Higher personal tax rates in selected European countries

For further information on personal tax rates in the UK please see:

www.hmrc.gov.uk/rates/it.htm

10. Capital gains tax

Capital gains tax (CGT) is a tax payable by individuals, personal representatives and trustees on the disposal of an asset or upon receipt of money in respect of an asset.

The amount of CGT is based on the gains made on disposals of assets and capital sums received from assets in the tax year. For the tax year 2008/09 individuals are exempt from CGT on the first £9,600 of profits made from the sale of an asset.

The rate of CGT is 18 per cent for the tax year 2008/09, although individuals may qualify for various forms of relief that reduce or defer chargeable gains.

For further information please see: www.hmrc.gov.uk/cgt/index.htm

11. Further information

This information sheet was updated in March 2008.

As information changes from time to time, please contact the organisations listed or UK Trade & Investment to confirm any item that you intend to rely on.

This information sheet was produced by the Marketing Group of:

UK Trade & Investment

9th Floor

Kingsgate House

66-74 Victoria Street

London SW1E 6SW

Tel: +44 (0)20 7215 4957

Email: enquiries@uktradeinvest.gov.uk

Website: www.uktradeinvest.gov.uk

Appendix a

• • • Approved and tax-favoured share plans

The Enterprise Management Incentive, for companies with less than 250 employees, is designed to assist companies to recruit and reward their employees. The specific features of this scheme are:

• no formal approval is required,

• the maximum value of shares over which unexercised options exist is not to exceed £3 million per company,

• the maximum value of unexercised qualifying options in one company or group is £120,000 per eligible employee,

• there is no tax or NIC on the granting of the option,

• there is no tax or NIC on exercising the option, if the exercise price is at least market value at the date of grant,

• the sale of shares is subject to capital gains tax, and

• shares qualify for taper relief from the date the options are granted.

Further information can be found at:

http://www.hmrc.gov.uk/shareschemes/

The Share Incentive Plan (SIP) is a tax and NIC advantageous plan for all employees in a company. The benefits of a SIP are that employees can reduce tax and NIC contributions that they would otherwise have to make on the acquisition of shares. Specific features of a SIP are:

• there are three types of share (free shares, partnership shares or matching shares) which can be used alone or in any combination,

• employees can be provided with free shares up to the value of £3,000 per year,

• employees can use up to £1,500 per year out of pre-tax and pre-NIC pay to buy partnership shares,

• employers can provide employees with matching shares, at a ratio of two matching shares for each partnership share bought by the employee,

• companies can also allow employees to use up to £1,500 per year of dividends from the SIP to buy further shares, and

• the plan must be approved by the HM Revenue & Customs and will apply to qualifying employees only.

Further information can be found at:

www.hmrc.gov.uk/shareschemes/

The Save as You Earn scheme is also known as Savings Related Share Options. This is an HM Revenue & Customs approved scheme aimed at employees and directors which:

• must be available to all employees,

• allows savings of between £5 and £250 per month,

• allows for shares to be purchased tax and NIC free at the end of three, five and seven year intervals, and

• interest received or bonuses granted are tax-free.

Further information can be found at:

www.hmrc.gov.uk/shareschemes

Approved Company Share Option Plans can be provided to specific employees and directors. Features of this scheme include:

• the maximum value of shares under option is £30,000,

• the exercise price must be close to market value of shares at the time of grant, and

• no tax or NIC on grant or exercise if the option is granted between three to ten years after grant.

Further information can be found at:

www.hmrc.gov.uk/shareschemes/