Here, Sonal Shah, shares the different tax advantages for UK companies and how to utilise them. 

Ease of doing business

According to the 2020 version of the ease of doing business world index, the UK is currently in 8th position globally. This index was created jointly by three leading economists at the World Bank Group. Clearly the UK remains a preferred country in which set to up a business or to invest in. This article explores some of the corporate tax reasons that enhance the UK’s favoured status.

Corporation tax rate

The UK has one of the lowest corporation tax rates in the G20.  The rate is currently 19%, greater only than Singapore and Switzerland. Whilst the rate will rise to a maximum of 25% in 2023, it will still be among the lower G20 rates.

Corporate tax advantages

• Dividends received by UK companies are generally free of corporation tax.
• There are no withholding taxes on dividends paid. This is irrespective of where the shareholder is resident and irrespective of the nature of the shareholder, e.g. an individual, another company (UK or non-resident), a trust, foundation or any other.
• The UK is purported to have the largest Double Tax Agreement network in the world. The consequence of this is much reduced, and often nil, withholding taxes levied by foreign subsidiaries of UK companies on dividends paid to the UK parent, as well as on other profit extraction payments such as interest and royalties.

The result of the above is very low or even no taxes on the flow of income through a UK company from a subsidiary right up to its shareholder.

Substantial shareholding exemption (SSE)

A UK company disposing of its holding in an underlying company will qualify for the SSE. This will exempt the UK company from corporation tax on any gain made on disposal, subject to conditions. The conditions are:

• The investing company must own at least 10% of the investee company.
• The 10% shareholding must have been held for at least a continuous period of 12 months beginning in the 6 years before the disposal.
• The investee company must be a trading company or the holding company of a trading group/subgroup.
• Involvement in trading activities must have continued throughout the above 12- month period.

Under limited circumstances, there is a post-disposal trading requirement.

The trading requirement means that the trading activity of the relevant company should comprise at least 80% of its total activity. In determining this, the UK’s tax authorities (HMRC) will consider all of the following criteria:

• Turnover.
• Asset value.
• Time spent by officers and employees.
• The company’s history.

A few specific tax reliefs

The Annual Investment Allowance (AIA)

This grants the UK a 100% tax deduction for the cost of qualifying capital expenditure in the year of acquisition. There is an annual limit for such expenditure of £1 million (up from £200,000 a few years back) but, subject to further conformation, possibly reverting to £200,000 in 2022. There is currently in place, until April 2023, a new super deduction of 130% for many capital expenditure categories of fixed assets.

Research & Development (R&D) Relief

R&D relief is given in two different ways, either by an enhanced deduction for corporation tax purposes or by a payable tax credit. Both are acknowledged as among the most generous tax reliefs in global corporate tax.

The enhanced deduction consists of an additional 130% deduction from profits subject to corporation tax of qualifying R&D expenditure. At the current tax rate of 19%, this equates to an additional tax saving of 24.7% of such expenditure. If the company is loss-making, the expenditure can be carried forward to be used in a future tax year or can be converted into a repayable tax credit. The credit is equal to 14.5% of 230% of the qualifying expenditure.

The UK Patent Box

The Patent Box regime is a corporation tax relief that gives a reduced rate of tax of 10% on profits earned from a company’s patented and other innovations.

Qualifying income includes the sale of patented items, licensed-in patent rights, and compensation income from infringement of owned rights.

To calculate the tax relief, routine profits are deducted from total profits to arrive at “qualifying residual profit”. Smaller companies, i.e. those with a qualifying residual profit of less than £1 million, may then deduct 25% for marketing asset return from residual profits. Larger companies have a different basis of calculation.  In both cases, the balance is taxed at 10%.

Gerald Edelman has expertise in working with businesses worldwide, handling international tax matters for inward-investing companies of all sizes, from start-ups to large corporations and multinationals, as well as high-net-worth individuals and their families and trusted advisors, across a broad range of industry sectors.

Our Partners and international tax experts have the commercial acumen and technical expertise required to support clients to overcome their business challenges, offering exceptional tax guidance for tax efficiencies, strategic growth, and success.

For more information on our inward investment services or to discuss your personal circumstances contact our tax team who will be happy to help.