Overview of UK Taxes and Reliefs

Home UK Tax and Accounting Overview of UK Taxes and Reliefs

When you establish a place of business in the UK, you will need to ensure your financial systems are fully compliant with legislation.
At St Matthew, we specialise in helping UK businesses owned by overseas companies or overseas entrepreneurs. Our approach is to provide exceptional, reliable and technically sound services to ensure your accounting and tax affairs are properly planned and managed in the most efficient manner.

We can help with ongoing solutions for accounting, payroll and tax compliance for all types of businesses, from sole traders to partnerships and limited companies. There’s no need for you to try to school yourself in the UK’s labyrinthine tax and accounting system when our team of exceptional chartered accountants can do everything for you. We offer peace of mind by ensuring you’re complying with all your tax liabilities.

Below is an overview of the principal taxes that are most relevant to businesses operating in the UK:

Corporation Tax

Corporation tax is levied on the profits of companies registered with Companies House (the UK’s registrar of companies). The tax is for a given twelve-month period and includes money that companies make from doing business, selling assets and investing.

Companies based in the UK pay corporation tax on their profits from the UK and abroad while foreign companies with a UK subsidiary pay the tax on their UK activities. The current corporation tax rate on profits is 19%

Businesses don’t receive a bill for corporation tax. Instead, they prepare and file a company tax return to determine how much they pay.

A corporation tax return, including a self-assessment of the tax, is due within twelve months of the end of the company’s accounting period. For most companies, corporation tax must be paid within nine months and one day of the end of the company’s financial year. Failure to pay the tax liability or missing filing deadlines can result in interest charges and fixed penalties.

VAT (Value Added Tax)

Value added tax is a form of consumption tax charged by VAT-registered businesses on supplies of taxable goods and services to consumers, such as other businesses and individuals. It is charged on things like business sales, commission, selling business assets, business goods used for personal reasons, items sold to staff and hiring or loaning goods to someone.

VAT registration is a requirement for businesses when the VAT taxable turnover for the previous year exceeds £85,000 or if they receive goods from the EU worth more than that amount. It is the VAT-registered businesses’ responsibility to report to HM Revenue and Customs (HMRC) the amount of VAT they’ve charged and the amount of VAT they’ve paid. This is done through a VAT return, which is typically submitted every three months.

VAT-registered businesses can deduct the VAT they have paid on purchases from the VAT they charge their customers. The difference is then paid to the tax authorities.

There are currently three VAT rates in the United Kingdom:

01

Standard Rate

VAT’s standard rate is 20% and applies to most goods and services, including any goods below the distance selling threshold to non-VAT registered European Union (EU) customers. If you go over the threshold, you will have to pay VAT in that country. The standard rate also applies to most services supplied to EU non-business customers.

If you supply services to a business customer in the EU, it is their responsibility to pay VAT in their country.

Therefore you do not need to charge the tax.

02

Reduced Rate

The reduced VAT rate of 5% applies to certain goods and services. Among them are women’s sanitary products, children’s car seats, installation of mobility aids for the elderly, caravans, domestic fuel or power supplies, installation of energy-saving materials, and smoking cessation products.

03

Zero Rate

Goods are still VAT-taxable, but the rate you charge customers is zero. Examples of zero-rated products are children’s clothes and shoes, books and newspapers, most goods exported to non-European Union countries and goods you supply to VAT-registered EU businesses.

Businesses have to record zero-rated VAT goods in their VAT accounts and report them in their VAT returns.

Payroll Taxes

UK subsidiaries with payroll schemes are responsible for collecting payroll taxes (PAYE – Pay As You Earn and National Insurance) from their employees’ salaries.

Income tax – is deducted monthly from an employee’s salary through PAYE. This also applies to non-UK employees who perform their duties in the UK. There are several levels of income tax in the UK. Currently, they stand at:

0%

Up to £12,500

an individual’s personal tax-free allowance

20%

£12,501 to £50,000

basic rate income tax

40%

£50,001 to £150,000

higher rate income tax

45%

Over £150,000

additional rate income tax

National Insurance – this is the UK’s social security scheme. National Insurance contributions (NICs) are paid by employees and employers to help fund state benefits such as the state pension. They are a percentage of the gross salary or wages paid to the employee. It is the employer’s responsibility to calculate the amount due for each employee and to pay it.

The amount employers pay varies depending on the category of employee (such as apprentices under 25, employees under 21 and married women and widows entitled to pay reduced National Insurance) and how much they earn.

Example:

If you have an employee in category A and they earn £1,000 per week you’ll pay:

  • Nothing on the first £169
  • 13.8% on earnings between £169.01 to £962
  • 13.8% on the remaining earnings above £962

Amounts deducted as PAYE and NICs are paid monthly or quarterly to HRMC.

Income Tax

Income tax is payable by sole traders and individual members of a Limited Liability Partnership (LLP) or Limited Partnership (LP).

The tax is payable annually on profits following the filing of a Self Assessment tax return.

Tax is not paid on incomes up to £12,500. After that, the following tax rates apply:

20%

£12,501 to £50,000

basic rate income tax

40%

£50,001 to £150,000

higher rate income tax

45%

Over £150,000

additional rate income tax

Capital Gains Tax

Capital Gains Tax (CGT) is a tax paid by businesses and individuals when all or part of an asset is sold for a substantial profit. The tax is paid on the gain, not on the money received. In most cases, this equals the amount you sold an item for minus the amount you paid for it.

Capital Gains Tax for businesses applies if you are a self-employed sole trader or in a business partnership. Other organisations such as limited companies pay Corporation Tax on their profits

Business assets you may need to pay CGT on include land, buildings, machinery, registered trademarks, fixtures, fittings and shares.

To reduce your tax burden, you may be able to deduct the costs of buying, selling or improving an asset from your gain. Deductible costs include:

  • Fees such as advertising the assets
  • Expenses to improve the assets (not regular repairs)
  • Stamp Duty Land Tax and VAT

Dividend Tax

If you own shares in a company, you may receive a share of the profits as a dividend. As with any income you earn, it may be subject to tax. Dividend tax is simply a special kind of tax levied on dividends.

You can earn up to £2,000 in dividends before you pay any tax on them. This is your Dividend Allowance, and the figure is over and above your Personal Allowance of £12,570 (the amount of income you can earn each year without paying tax).

Once you have used up your Dividend Allowance and Personal Allowance, the amount of dividend tax you pay is based on your tax band. However, the rates of tax you pay are lower than income tax rates.

The current dividend tax rates are:

  • Basic rate 7.5%
  • Higher rate 32.5%
  • Additional rate 38.1%

Inheritence Tax

Inheritance Tax (IHT) is a tax on the estate of someone who has died and includes property, savings, possessions, and other assets passed on after debts and funeral expenses have been paid.

There is usually no tax to pay if the estate’s value is below £325,000 or if anything above this amount is left to a spouse, civil partner or charity. If you give your home to your children or grandchildren, the threshold is raised to £500,000.

The standard inheritance tax rate is 40%, and it is charged on the part of the estate above £325,000.

For example, your estate is worth £625,000, and your tax-free threshold is £325,000. The IHT tax bill will be calculated on £300,000 (£625,000 – £325,000). The amount due would be £120,000 (40% of £300,000).

When a UK-domiciled individual dies, their estate is subject to IHT on a worldwide basis. However, UK non-doms are not deemed domiciled in the UK for IHT, and therefore the tax only applies to their UK assets. The domicile status of beneficiaries is not relevant for IHT purposes.

Business Rates

Business rates are a tax your business pays when you own or rent a non-domestic property, such as a shop, factory, warehouse, pub, offices and a holiday rental home. The central government sets the rates, but you will receive your bill from your local council, typically in February or March each year.

Business rates are calculated using your property’s ‘rateable value,’ which is its rental value on the open market according to an estimate by the Valuation Office Agency (VOA).

To reflect changes in the property market, the VOA adjusts the rateable value of business properties, usually every five years. The last revaluation came into effect in England and Wales on 1 April 2017 and referred to rateable values from 1 April 2015. The next revaluation will take effect in 2023 and will be based on property values as of 1 April 2021.

Some properties are eligible for business rates relief, such as farm buildings and buildings used for training or welfare of disabled people. You can also get relief if your property has a rateable value of less than £15,000.

In general, you won’t have to pay business rates if you use a small part of your home for business purposes. For example, you are using a bedroom as an office.

Note that rates reliefs are handled differently in England, Scotland and Northern Ireland.

Relevant Tax Reliefs & Benefits

R&D Tax Credits

Research and development tax credits are a government incentive scheme to encourage UK companies to invest in innovation. If you are spending money developing new products, processes and services or enhancing existing ones, you are eligible for R&D tax relief. This can be in the form of a cash payment or Corporation Tax reduction.

Any company in any industry can benefit from R&D tax credits. To qualify, you must:

  • Be a UK limited company
  • Develop new products or services
  • Come up with new ways of solving problems in your sector
  • Employ staff to work in innovation
  • Purchase plant and equipment to facilitate innovation

There are two types of R&D relief: Small and medium-sized enterprises (SME) R&D Relief and Research and Development Expenditure Credit.

  • (SME) R&D Relief can be claimed by companies with less than 500 staff and turnover of under €100 million or a balance sheet total under €86 million. Relief is given through an enhanced deduction, currently set at 130% for qualifying expenditure. This is in addition to the standard 100% deduction, making a total deduction of 230%. So, for every £100 of qualifying expenditure, £230 can be deducted for Corporation Tax purposes.
  • Development Expenditure Credit is for large companies working on research and development projects and SMEs subcontracted by a large company to work on R&D. It is calculated at 13% of your company’s qualifying R&D expenditure (for expenditure incurred on or after 1 April 2020).

Business Asset Disposal Relief (BADR)

Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief) is a Capital Gains Tax relief when you dispose of all or part of your business. Under this scheme, you will pay 10% gains on qualifying assets.

BADR applies to the:

  • Sale of a business
  • Disposal of the share of a partnership
  • Shares or securities
  • Assets lent to the business
  • Business assets held by a trust

To be eligible for BADR, you must have owned the business for two years as a sole trader or business partner.

Business Asset Disposal Relief (BADR)

Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief) is a Capital Gains Tax relief when you dispose of all or part of your business. Under this scheme, you will pay 10% gains on qualifying assets.

BADR applies to the:

  • Sale of a business
  • Disposal of the share of a partnership
  • Shares or securities
  • Assets lent to the business
  • Business assets held by a trust

Overseas Workday Relief (OWR)

Overseas Workday Relief is a tax relief available to non-UK domiciled taxpayers who split their working time between the UK and overseas. This valuable exemption treats earnings related to duties performed abroad as if they were a foreign income. Earnings include salary, bonuses, commissions, profit sharing allowances and other cash-based payments.

For example, if you spend 25% of your time working outside the UK, you can relieve up to 25% of your employment earnings as long as certain conditions are met.

To qualify for OWR, you have to:

  • Have a foreign domicile
  • Be taxed on a remittance basis. If your foreign earnings are not remitted to the UK,
    they are not taxable in the country
  • Perform some or all of your duties abroad
  • Be a UK tax resident after three consecutive years of non-UK tax residence
  • Have your earnings paid into an overseas bank account

The number of tax years you can be eligible for OWR is unlimited, provided there’s a period of three consecutive years of non-UK tax residence.

The Enterprise Investment Scheme (EIS)

EIS is a government-backed scheme to incentivise private investment in small and growing enterprises. Under EIS, companies can raise up to £5 million each year and a maximum of £12 million in their lifetime.

Investing in early-stage enterprises is inherently riskier than investing in larger, more established businesses. So, to encourage investors, EIS offers significant tax advantages.

  • Up to 30% income tax relief. You can invest up to £1 million in any tax year or £2 million if £1 million is invested in companies classified as ‘knowledge-intensive’;
  • There is no Capital Gains Tax to pay if you make a profit when you sell your EIS shares.
  • You can defer capital gains made elsewhere if you invest them in any EIS company.
  • If your EIS investment doesn’t work out, you can write off any losses against income or capital gains tax.
  • If you hold the EIS investment for at least two years and continue holding it until your death, the value of the investment should be free of inheritance tax.
  • To keep the tax reliefs, investors must hold onto the shares for at least three years.

Investors can invest in a single company or a portfolio of companies.

The Seed Enterprise Investment Scheme (SEIS)

The Seed Enterprise Investment Scheme aims to help small, early-stage companies by offering tax-efficient benefits to their investors. Companies can receive £150,000 through SEIS investments provided they’ve been in existence for less than two years.

Like the EIS, the Seed Enterprise Investment Scheme rewards investors with significant tax advantages.

  • People purchasing qualifying shares in companies meeting SEIS requirements get income tax relief of up to 50% of the value of their investment (provided they keep their shares for at least three years). So, someone investing £10,000 can save £5,000 in income tax.
  • Any profit made from selling SEIS shares is free of Capital Gains Tax. Investors can also invest gains from non-SEIS investments into an SEIS eligible company and receive 50% Capital Gains Tax relief.
  • Any losses can be offset against income tax.
  • EIS shares are free of inheritance tax, provided you have owned them for at least two years and hold them at the time of death.

Investors can invest in a single company or a portfolio of companies, and the maximum investment in any one tax year is £100,000.

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