Business taxes - UK taxes and deadlines

Welcome to our comprehensive Doing Business in the UK article series, designed specifically for international businesses and investors looking to establish or expand their operations in the United Kingdom. This series aims to provide you with essential insights and practical guidance on navigating the UK business landscape.

Throughout this series, we will cover the initial setup of your business, understanding business taxes, and the process of registering a UK business. We will also delve into workforce setup, payroll, employment costs and international hiring considerations for businesses employing people in the UK. Finally, we also explore accountancy processes, compliance and management reporting requirements, and discuss the complexities of importing goods and services into the UK.

The principal taxes for businesses are Corporation tax, paid on profits, and National Insurance Contributions (NICs), a form of social security contribution charged on salaries.

In addition, certain indirect taxes are charged on transactions entered into by both individuals and businesses, such as VAT, property taxes and customs duty.

Additionally, the UK also offers tax incentives for businesses looking to invest in the UK and promote innovation, such as:

• The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) offer income and capital gains tax relief to investors who invest in early-stage companies
• Research and Development (R&D) Tax Credits allows companies to claim refundable tax credits
• Patent Box allows companies that own or exclusively license certain patents, to apply a lower rate of corporation tax to profits derived from those patents
• Creative Industry Tax Reliefs (CITR) offers tax incentives to companies involved in the production of creative content, such as films, television programmes, video games, and other forms of digital media
• For key tax rates, allowances and reliefs refer to our tax data guide or request a call with us

 

Corporation tax

Corporation tax is levied on the taxable profits of UK resident companies and on the profits of non-resident companies attributable to UK permanent establishments.

A company's taxable profits are based on its annual financial statements. UK transfer pricing legislation requires that trading between connected parties must be at arm's length and groups should maintain adequate documentation. This prevents international groups from manipulating intra-group transactions to shift profits to countries with lower tax rates. A UK entity often needs to undertake a transfer pricing study to show that the pricing between the parent company and its UK entity is what independent parties would agree on an arm's length basis.

Corporation tax is normally payable nine months and one day after the end of the period for which a company prepares its financial statements, although larger companies are required to pay their tax liability sooner by quarterly instalments.

A UK company must normally submit its tax return within 12 months of its accounting year end. Usually companies must file their corporation tax return online and pay any corporation tax and related payments due electronically (for example, by bank transfer or direct debit).

It is possible to extend your accounting period beyond 12 months (up to a maximum of 18 months) or to shorten it, for example to align it with the group accounting year end.

The tax return, computations and - crucially - usually the financial statements must be submitted in an electronic format called iXBRL (inline eXtensible Business Reporting Language). Financial statements can also be filed with Companies House in iXBRL format.
 

Pillar Two

The OECD (Organisation for Economic Cooperation and Development) Pillar Two framework seeks to address the tax challenges arising from the digitalisation of the economy with wide-reaching implications for many international businesses. The main purpose is to reduce incentives for base erosion and profit shifting by limiting tax competition among countries. This is to be achieved through ensuring that large multinational groups pay a minimum level of tax on the profits arising in each jurisdiction in which they operate.

These rules apply to multi-national enterprises (MNE’s) with annual consolidated revenues of at least €750 million (where this threshold is met in at least two out of four preceding accounting periods). The intention of pillar 2 is to impose a minimum 15% effective tax rate across all jurisdictions in which an in scope MNE group operates.

Whether the UK entities fall within the scope of the rules will depend on the consolidated revenues of the wider corporate group.
 

National Insurance Contributions (NIC)

National Insurance (NI) is a social security charge on earnings. Contributions are payable by employers, employees and self-employed people. Businesses (or individuals) employing individuals to work permanently in the UK must deduct NIC from employees' salaries and remit this to HMRC. For employees who are on a monthly payroll, both employer and employee NIC is included in the monthly payment of payroll taxes that is to be transmitted by the 22nd of the next tax month.

There are exemptions for short-term periods of employment where the employing business is ordinarily based outside the UK. However, even if a business does not have a permanent establishment in the UK, it may be necessary for payroll deduction arrangements to be set up.
 

Value Added Tax (VAT) and Customs Duties

VAT is a sales tax charged on the supply of goods and services provided in the course of doing business in the UK. Consequently, the real burden of the tax normally falls on the final consumer, with the intervening businesses acting as collecting agents for the Government.

In general, when the turnover of a business exceeds the registration threshold, it will have to register for VAT, charge VAT on the supplies it makes, and pay it to HMRC.

All non-UK established businesses making taxable supplies of goods or services in the UK will need to register for VAT as they are subject to a nil threshold.

Businesses that are required to charge VAT on the goods or services they sell, can recover the VAT incurred on the purchases made in generating those sales. However, VAT cannot be recovered on purchases used to generate sales that are exempt from VAT.

The net amount of VAT, after deducting recoverable VAT, must be paid to HMRC on a regular, usually quarterly, basis supported by a tax return. These must all be submitted digitally from accounting systems that are ‘digitally linked’ to reduce errors from manual inputs.

UK VAT returns are required to be filed by the seventh day of the following month. Therefore, a quarterly VAT return up to 31 March will be required to be filed with HMRC before 7 May. This is also the deadline for paying HMRC. Large businesses may be required to make monthly payments on account.

VAT is also charged on the importation of goods into the UK and the receipt of many international services in the UK.

Following the UK’s departure from the EU, there is a free-trade agreement in place that limits the Customs duty payable on many goods moved between the UK and the EU.