An Introduction to Tax for UK Companies

Understanding the nuances of the UK tax system is the core of operating any business within the kingdom. And firms that manage to get their tax structure in order are positioned to gain optimal resources. They also tend to reduce liabilities while experiencing a steady performance. 

This introductory guide offers a thorough overview of corporate taxes, value-added tax (VAT), PAYE schemes, R&D tax credits, capital gains tax, and more. 

The UK Tax System for Companies

The UK tax system is very comfortably designed toward all those and more different types of organisations, be it limited company accounts, a foreign company having its branch in the UK, or unincorporated associations, which may include charities and community groups. 

Though this range might look huge and complicated, the major ones comprise corporation tax, VAT, payroll taxes under the PAYE system, and special reliefs including R&D tax credits.

Key Sources of Taxable Profits

Taxable profits for UK companies include:

• Trading Profits: Revenue from regular trade and business activities.
• Investments: Returns from company-held investments.
• Chargeable Gains: Profits from selling assets at higher prices than their original cost.

UK resident companies pay corporation tax on their entire worldwide income. Non-UK residents carrying on a trade through a branch or agency. In the UK, they are chargeable only on profits arising from activities carried on in the kingdom.

Corporation Tax Rates and Payments

Corporation tax is the major tax for most companies in the United Kingdom. The main rate as of 2024 is 25% applicable to those companies whose taxable profits are more than £250,000. For small Businesses:

• Those below £50,000 are taxed at the small profits rate of 19%. 
• Between £50,000 and £250,000, because marginal relief applies, the effective rate within this band is 26.5%.

Payment Schedules

Corporation tax deadlines depend on the company’s profit levels:

• Companies with annual profits below £1.5 million pay their tax nine months and one day after the end of their accounting period.
• Companies with profits exceeding £1.5 million adhere to a quarterly instalment payment regime. For such companies:
  • Taxable profits < £20 million require payments starting six months and 14 days after the start of their accounting period.
  • Taxable profits of> £20 million must make payments within two months and 14 days after the start of the accounting period.

How Taxable Profits Are Calculated

You can calculate taxable profits from the accounting profits of a company with adjustments for allowable deductions. The major considerations include:

• Allowable Business Expenses: Expenses that you spend totally and exclusively for business, e.g., operating costs and salaries.
• Capital Gains on Assets: Profit realised from the sale of certain assets belonging to the company.
• Exemptions:
  • Most dividend income is tax-exempt. Specific capital gains, e.g., capital gain from share disposal in trading subsidiaries held for more than 12 months, are also tax-exempt.

Value-Added Tax (VAT)

VAT is a tax on most supplies of goods and services in the UK, charged at 20%, which makes up the standard rate. Some supplies like financial services, education, and health services are exempt from the VAT. 

Some goods and services are rated zero for VAT tax. These include basic food, prescription medicines, books, public transport, educational material, and exports.  

A company shall register for VAT if it has made taxable supplies of more than £90,000 in the past 12 months or will do so in the next 12 months.

Once registered, businesses must:

1. Charge VAT on taxable supplies (output tax).
2. Recover VAT on purchases (input tax) used in taxable supplies.

When businesses generate supplies that are exempt, they can’t reclaim VAT. This means it’s really important for them to register properly and follow.

PAYE Scheme for Employers

Every UK company that has directors and staff must operate a PAYE (Pay As You Earn) scheme. This simplifies income tax plus National Insurance Contributions, making the administrative burdens lighter.

Key PAYE Obligations:

• Income Tax Rates:
  • 20% Basic Rate on earnings within threshold limits.
  • 40% Higher Rate for earnings exceeding higher thresholds.
  • 45% Additional Rate for the highest earners.
• NICs Contributions:
  • Employee NICs are charged at 8% for earnings up to the upper limit and 2% above the threshold.
  • Employers shall pay NICs at an even rate of 13.8%. This is for those who are above the established secondary earnings threshold.

Accurate accounting for benefits like company cars or private medical insurance is essential. Employers are responsible for reporting these benefits to HMRC and for their correct taxation.

Research and Development (R&D) Tax Credits

Companies conducting R&D for product, service, or process development or enhancement may claim their costs under this scheme.

Key Benefits:

1. Tax Credit System (Post-April 2024):

• The 20% tax credit against the qualifying R&D expenditure for all eligible companies.
• For SMEs that are “research-intensive” (30% or more total costs on R&D), enhanced deductions of up to 186% of qualifying expenses are available.
• An alternative repayable cash credit at the rate of 14.5% is also available to loss-making research-intensive SMEs.

1. Patent Box Regime:

Companies can benefit from a reduced 10% corporation tax rate on profits attributable to qualifying patents.

Capital Allowances and Investment Relief

UK businesses can claim capital allowances instead of accounting depreciation to obtain tax deductions linked to investment in eligible assets such as machinery, vehicles, and property.

Available Capital Allowances:

• Annual Investment Allowance (AIA):
  • Companies can deduct up to £1 million annually for qualifying plant and machinery.
• Full Expensing:
  • Introduced permanently in 2023, 100% relief applies upfront to expenditure on eligible assets.
• Structures and Buildings Allowance:
  • A 3% annual deduction for qualifying structures and buildings over 33 years.

These relief measures aim to reduce upfront costs for capital investments, making them invaluable to growing companies.

Additional Tax Considerations

Capital Gains Tax (CGT)

Capital gains tax is levied on the profit arising from the sale or disposal of an asset by a company.

While in most cases it falls due in respect of shares or property disposals, relief such as Business Asset Disposal Relief may substantially lower the rate to 10% for qualifying gains within a lifetime limit of £1 million.

Diverted Profits Tax (DPT)

It was designed to discourage large multinationals from shifting their profits outside the UK with artificial arrangements. DPT would ensure tax revenues by attacking artificially structured operations.

Transfer Pricing and Global Compliance

Under OECD-aligned standards, the UK ensures that transactions with related parties meet the arm’s length principle. This approach prevents foreign affiliates from siphoning profits out of the UK tax jurisdiction.

Filing Obligations and Deadlines

All UK companies must file:

• Annual tax returns.
• Accounts reconciled to tax computations.
• Corporation tax payments.

Filing is typically due 12 months after the end of the accounting period, with penalties applicable for late submissions or inaccuracies.

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