Companies taxable in the UK
A company incorporated in the UK is automatically resident in the UK for tax purposes and is subject to the UK Corporation Tax. There can be exceptions, but they are extremely unusual.
Tax benefits of having a UK company
- The UK has one of the lowest rates of Corporation Tax amongst all the developed OECD countries.
- Payments to overseas suppliers, shareholders, directors and managers can be made without the need to withhold or deduct tax before making the payment.
- Expenses incurred overseas by a UK company can be deducted from income before the profit on which a company is taxed.
Corporation Tax rate
Corporation tax is 19% of the taxable profits for the tax years ending 31 March 2019 and 31 March 2020. Furthermore, in the first post Covid budget, the Chancellor has announced that the current rate of Corporation tax will remain at 19% until 1st April 2023 and thereafter will apply to profits of £50,000 or less. The main rate will increase to 25% on profits over £250,000. There will be a marginal rate between the two limits. It should be noted that 25% is still the lowest rate of tax amongst all the developed nations. The UK’s rate of Corporation Tax will remain the lowest amongst all the developed countries.
Accounting and Corporation Tax Dates
There are a host of rules relating to accounting dates for financial reporting purposes at Companies House and for reporting trading results to HMRC for calculating Corporation Tax. Some of them are set out below:
- The Accounting Reference Date (ARD) is the date to which a company must prepare its accounts each year. The ARD is the anniversary of the last day of the month in which a company is incorporated (registered). See the example given below:
- The First Accounts will normally be made up for a period that exceeds 12 months. This is because they:
- start on the day your company was registered (‘incorporated’) and
- end on the ‘accounting reference date’ that the Companies House sets for the end of your company’s financial year.
- An accounting period for Corporation Tax purposes cannot exceed 12 months. In most cases, a new company will have to file 2 Corporation Tax returns with respect to its first accounting period. In subsequent years, only 1 tax return will be required each year, and this will coincide with your accounts.
|Company was set up and started trading||19.04.2018|
|First accounting period for Corporation Tax ends||18.04.2019|
|Accounting reference date||30.04.2019|
|Second accounting period for Corporation Tax ends||30.04.2019|
You will prepare your first set of accounts for 19.04.2018 to 30.04.2019. Then file your:
-first tax return for 19 04.2018 to 18.04.2019
-and second tax return for 19 04.2019 to 30.04.2019.
- Subsequent tax returns will be from 1 May to the following 30 April of each year.
- Financial Accounts are filed with Companies House and Corporation Tax Returns are filed with Her Majesty’s Revenue and Customs (HMRC).
- There are provisions which allow a company to change its accounting reference date (ARD). You should consult your financial advisor to assess if there is any advantage in making a change.
Various rules also apply for reporting Corporation Tax if your company is dormant for a while after it is formed or if you fail to register with HMRC before your ARD. You should consult your financial advisor about this.
The profit figure on which tax is assessed:
There is a difference between accounting profits and taxable profits.
Accounting profits. A company’s profits are calculated by deducting expenses from sales. This is subject to some interpretation in accordance with International Accounting standards. The treatment of goodwill and the depreciation of tangible assets are the most obvious examples.
Profits or losses for Corporation Tax purposes. The figure used for assessing a company’s profits or losses for Corporation Tax purposes are very similar to normal accounting conventions, but some expenses may not be accepted or allowed by HMRC (the taxing authority) for social, moral or political reasons. So, for example, it may be conventional to wine and dine a potential customer for a company and the company will foot that expense as an acceptable (even necessary) cost. But HMRC will not allow the expense because they do not wish to promote the consumption of alcohol. There is a huge amount of legislation setting out which expenses are not allowed for Corporation Tax purposes.
|Example UK company Limited||True results||Adjusted Tax results|
|Direct cost of sales||(20,000)||(20,000)|
|Administration costs (including disallowable expenses of £1,000)||(10,000)||(9,000)|
|Net Profit / Net taxable profit||12,000||13,000|
In practice, most small companies and start-ups simply try to keep their costs to a minimum and are not concerned about which costs may or may not be treated as deductible when they get around to submitting their tax returns because their costs are rarely discretionary. You should consult your financial adviser for more information about disallowable expenses, if this is a concern.
Non-UK residents should note that it does not matter whether expenses were incurred in the UK or offshore, and this is another reason that UK companies are so attractive to non-UK residents.
Profits are calculated after deducting costs from income, wherever they were incurred, as long as they were incurred for the benefit of the company. In practice, overseas owners of small UK companies have some discretion over the level of Corporation Tax they want to pay in the UK and their decision will depend on where they themselves reside.
Because it does not matter where a company’s expenses arise (the UK or offshore), owners of companies residing in a low or zero tax offshore country usually take the opportunity to charge the UK company a salary or fee for their management services. The effect of this will be to reduce the taxable profits of the UK company (often to zero) and reduce or even escape the UK Corporation Tax altogether.
Owners residing in a country that has high levels of taxation may decide that 19% is preferable to the exorbitant rate of tax they would have to pay in their own country. They will draw the minimum they need to meet their personal requirements, pay the UK Corporation Tax and build up a fund in their UK company.
If a company employs a UK resident staff, their salaries must be subject to pay-as-you-earn-tax (PAYE), which is deducted from and levied on salaries. However, non-UK resident staff will not be subject to PAYE.
|Example UK company Limited||y/e 31.3.19||y/e 31.3.19|
|Direct cost of sales||(20,000)||(20,000)|
|Administration costs (including disallowable expenses of £1,000)||(9,000)||(9,000)|
|Management fee paid to overseas owners/directors||0||13,000|
|Net profit for tax purposes||13000||0|
There are various provisions in UK tax law which allow trading losses incurred in one tax year to be offset against profits generated in another tax year. The ability to offset trading losses against other and future profits is useful to start-ups that may incur losses in their first few years of trade.
Taxation of Limited Liability Partnerships (LLPs)
LLPs with a UK registered office must also file accounts with Companies House and tax returns with HMRC. However, it is the partners that will be subject to tax and not the partnership. If the partners are not UK residents, then they are not be subject to UK tax. This means that partners living in a tax-free country will not be subject to tax, either in the UK or their country of residence. This makes LLPs very attractive to overseas traders.
Exceptions to the corporate residency rule
Exceptions arise when a company must be treated as resident in another country in accordance with the tie-breaker provisions of a double taxation treaty between the UK and the other country. The tie-breaker provisions deal with dual residency for individuals and companies.
If this is a concern, you may want to consult a tax expert, although it is unlikely that a small start-up company will need to address this issue or can even afford the fees involved in getting a reliable professional opinion.
Please note: This article should not be relied upon when making any decisions or taking any action of any kind. Please consult professional advisers before making any decision based on the contents of this blog.