Doing business in the UK – key tax considerations

The U.K. has long been one of the most attractive destinations for international investment. According to The World Bank report Doing Business 2020, it is the second easiest place to set up and run a business in Europe, and the eighth easiest jurisdiction globally.

The appropriate vehicle will depend not only on tax considerations in the UK and the home jurisdiction, but also on the nature of the goods or services, the anticipated level of profits or initial losses, and the level of investment required to establish and maintain the UK operation.

An important factor will be the existence and terms of any double tax treaty between the home jurisdiction and the UK. The UK has a wide network of double tax treaties, although not generally with tax haven jurisdictions.

The following is a very brief overview of the UK tax regime and some of the relevant tax considerations which may be important to structuring your business in the UK.

Corporation tax

UK companies are generally liable to corporation tax (CT) on their worldwide profits. The standard rate of corporation tax is 25% for 2023/24.

Trading through a PE

A non-UK company which carries on a trade within the UK through a PE will be subject to CT on profits attributable to its UK PE.

Interest paid

This will normally be deductible in calculating taxable profits but subject to a number of restrictions including a group limit of 30% of taxable EBITDA under the corporate interest restriction rules (subject to a £2m de minimis threshold).

UK dividends

There is no UK withholding tax on the payment of UK dividends.

Withholding tax (currently 20%)

This may need to be deducted and paid to HMRC on payments of interest or royalties made to an overseas parent company, subject to the terms of any double tax treaty.

Transfer pricing

The UK’s transfer pricing regime can be used to challenge arrangements by which the UK operation charges artificially low prices to, or is charged artificially high prices by, its affiliates. The legislation incorporates the OECD arm’s length principle. Small and medium-sized companies are generally excluded from the scope of the rules.

Diverted profits tax

The UK’s diverted profits tax will also affect certain arrangements designed to prevent the existence of a UK PE or which lack economic substance and are designed to divert profits from the UK. The diverted profits tax is charged at a rate of 31%.

VAT

The current standard rate of UK VAT is 20%.

Customs duty

This is generally charged on the import of all goods (but not services) into the UK when those goods are released for free circulation.

Employment taxes

The UK business will be responsible for deducting income tax and social security contributions (NICs) that need to be paid on UK employee’s salary. The highest rate of income tax (for earnings over £125,140) is currently 45% (with a higher rate of 40% and basic rate of 20%). Social security contributions in the UK are collected from employees and their employers.

We would be happy to discuss any of the above areas in more detail.