This country-specific Q&A provides an overview to tax laws and regulations that may occur in The United Kingdom.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-4th-edition/
How often is tax law amended and what are the processes for such amendments?
An annual Finance Act is passed by the UK Parliament enacting substantive changes to tax law. In some years there may be more than one Finance Act. Procedural or administrative changes to tax law may be included in secondary legislation which may be passed at any time although there may be prior public consultation.
There is public consultation in relation to most substantive changes, previously often linked to the Autumn Statement to the House of Commons of the Chancellor of the Exchequer which was followed by a Budget Statement the following March or April. Since 2018, the major fiscal event each year is a Budget in the autumn and a Spring Economic Statement.
Draft clauses to be included in the next Finance Act are often published several months before the Act is introduced to Parliament to allow for comments. On occasion, however, changes are implemented without prior consultation.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
The principal tax procedural obligation in the UK is to file a tax return. Companies are required to provide self-assessments of their corporate tax liability on delivering the return. Returns must normally be filed within 12 months of the end of the accounting period for which the return is made.
Most employees pay their income tax through the employer company’s payroll system and are therefore not required to submit an individual tax return. However, where an employee’s tax affairs are complicated in some way (for example, by having a source of untaxed income) or where an individual is self-employed, that person is required to complete a tax return.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
Her Majesty’s Revenue and Customs (“HMRC” or “the Revenue”) is the regulatory authority for tax matters. A 2018/19 survey shows a large drive on the part of HMRC to provide online support through new services such as the “Making Tax Digital for Business” which was launched in April 2019. This has had a mostly positive response with 80.4% of customers stating they were satisfied or very satisfied with the digital services. With 93.5% of all returns filed in 2018-2019 being filed online, this is likely to continue. Other methods of communication with HMRC were less positive HMRC missing its targets to answer a call within 5 minutes and turn around 80% of post within 15 days.
The resolution of disputes with HMRC, particularly if leading to litigation, tends to be a relatively lengthy process. In 2017, HMRC published a commentary on its litigation and settlement strategy (LSS), the aim behind which was to provide a mechanism for HMRC to settle disputes in a non-confrontational and collaborative way. However, in practice, HMRC often approach disputes in a litigious and uncompromising manner, particularly in cases where the revenue exposure is high. This means that a large number of tax disputes still proceed all the way to courts and tribunals.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
The first instance tribunal for most tax disputes is the Tax Chamber of the First-tier Tribunal (FTT). The Upper Tribunal (UT) commonly deals with appeals from the FTT only on matters of law. However where the case is categorised as complex and where the UT and both parties consent, the UT may hear the case at first instance. A case requiring a hearing of less than a week will usually be heard by either tribunal within a year.
Appeals from the Upper Tribunal are to the Court of Appeal, then to the Supreme Court. In both instances, permission is required and appeals can only be made on questions of law. Cases usually take around 18 months to complete in the Court of Appeal and two years in the Supreme Court. All tax tribunals and courts mentioned above are independent of HMRC.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
For corporates with taxable profits of up to £1.5m, tax must be paid nine months and one day after the end of the accounting period. Where taxable profits exceed £1.5m, businesses must pay their tax in four equal instalments. If a company has a 12-month accounting period, instalments are due:
- 6 months and 13 days after the first day of the accounting period
- 3 months after the first instalment
- 3 months after the second instalment (14 days after the last day of the accounting period)
- 3 months and 14 days after the last day of the accounting period.
The ultimate date for payment of self-assessed income tax is 31 January following the tax year ending in the previous April. There is also a system of advance payments, known as payments on account, which operates in some cases. However, a year’s income tax liability must be settled by 31 January.
It is possible on application to defer paying tax where the amount is in dispute. However, since 2014, in the case of tax avoidance schemes which are or should have been registered under the Disclosure of Tax Avoidance Schemes (DOTAS) rules HMRC has the power in certain circumstances to require payment of disputed tax in advance of ultimate resolution of the dispute. HMRC exercises the power to require prior payment by issuing an “Accelerated Payment Notice” or “Partner Payment Notice” (APN or PPN) depending on whether the scheme in question involved a partnership (sections 199-233 and Schedule 30-33 Finance Act 2014). The taxpayer has 90 days to object in writing, following which HMRC will confirm, withdraw or amend the notice. There is no right of appeal against the confirmation of an APN or PPN.
Similarly, the Diverted Profits Tax incorporates an advance payment procedure, against which there are only very limited appeal rights.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government? Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public register of beneficial ownership?
Section 18 of the Commissioners for Revenue and Customs Act 2005 (CRCA) imposes a duty on HMRC officials to ensure that taxpayer information is kept confidential. It is a criminal offence to contravene section 18 by disclosing information to a person whose identity is specified in the disclosure or can be deduced from it. The section 18 duty is not absolute and it does not apply to a disclosure which “is made for the purposes of a function of the Revenue and Customs and does not contravene any restriction imposed by the commissioners.”
A case of particular interest on this exception is R (Ingenious Media Holdings plc) v The Commissioners for HMRC  EWHC 3258 (Admin). This judgment emphasizes that HMRC’s duty of confidentiality is a fundamental duty owed to the taxpayer.
The UK is a signatory to the CRS. Reporting runs annually from 1 January to 31 December. Financial institutions are legally required to provide the required information to HMRC. Information of beneficial ownership of companies is now publicly available on the Companies House website.
What are the tests for residence of the main business structures (including transparent entities)?
There are two tests for determining whether a company is resident for tax purposes in the UK: (1) the incorporation test (the process is also referred to broadly as company registration), or (2) the central management and control test. A company will automatically be resident in the UK for tax purposes if it is incorporated in the UK, unless it must be treated as resident in another country under the tiebreaker provisions of a double tax treaty. Companies incorporated outside the UK will be deemed UK tax resident if they are centrally managed and controlled in the UK.
Regarding transparent entities, such as partnerships, one looks at the partner level. An individual’s residence status is determined by the application of a statutory residence test. UK-resident partners are liable to UK tax on their share of the worldwide profits of the partnership. Non-UK-resident partners are only liable to tax on profits that arise in the UK and their share of partnership investment income, to the extent that it arises in the UK. Where a partnership is managed and controlled abroad, UK resident partners may be entitled to be taxed on the remittance basis for their share of the profits that arise overseas.
Have you found the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
International tax planning and avoidance has a high public profile in the UK. The UK has been an active and vocal supporter of the OECD and BEPS project since its inception and has actively implemented the BEPS recommendations. The UK was ahead of the BEPS process with the introduction, in 2015, of the Diverted Profits Tax, to claw back any profits that have been shifted to avoid tax. Furthermore, the UK has had the arbitrage legislation since about 2005. Accordingly, attention has been paid to cross-border transactions for a long time.
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
The UK CFC regime is based on rules designed to prevent diversion of UK profits to low tax territories. Where UK profits are diverted to a CFC, those profits are apportioned and charged on a UK corporate interest-holder that holds at least a 25% interest in the CFC. There are a number of exemptions to reflect the fact that the majority of CFCs are established for genuine commercial reasons. The Finance Act 2004 abolished the separate thin capitalisation requirements that had existed previously and subsumed them within the general transfer pricing rules in the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010).
The UK transfer pricing (TP) regime is contained in Parts 4 and 5 of TIOPA 2010. The UK TP regime must be considered in light of the Diverted Profits Tax (DPT) rules, which were introduced by the Finance Act 2015. There is also an advanced pricing agreement (APA) programme through which unilateral, bilateral and multilateral APAs can be obtained. The process by which such an agreement can be obtained is detailed in HMRC’s Statement of Practice 2/2010. HMRC will determine the taxpayer’s DPT position before agreeing to an APA.
As demonstrated in, for example, the Starbucks and Apple decisions, any business which has secured a favourable APA could, potentially, be at risk of having those arrangements reviewed under the State Aid rules and be faced with having to make significant payments to repay tax benefits received under APAs that, allegedly, do not comply with State Aid rules.
Is there a general anti-avoidance rule (GAAR) and, if so, in your experience, how would you describe its application by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only etc?
A GAAR was introduced in the UK in 2013 and is intended to target abusive tax avoidance schemes. To determine whether a scheme should be thwarted, the question is whether there are abusive arrangements that give rise to a relevant tax advantage and it is reasonable to conclude that the tax advantage was the main purpose, or one of the main purposes, of the arrangements. The objective test for abuse is whether entering into the tax arrangements, or carrying them out, cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances. This is termed the double reasonableness test.
The Finance Act 2016 has introduced several new measures to bolster the GAAR in the UK. These include allowing HMRC to issue provisional counteraction notices within normal assessment time limits and the introduction of GAAR penalties of up to 60% of the counteracted tax.
It is HMRC’s intention that the GAAR be applied initially by taxpayers themselves, through their own self-assessment or in their accounts and adjusting any tax advantage on a just and reasonable basis. HMRC also has powers of counteraction and matters may therefore proceed to litigation to be decided by the courts.
To date the GAAR Advisory Panel (part of the GAAR operating process) has only issued opinions in connection with an avoidance scheme in an employment context. However, HMRC has issued very extensive guidance materials indicating how the GAAR would operate in a wide range of contexts, including in respect of corporate tax.
Have any of the OECD BEPS recommendations been implemented or are any planned to be implemented and if so, which ones?
In March 2016, the UK government confirmed the implementation of hybrid mismatches (Action 2), interest deductibility (Action 4), intellectual property (Action 5), transfer pricing (Actions 8-10), and country-by-country reporting measures. In September 2016, UK rules on hybrid mismatches and patent box were enacted. In April 2017, the UK government implemented rules on interest deductibility.
In March 2018, the UK government released a position paper in respect of the taxation of companies operating in the digital economy (Action 1). The government expressed the view that the profits of a business should be taxed in the countries in which it creates value but that this principle is being challenged by business models for which value creation is in part reliant on the engagement and participation of users. The paper concludes that action is needed to update the tax system. Consultation remains ongoing as at October 2019.
The UK already follows the transfer pricing guidelines Actions 8-10 as well as the disclosure of aggressive tax planning (Action 12). A further order entered into force in March 2018, recognising the updated transfer pricing guidelines. The UK has signed a multilateral competent authority agreement for the automatic exchange of CbC reports and is one of the countries committed to binding arbitration. Regarding CFCs, the UK considers that its CFC rules are compliant with the BEPS Action 3.
In May 2017, the European Council adopted the Anti-Tax Avoidance Directive which establishes a minimum standard with respect to five areas that relate to Actions 2, 3, 4 and 6 of the BEPS Project. By July 2018 the UK had transcribed these minimum standards into domestic law and they are all currently in force.
In your view, how has BEPS impacted on the government’s tax policies?
The UK Government considers it is ahead of the curve. There is therefore unlikely to be any change in existing policies.
Does the tax system broadly follow the recognised OECD Model? Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties? If so, what are the current rates and are they flat or graduated?
The UK does broadly follow the recognised OECD model of taxation. The current rates are as follows:
a. Corporation tax is at a flat rate of 19%. The corporation tax rate is planned to go down to 17% by 2020.
b. Personal income and pensions are taxed on a gradated basis – each band of income is taxed at a different rate:
- Personal allowance up to £12,500 – 0%
- Basic rate between £12,501 to £50,000 – 20%
- Higher rate between £50,001 to £150,000 – 40%
- Additional rate over £150,000 – 45%
When an individual taxpayer has income of over £100,000 they lose their personal allowance at a rate of £1 for every £2 of income over £100,000. This has the effect of charging additional tax at the 40% higher rate band.
c. VAT is set at a flat rate of 20%, although some goods are subject to a reduced of 5% or a zero rate (such as children’s car seats or children’s clothes).
d. The amount of tax paid on savings income will depend on a person’s total taxable income. Firstly, if one has not claimed the full personal allowance from other income, one can use the remainder of the allowance to earn interest tax-free. Secondly, if one’s other income is less than £17,500, one may also claim up to £5,000 of interest tax-free. Thirdly, one may be eligible for up to £1,000 of interest tax-free depending on which income tax band one is in. e. Income from land will generally be added to an individual’s overall taxable income in a given year and is therefore taxed on the same basis as income from other sources (see b above).
f. The annual tax-free allowance for capital gains is £12,000 generally and £6,000 for trusts. Higher and additional rate taxpayers pay 28% on gains from residential property and 20% on gains from other chargeable assets. Basic rate taxpayers generally pay at a lower rate, but this depends on the size of the capital gain.
g. Stamp Duty Land Tax is a tax on the purchase of a property. Normally, the first £125,000 of the purchase price of a residential property is tax-free. This is also true for the first £150,000 paid for non-residential land and properties. Following bands of the purchase price are taxed rates of 2%, 5%, 10% and 12%. There are different rules if the purchaser (and anyone they are purchasing with) is buying their first home on or after 22 November 2017 and the purchase price is £500,000 or less (“The Help to Buy Scheme”). Where The Help to Buy Scheme applies, up to 100% tax relief can apply.
Stamp Duty Reserve Tax (SDRT) is a tax on the purchase of shares. The SDRT rate is 0.5% and is automatically imposed where shares are purchased electronically and imposed on transactions over £1,000 where purchased using a stock transfer form.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
Yes. Corporation tax in the UK is a tax on profits. The starting point in the computation of taxable profits is the figure provided by commercial accounting. This figure is then adjusted as required or authorised by law. Taxable profits include the money the company or association makes from doing business (‘trading profits’), investments and selling assets for more than they cost (‘chargeable gains’).
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
In the UK there may be a difference between the recognition of an entity for tax purposes and the incidence of tax liability. A company is a legal entity and pays tax at the corporate level. A general partnership is not a legal entity distinct from its partners (except in Scotland) but profits are computed at partnership level and consequent tax is levied at partner level on the individual partner’s share of the profit. A limited liability partnership is a legal entity for company law purposes but, provided it is trading, is treated like a general partnership for tax purposes, ie as transparent.
Trusts can attract income tax, capital gains tax or inheritance tax. The tax payable and the person responsible for ensuring the tax is paid largely depend upon the type of trust.
Is liability to business taxation based upon a concept of fiscal residence or registration? If so what are the tests?
Yes. The UK follows the principle of territoriality: it taxes the worldwide profits of its residents and the UK profits of non-residents. There are two tests for determining whether a company is resident for tax purposes in the UK: (1) the incorporation test (the process is also referred to broadly as company registration), or (2) the central management and control test. A company will automatically be resident in the UK for tax purposes if it is incorporated in the UK, unless it must be treated as resident in another country under the tiebreaker provisions of a double tax treaty. For companies incorporated outside the UK, they will be deemed UK tax resident if they are centrally managed and controlled in the UK.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
Established in 2012, enterprise zones are designated areas across England that provide tax breaks and government support. Examples of the benefits that may be available to businesses located in an enterprise zone are 100% enhanced capital allowances, government support to ensure superfast broadband throughout the zone and up to 100% business rate discount worth up to £275,000 per business over a 5-year period. The aims of the regime are to attract foreign investment into the country and to deliver long-term, sustainable growth across England. New zones were announced in 2016 and 2017 respectively. A time limit is imposed on locating one’s business in an Enterprise Zone. For example, those planning to locate to one of the Zones which began in April 2017 will need to have located there by March 2022 in order to qualify for a government-backed business rates discount.
Regulated banking entities in the UK are currently subject to an additional 8% “banking surcharge” in addition to their corporation tax. A large part of the financial services sector therefore suffers increased, rather than favourable, taxation.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
The Patent Box enables UK companies to apply a lower rate of 10% corporation tax to profits earned after 1 April 2013 from its patented inventions. The patent box regime was designed to attract companies with intellectual property overseas to choose the UK as a jurisdiction in which to develop the asset. Following OECD concerns that Patent Box was open to abuse, the UK government committed to making changes to the regime. In particular, it is no longer possible to use the standard method of calculating the percentage of taxable profits that could benefit from the regime. Instead, only profits derived from research and development activities carried out by the company will be allowed in a claim.
In addition to the Patent Box, the UK also gives tax relief in the form of Research & Development Tax Relief for projects that advance overall capability or knowledge in a technological or scientific area (note: this is not just increasing the company’s knowledge). There are two schemes, the first is for SMEs – up to 500 employees, up to €100m turnover and up to €86m balance sheet – which gives tax relief at 230% of the R&D costs. The second scheme is for larger companies or SMEs who do not qualify under the other scheme. Those who qualify under this second scheme can apply for a tax credit, calculated at 12% of the company’s research and development expenditure.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
The UK does not provide for fiscal consolidation of company groups. Each company within a corporate group must pay corporation tax on profits. However, group relief, which allows certain types of loss of one group member to be surrendered to another, is available. Any amount of trading losses, non-trading loan relationship deficits and excess capital allowances may be surrendered and do not need to be used first by the loss-making company. However, all other current-year losses (such as property business losses, qualifying charitable donations) can only be surrendered as group relief to the extent that they exceed the surrendering company’s other profits in the accounting period.
Are there any withholding taxes?
There is no withholding tax (WHT) on dividends paid by UK companies, save for a 20% WHT applied to certain dividends paid in respect of income profits and capital gains of a UK real estate investment trust. Interest and royalties are subject to a 20% WHT unless the rate is reduced under a double tax treaty or exempt under the Interest and Royalties Directive, or the interest is considered to be short interest rather than yearly interest.
In Coal Staff Superannuation Scheme Trustees Limited v Commissioners for Her Majesty's Revenue & Customs  UKUT 152 (TCC);  STC 1095, the Upper Tribunal held that EU law did not permit HMRC to charge UK withholding tax on manufactured overseas dividends owned by a pension fund when it did not charge an equivalent tax on manufactured dividends in relation to UK shares. According to the Upper Tribunal, this regime breached Art. 63 TFEU. The decision is under appeal.
Are there any recognised environmental taxes payable by businesses?
Yes. The UK imposes a Climate Change Levy (CCL) on industrial, commercial and agricultural businesses and public services on electricity, gas and solid fuels. Businesses can get a reduction on the rate of CCL if the business has entered into a climate change agreement with the Environment Agency. There are two further environmental taxes of note:
a. A tax on top of normal landfill fees if the business gets rid of waste using landfill sites.
b. A tax on sand, gravel and rock that has either been dug from the ground or dredged from the sea in UK waters or imported.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not, how is it taxed?
Until 2009 where a UK company received a dividend from a UK company the income was exempt from tax. However, dividends received from non-resident companies were taxed with credit for any foreign withholding tax and tax on the underlying profits. Following adverse rulings from the ECJ, in 2009 the UK introduced a general exemption system. UK and non-UK sourced dividends and other distributions received by a UK company or a UK permanent establishment are subject to corporation tax unless the distribution falls within a number of exemptions. The exemptions are drafted broadly such that their overall effect is to exempt all dividends from corporation tax unless they fall within certain anti-avoidance provisions called Targeted Anti-Avoidance Rules (TAARs). TAARs include rules that, for example, prevent the artificial transfer of value out of a company resulting from either an intra-group asset transfer otherwise than at market value or the payment of a dividend out of artificial profits.
If you were advising an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered?
Much would probably depend on the nature and scope of the group’s activities. Notwithstanding uncertainty caused by Brexit many advantages of the UK jurisdiction will remain. The UK will continue to possess a well-developed, sophisticated financial infrastructure. Its high level of connectivity with the rest of the world will not change. Whatever the eventual political settlement over Brexit, the UK Government has indicated that it intends to maintain existing trade etc standards and regulation. Consequently, but subject to the Brexit settlement, activities in the UK should continue to be compatible with similar activities within the EU. The UK courts are experienced at dealing with international disputes and are often flexible in procedure and cost-effective. They are likely to remain a forum of choice for the resolution of international disputes. The tax authority always scores well in comparison exercises with other national fiscal organisations and is recognised as honest and sophisticated. Whilst the UK will not become a low rate tax haven, it is the policy of the UK Government to reduce corporate tax rates. The UK has a track record of using the tax system to encourage and incentivise business. Self-evidently the language of business in the UK is English.
Disadvantages attributable to Brexit will depend on the eventual political settlement but will most likely include the loss of membership to the single market and customs union, potential consequent loss of passporting rights, and inability to rely on the EU Arbitration Convention, which established a procedure to resolve disputes where double taxation occurs between companies of different Member States. Without an agreement with the remaining EU Member States, for example, directives, such as the Parent-Subsidiary Directive and Interest and Royalties Directive, will no longer have direct application to UK companies. Consequently, UK companies receiving dividends, interest and royalties from EU companies will have to rely on double tax treaties to eliminate (if possible) withholding taxes on such distributions. Depending on the terms of the tax treaty, companies might incur additional costs when distributing profits from certain EU Member States and might have to consider restructuring to distribute dividends more efficiently.