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Taxation in United Kingdom


The UK has a low-tax, low-allowance system of taxation. The main tax rate on corporate profits is 30%. With effect from April 1st 2006, UK-tax-resident companies with profits up to £300,000 are taxed at a 19% rate, and those with profits between £300,000 and £1.5m are taxed at a rate between 19% and 30%. Where companies are associated, the thresholds are reduced pro-rata. Similar rates apply to UK permanent establishments (PEs) of non-UK-resident companies provided the company is resident in a territory that has an appropriate double-taxation treaty with the UK.

A UK-resident company is subject to corporation tax on its worldwide profits with credit given for most overseas taxes. Profits include chargeable gains. A non-UK-resident company is subject to corporation tax only in respect of the profits of its PE in the UK and chargeable gains on assets used or held for the purpose of the trade or PE. If a non-resident company carries on an investment activity in respect of UK sources of income, it will be subject to income tax. The rate of income tax for income from UK real estate (held as an investment) is 22%, and that on UK-source interest income is 20%.

A company is UK tax resident if it is incorporated in the UK or, if not incorporated in the UK, if its place of central management and control is in the UK. In practice, this often means determining whether the directors exercise central management and control and, if so, where they exercise that control.

The government believes it is important to maintain a competitive tax system. Recent measures cited by the government in support of this include a new regime for the taxation of intellectual property, goodwill and other intangibles; an exemption for capital gains and losses on the sale of a substantial shareholding; a volume-based enhanced tax deduction (150%) for small and medium-sized enterprises (SMEs) for certain revenue expenditure on research and development (R&D) that, for loss-making SMEs, can also be surrendered for cash; a volume-based enhanced tax deduction (125%) for non-SMEs for certain revenue expenditure on R&D; and a comprehensive system for taxing loan relationships, derivative contracts, and foreign-exchange gains and losses.

Like many EU governments, the UK government must carefully monitor developments in EU jurisprudence to ensure that UK corporation tax provisions accord with EU law. As a result of recent decisions by the European Court of Justice (ECJ), there is significant litigation in progress and pending that challenges many provisions in UK tax law. These include the taxation of foreign dividends, the controlled foreign companies’ legislation, the taxation of capital assets transferred to a foreign group company and the restriction on claiming relief for interest paid by a thinly capitalised company.

The ECJ decision in the Marks & Spencer case has caused the UK government to amend the group loss surrender rules. It is now possible, in certain limited circumstances, to offset losses of a non-UK trade incurred by a non-UK company against UK taxable profits, even if that non-UK company had made profits they could not be taxed in the UK.

Compliance with and enforcement of tax law is high in the UK. HM Revenue & Customs (formerly the Inland Revenue), the tax collector, has intensified enforcement procedures in recent years. The chancellor of the exchequer, currently Gordon Brown, takes a tough line on tax avoidance and the government recently introduced significant measures to monitor and counter some lawful tax avoidance. For example, the Finance Act 2004 introduced anti-avoidance rules that give HM Revenue & Customs early notification of certain tax-avoidance schemes. Where this applies, a promoter is required to disclose certain tax-planning proposals (on a no-names basis) shortly after they are made, setting out the nature of the proposed transactions and the expected tax consequences. If the transaction is implemented, it must be reported in the user’s tax return. The regime is to be extended in 2006. The recent Finance Acts included many anti-avoidance measures to address some of the disclosed proposals.

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