Formation Company & Tax Advisory

Sunday, May 20, 2018

Tax System in United Kingdom (UK)

The UK is one of the most competitive Countries in the world from a tax point of view, with several advantages, both for legal entities and Individuals.

The British tax system demands:

  • Taxes on income of Legal entities which are the lowest of Europe.
  • Strong incentives and/or breaks for investment in research and development.
  • An effective system of monitoring and the enforcement of provisions of double taxation.
  • Competitive personal taxes.
  • A minimum contribution in the field of social services.
  • The ability to amortize the cost of capital goods with taxable profits.

With respect to this tax system there are two types of them:

  1. Direct Taxes.
  2. Indirect Taxes.

The first one includes:

  • Income Tax.
  • Corporation Tax.
  • Inheritance Tax.
  • Capital Gains Tax.

The second one includes:

The fiscal year begins on April, 6th and it ends on April, 5th the following year. Income Tax and Corporation Tax are administered and collected by Her Majesty's Revenue and Customs -HMRC). The concept of family in the UK does not exist and each Individual is taxed separately.

TAXES ON INCOME OF INDIVIDUALS - INCOME TAX

According to the principle of double taxation, in ompliance with the general international and community principes, residents in the UK are subjected to pay their Income Tax applied to their total revenue, while the non-residents in the UK are subjected to this tax but limited to the income got there. In the United Kingdom Source Rule rules, according to which an item is taxed only whether there is a specific Law provision ruling the recognition to a given levy.

For the tax year 2015 the following rates have been provided at :

  • Exemption up to £ 10,600.
  • 20% for any income up to £ 31,785.
  • 40% for any income from £ 31,786 up to £ 150,000.
  • 45% for any income over £ 150,000.

TAXES ON INCOME OF LEGAL ENTITIES - CORPORATION TAX

Income received by an Entity are subjeted instead to Corporation Tax. This tax is applied to:

  • Any Income earned by Legal entities which are residents in the United Kingdom.
  • Any income earned by permanent establishments of Legal entities which are non-residents in the United Kingdom.

Permanent establishments are defined as Legal entities that own fixed locations (branch, office, workshop or factory bulding site or similar) in the United Kingdom or employ their agents. However, when fixed locations operate on merely preparatory or auxiliary business they are not considered permanent establishments.

A Legal entity will therefore be subjected to taxation if the place of business is in the UK and/or its activity is mainly carried out in that Country. It should be marked that if a Legal entity is resident in the UK and in another European Country at the same time, according to the mentioned treaty against double taxation, it is first necessary to determine where that entity appears to have its Legal residence. Unaffected is, in any case, the general obligation of contribution on profits made in the United Kingdom.

Tax on Legal entities is approved annually by the British Government in order not to lose their legitimacy at the moment of their tax collection. For the tax year 2015 has been scheduled for a single rate of 20%.
 
In the UK it is possible to make use of Tax Return by which the company self-certifies its income, taking full responsibility for it.

INHERITANCE TAX

Inheritance Tax in the UK is made on the property basis which gets in succession at a rate calculated on the basis of 40% on goods of the entire estate when they overcome a certain threshold (e.g. 325 000 GBP is the threshold established from the year 2014 to April 5th, 2015). Individuals which are non-resident in the UK are not required to pay any Inheritance Tax on inherited property abroad, but when they have been resident for tax purposes in the United Kingdom during the last seventeen of their twenty years there, under that circumstance Inheritance tax is due for assets inherited worldwide.

CAPITAL GAINS TAX

Since July 2010, the British Government has approved the raising of the rate on financial income from a former 18% to 28% but only for those who earn high incomes, i.e. the so-called - Higher Taxpayers and Additional Rate Tax payers. This means that for all other investors who earn less than 35 000 GBP per year, i.e. the so-called - Basic Taxpayers - the rate of Capital Gains Tax remains at 18%.

With respect to dividends there is currently no withholding tax on those paid by companies which are resident in the United Kingdom. Dividends are therefore subject to the following rates of Income Tax: 

  • 10% for any income up to 31,785 GBP.
  • 32,5% for any income from 31,786 GBP to 150,000 GBP.
  • 37,5% for any income over 150,000 GBP.

The interest is usually applied a deduction of 20%.

VALUE ADDED TAX - VAT

VAT or Value Added Tax was introduced in UK in 1973 with a standard 10% rate. VAT is an indirect tax that is charged on most goods and services provided by Individuals and Legal entities registered and operating in the United Kingdom. It is also due for goods and services imported from some non-EU Countries and EU Countries.

Since April 1st, 2015, in the UK a LTD, LIMITED or LLP, has not been obliged to request the allocation of VAT if its annual turnover, expected or recorded in the previous twelve months, is less than 82 000 GBP. Three rates are currently valid for VAT, which vary depending on products sold or services provided. The rates applied are as follows:

  • 20% standard rate.
  • 5% reduced rate applied to domestic energy sources.
  • 0% zero rate.

The standard 20% rate has been applyed since January 4th, 2011. Some goods and services are exempt from VAT or excluded from British VAT system, e.g. children's clothing and food products. Tax advice aimed at finding the best solution for the most advantageous tax planning (selecting business approaches, corporate structures and markets where you can reduce the tax burden) is what should be done to legitimize profits. An advice customized to specific areas of activities and in compliance with any local tax Law issued is helpful for planning. Regarding to this, Bright Business Consulting LLP provides the necessary support for achieving this target.

STAMP DUTY LAND TAX

The United Kingdom has always been a monarchy. Because of it, many traditions have ancient roots. Stamp Duty is one of them. It dates back to the Kingdom of William and Mary in 1694. At the beginning, Stamp Duty was applied to transfers of different nature and items such as newspapers, lottery tickets, advertisement, cards, medicines, perfumes, gold and silver and so forth. Each of these items had to be stamped.

This approach has been used over the ages until recently. However, in 2003, Stamp Duty was deeply reconsidered and significantly reduced. As a consequence of it, the application of Stamp Duty was abolished for most of the articles cited above, with the exception of shares and stocks.

Since 2003, the United Kingdom has been demanding three types of Stamp Duty:

  • STAMP DUTY LAND TAX: which is applied to property transactions such as purchasing, selling or moving a residential property.
  • STAMP DUTY RESERVE TAX: which is a Tax payable on shares and when you buy an item on the stock market or through brokers.
  • STAMP DUTY: which is applied on purchases of bonds by moving stocks and transferring of rights on investments.

Tax advice aimed at finding the best solution for the most advantageous tax planning (selecting business approaches, corporate structures and markets where you can reduce the tax burden) is what should be done to legitimize profits. A survey customized to specific areas of activities and in compliance with any local tax Law issued is helpful for planning. Regarding to this, Bright Business Consulting LLP provides the necessary support for achieving this target.

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LONDON - UK - W8 4DB 

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