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Income Tax in United Kingdom



Personal Income Tax:

Tax Return:

If an individual meets the requirements to report his/her income to HMRC, they are required to notify HMRC of this by 5 October following the relevant tax year end. The deadlines for tax returns to be submitted to HMRC are as follows:

· 31 October, if a paper return is filed (whether or not the taxpayer wishes HMRC to calculate the liability); and,

· 31 January, if the return is filed online (the liability is then calculated automatically). To enable an individual to file a return online, he/she must be in possession of a UTR (Unique Taxpayer Reference), which is issued by HMRC when they know a tax return may be required from the individual.

The tax year starts from 6th April and ends on 5th April.

Tax Rates:

The table shows the tax rates you pay in each band if you have a standard Personal Allowance of £11,500.

Band
Taxable Income
Tax Rate (%)
From
To
Personal Allowance
0
11,500
0
Basic Rate
11,501
45,000
20
Higher Rate
45,001
150,000
40
Additional Rate
Above 150,000
45

Residency Rule:

An individual’s tax liability can be affected not just by his/her residence status but also by his/her domicile status.

Prior to 6 April 2013, an individual’s UK residence status was determined according to case law and guidance issued by HMRC (latterly known as “HMRC6”). However, due to these existing “uncertain and complicated residence rules” the government introduced a statutory residence test (SRT) which applies from 6 April 2013.

Broadly, the SRT, which applies from 6 April 2013, is made up as follows:

· Automatic overseas tests
· Automatic UK tests: and,
· A sufficient ties test

Automatic Overseas Test:

An individual will be classed as non-UK resident if one of the following three automatic overseas tests applies (there are a further two automatic overseas tests which are only applicable when the individual dies during the relevant tax year):

· The individual has not been resident in the U.K. throughout the previous three tax years and will spend less than 46 days in the U.K. in the relevant tax year.

· The individual has been resident in the UK for one or more of the previous three tax years and will spend less than 16 days in the U.K. in the relevant tax year.

· The individual is in full time work abroad (as defined in the legislation) in the relevant tax year, spends less than 91 days in that U.K. in the tax year and no more than 31 days are spent working in the U.K.. For these purposes a workday is where more than three hours of work is performed and may include travel time.

If any one of the automatic overseas tests is met, the individual is classed as non-UK resident for the tax year and does not need to consider the SRT any further. Otherwise, if none of the automatic overseas tests are met the automatic UK residence tests have to be considered.

Automatic UK residence tests:

An individual will be classed as UK resident for the relevant tax year if they have not met any of the automatic overseas tests and they meet any one of the following three automatic U.K. residence tests (there is a further test applicable only if the individual dies during the relevant tax year):

· The individual spends 183 days or more in the U.K. in the relevant tax year.

· The individual has a UK home for at least 91 consecutive days, at least 30 days of which are in the relevant tax year. In addition, the individual must be present in that home in the relevant tax year for at least 30 days (whether consecutively or otherwise). If the individual also owns a home overseas during that 91 day period, they must not be present in that home for more than 30 days in the tax year.

· The individual works full-time (as defined in the legislation) in the United Kingdom.

If the individual has met none of the automatic overseas tests and then none of the automatic UK tests, they must then turn to the sufficient ties test to determine their UK residence status.

Sufficient ties test:

To determine whether an individual meets the sufficient ties test to be regarded as a U.K. resident for the relevant tax year, a number of factors are considered in association with the number of days an individual spends in the United Kingdom. These factors or ‘ties’ relate to:

· location of family;

· availability of UK accommodation;

· extent of U.K. work;

·U.K. presence in earlier tax years; and,

· whether more time is spent in the U.K. than any other country.

For the sufficient ties test a distinction is drawn between “arrivers” (i.e. individuals who have been not U.K. resident in any of the previous three tax years) and “leavers” (individuals who have been U.K. resident in one or more of the previous three tax years).

“Arrivers”

Where the individual has been regarded as not resident in the U.K. in all of the three previous U.K. tax years, the four ‘UK ties' to be considered are:

· the U.K. resident family tie;

· the accommodation tie;

·the work tie; and,

· the 90-day tie.

The combination of the number of ties the individual has with the U.K. during the relevant tax year and the number of days the individual is in the U.K. determine whether the individual is U.K. resident for that tax year. The criteria are as follows:

Days spent in the U. K.
Number of U. K. Ties
Fewer than 46 days
Always non resident
46-90 days
Resident if has 4 U. K. ties
91-120 days
Resident if has 3 U. K. ties
121-182 days
Resident if has 2 U. K. ties
183 days or more
Always Resident

“Leavers”

Where an individual has been regarded as resident in the U.K. in at least one of the three previous U.K. tax years, the five ‘U.K. ties' to be considered are:

· the U.K. resident family tie;

· the accommodation tie;

· the work tie;

· the 90-day tie; and,

· the country tie.

The combination of the number of ties the individual has with the U.K. and the number of days the individual is in the U.K. during the relevant tax year determine whether the individual is U.K. resident for that tax year. The criteria are as follows:

Days spent in the U. K.
Number of U. K. Ties
Fewer than 16 days
Always non resident
16-45 days
Resident if has 4 U. K. ties
46-90 days
Resident if has 3 U. K. ties
91-120 days
Resident if has 2 U. K. ties
121-182 days
Resident if has 1 U. K. ties
183 days or more
Always Resident

Exempt Income:

The costs of transporting an employee and close family to the U.K. at the beginning and end of U.K. assignments are not taxable in most circumstances. Certain other moving expenses may also be non-taxable up to a maximum of GBP 8,000.

The exercise of most foreign share incentives gives rise to U.K taxable income from employment.

The categories of income that are exempt from income tax include the following.

Gaming winnings:

Winnings from betting (including pool betting, or lotteries, or games with prizes) are not chargeable gains, and rights to winnings obtained by participating in any pool betting, or lottery, or game with prizes are not chargeable assets. Strictly, where the prize takes the form of an asset, it should be regarded as having been acquired by the winner at its market value at the time of acquisition.

Long service awards (within certain limitations):

Long service awards are fully tax-exempt if made in the following circumstances:

· The award is not in cash.

· The award is made to an employee to mark long service with an employer.

· The award marks at least 20 years service.

· No other long service award has been made to the employee within the previous 10 years.

· The award is worth no more than GBP50 for each year of service.

Individual savings accounts (ISAs) for U.K. resident individuals:

From 6 April 2017, the annual ISA investment allowance is GBP20,000. Different ISA-types exist to facilitate investment of the funds in different asset classes e.g. cash ISA, Stocks and Shares ISA etc.

Any income arising from funds invested in such accounts, such as interest or dividends, are exempt from U.K. tax.

Certain pensions:

Some pensions and allowances paid to war widows and dependents are exempt from tax, as well as similar pensions or allowances payable under the laws of a foreign country.

Certain social security and state benefits:

These include the following (non exhaustive):

·  child tax credit

· housing benefit

· maternity allowance (but statutory maternity pay is taxable)

·  employment and support allowance (for the first 28 weeks of entitlement): and,

· attendance allowance

Deductions from Income:

Unlike certain other jurisdictions, deductions from income are limited. Below are some of the main deductions:

· Annual subscriptions to certain approved professional bodies or learned societies, where the body’s activities are relevant to the duties of the employment.

· Higher rate taxpayers will be able to claim tax relief for payments made to charities in EU member states, Norway and Iceland and (from 31 July 2014) Liechtenstein if the payment is made under Gift Aid arrangements or other approved arrangements. Payments made to a charity using a payroll giving scheme will receive tax relief at source.

·  A deduction is allowed for expenses incurred in performing the duties of an employment, such as business travel expenses. In certain circumstances, it may be difficult to obtain a deduction for business entertaining expenses.

· Deductions are also allowed for employee contributions to a registered pension plan, or to a foreign pension plan that satisfies certain criteria. There are both annual and lifetime contribution limits which apply to such contributions. An additional tax charge will arise if the contribution limits are exceeded so care is required and professional advice is recommended.

· The personal allowance (effectively, income taxed at 0%) for 2017/18 is GBP11,500. For 2017/18 the personal allowance reduces where the income is above GBP100,000 - by GBP1 for every GBP2 of income above the GBP100,000 limit. This reduction applies regardless of age.

· A child tax credit has applied since 6 April 2003. This is a means-tested benefit paid directly (rather than through the tax system) to the individual mainly responsible for looking after the child or children. There are no personal allowances in respect of children, although children themselves are entitled to the standard personal allowance if they have income in their own right.

Generally, no deduction is allowed for alimony and child support payments, and neither is the recipient taxable on the amount received. Nor is a deduction available for interest on a loan to purchase a main residence or for investment expenses such as a safe deposit box, safekeeping fees, or investment management fees.

However, it is possible to obtain tax relief for amounts invested in:

· certain qualifying unquoted companies (30% relief on up to GBP1 million per year—the Enterprise Investment Scheme or “EIS”);

· in certain qualifying venture capital trusts (“VCTs”) (30% relief on up to GBP200,000 per year);
· in small early stage companies in the Seed Enterprise Investment Scheme (“SEIS”) (50% on up to GBP100,000); and,

· in certain buildings on sites in designated enterprise zones.

They cannot create an additional tax refund (other than tax already paid at source). Therefore, it is important that an individual obtains advice before making their investment to ensure they can utilise the available reliefs effectively.

Remittances to invest in certain commercial businesses can also be made without incurring a tax charge via the Business Investment Relief (“BIR”). But care is required as the criteria are strict and there are anti-avoidance rules which can trip the unwary.

To curtail what the Government views as an excessive use of tax reliefs, it introduced a limit on all uncapped income tax reliefs on 6 April 2013. For anyone seeking to claim more than GBP 50,000 of reliefs, a cap is set of 25% of income (or GBP 50,000, whichever is greater) applies. Again, any individual wanting to obtain tax reliefs in excess of GBP 50,000 should seek advice first.



Corporate Income Tax:

Resident companies are taxable in the United Kingdom on their worldwide profits (subject to an opt-out for non-UK permanent establishments [PEs]), while non-resident companies are subject to UK corporate tax only on the trading profits attributable to a UK PE plus UK income tax. In practice, for many companies, the application of a wide range of tax treaties, together with the dividend exemption, makes the UK corporate tax system more like a territorial system.

General corporation tax rates:
The normal rate of corporation tax is 19% for the year beginning 1 April 2017. It is proposed that this rate will fall to 17% for the year beginning 1 April 2020.

Where the taxable profits can be attributed to the exploitation of patents, a lower effective rate of tax applies. The rate is 10% from 1 April 2017. Profits can include a significant part of the trading profit from the sales of a product that includes a patent, not just income from patent royalties. This scheme was revised from June 2016.

Special corporation tax regimes:

Apart from the four specific exceptions noted below, there are no special regimes for particular types or sizes of business activity; in general, all companies in all sectors are subject to the same corporate tax rates and rules. However, certain treatments and reliefs do vary according to size, including transfer pricing, R&D credits, and some targeted anti-avoidance rules.

For large companies, there are some additional compliance and reporting requirements. Some elements of Her Majesty’s Revenue and Customs’ (HMRC’s) organisational structure and approach to avoidance and compliance are arranged by size of business (e.g. Large Business Strategy).

Oil and gas company regime:

Profits that arise from oil or gas extraction, or oil or gas rights, in the United Kingdom and the UK Continental Shelf ('ring-fence profits') are subject to tax in the United Kingdom in accordance with rates applicable in 2006, i.e. a full rate of 30% and a small profits rate of 19%. Such activities also attract 100% capital allowances on most capital expenditure. A supplementary tax charge of 10% applies to 'adjusted' ring fence profits in addition to normal corporation tax.

Petroleum revenue tax is now set at 0% but is retained for technical and historic reasons in relation to certain old oil fields.

Life insurance company regime:

Life insurance businesses are also taxed under a special regime, which effectively includes different corporate tax rates as well as special rules for quantifying profits.

Tonnage Tax regime:

Companies that are liable to corporation tax and operate qualifying ships that are strategically and commercially managed in the United Kingdom can choose to apply Tonnage Tax in the place of corporation tax. Tonnage Tax is an alternative method of calculating corporation tax profits by reference to the net tonnage of operated ships. The Tonnage Tax profit replaces the tax-adjusted profit/loss on a shipping business and certain related activities, as well as the chargeable gains/losses made on Tonnage Tax assets. Any other profits are taxable under the normal corporate tax regime.

Banking sector:

A supplementary tax is applicable to companies in the banking sector at 8% on profits in excess of GBP 25 million. Also, loss utilisation is restricted; carried forward trading losses can be set against only 25% of profits in a period.

Income tax for non-resident companies:

A non-resident company is subject to UK corporation tax only on the trading profits of a UK PE. Any other UK-source income received by a non-resident company is subject to UK income tax at the basic rate, currently 20%, without any allowances (subject to any relief offered by a double tax treaty [DTT], if applicable). This charge most commonly arises in relation to UK rental income earned by a non-resident landlord (NRL). The United Kingdom therefore operates an NRL scheme that requires the NRL's letting agent or tenants to withhold the appropriate tax at source unless they have been notified that the NRL has applied for and been given permission to receive gross rents.

It is proposed that, with effect from April 2019, non-resident companies will be liable to UK tax on the disposal of UK property; and, with effect from April 2020, income and gains that non-resident companies receive from UK property will be chargeable to corporation tax.

Diverted Profits Tax (DPT):

DPT is separate from other corporate taxes. It is levied at 25% (or 55% in the case of UK ring fence operations, i.e. broadly oil extraction operations) on diverted profits (as defined) and may apply in two circumstances:

· where groups create a tax benefit by using transactions or entities that lack economic substance (as defined), and/or

· where foreign companies have structured their UK activities to avoid a UK PE.

Companies are required to notify HMRC if they are potentially within the scope of DPT within three months of the end of the accounting period to which it relates (extended to six months for the first year). The legislation is complex and subjective in places, and has the potential to apply more widely than might be expected.

Taxable Income:

A UK resident company is taxed on its worldwide total profits.

Total profits are the aggregate of (i) the company's net income from each source and (ii) the company's net chargeable gains arising from the sale of capital assets.

The main sources of income are (i) profits of a trade, (ii) profits of a property business, (iii) non-trading profits (or losses) from loan relationships, mainly interest receivable or payable, (iv) non-trading gains (or losses) on most intangible fixed assets, and (v) non-exempt dividends or other company distributions. The amount of income for sources (i) to (iv) is measured based on the company’s accounts, with specific adjustments. Taxable income from non-exempt dividends and calculating chargeable gains or income from other sources is based on actual amounts.

The rules for measuring the gross income are different for each category, and there are subtle differences in the rules about tax deductions and how gains are calculated. Because of this continuing reliance on taxing companies on a 'source-by-source' basis, it is difficult to explain the rules about income determination and deductions as two wholly separate topics.

Basic rules for accounts-based sources:

The main source of profits is often from trading. A company's trading profits are based on its worldwide profit before tax in its accounts. Adjustments are made for non-trading receipts (such as dividends from other companies and income from property) and non-deductible expenditure (such as capital expenditure). Depreciation for tax purposes (known as capital allowances) is calculated and substituted for the depreciation charged in the accounts. A number of other statutory adjustments are made; three important ones are that pension contributions, deferred pay, and benefits in kind are broadly deductible only when paid, that a deduction is available for the notional cost of certain share awards to employees, and that, where certain acquired intangibles (but, in particular, not goodwill and customer-related intangible assets acquired on or after 8 July 2015) are not depreciated in the accounts, a 4% flat-rate deduction can usually be claimed. There are many other adjustments.

Similar principles apply in relation to the calculation of profits of a property business.

Financial profits from a company's trading and non-trading loan relationships and related matters are usually based on the accounts, and the distinction between 'capital' and 'revenue' receipts and deductions is not relevant. Instead, all credits and debits in the accounts are aggregated in order to find the net profit or deficit. Certain statutory adjustments have to be made, which include an interest capping limitation.

For traders, any profit or loss on loan relationships, and/or on intangibles, is generally included within the trading profits. If the company doesn’t have a trade, then loan relationships and intangibles are treated as a separate source of income or loss.

Income losses:

Where a loss arises in respect of a particular source of income, there are detailed rules regarding the possible offset of the loss. Carryback and sideways reliefs are often allowed within limits; carryforward is generally allowed and carried forward losses do not time expire, although from April 2017 the maximum carried forward loss offset is broadly limited to GBP 5 million plus 50% of the current year profits in excess of that amount. Losses can also be utilised by other group companies.

More specifically, dealing with the main sorts of income losses,

· trading losses may be set off against any other source of profit or gains in the same year, may be carried back one year (three years on the cessation of the trade) against any other source of profit or gain, or may be carried forward without time limit against profits of the same trade only (for trading losses accruing up to 1 April 2017) or against total profits (for trading losses accruing on or after 1 April 2017)

· property losses may also be set off against any other source of profit or gains in the same year, or may be carried forward without time limit against profits of any sort; they cannot, however, be carried back, and

· non-trading deficits (NTDs) (i.e. interest and financing losses) can again be set off against any other source of profit or gains in the same year, may be carried back one year against non-trading credits (i.e. interest and financing profits), or may be carried forward without time limit against non-trading profits (for NTDs accruing up to 1 April 2017) or against total profits (for NTDs accruing on or after 1 April 2017).

Non-trading companies may deduct non-capital management expenses incurred in managing their investments from their total profits. Any excess management expenses can be carried forward without limit to set against profits in future years.

While income losses can generally be offset against capital gains of the same accounting period, capital losses are never available for offset against any type of income.

There are complex anti-avoidance rules that restrict the utilisation of all types of losses where there is a change in ownership of the company. Specific rules can also deny or limit loss relief or deductions arising from brought forward losses or potential losses where certain conditions are met.



Inventory valuation:

In general, the book and tax methods of inventory valuation will conform. In practice, inventories are normally valued for tax purposes at the lower of cost or net realisable value. A first in first out (FIFO) basis of determining cost where items cannot be identified is acceptable, but not the base-stock or the last in first out (LIFO) method.

Capital gains:

Gains on capital assets are taxed at the normal corporation tax rates. The chargeable gain (or allowable loss) arising on the disposal of a capital asset is calculated by deducting from gross proceeds the costs of acquisition and subsequent improvements, plus the incidental costs of sale and indexation allowance up to December 2017. Indexation allowance compensates for the increase in costs based on the percentage rise (if any) in the UK retail prices index to the earlier of date of disposal or December 2017. Indexation allowance is, however, limited; it cannot create or increase a capital loss, it can only reduce or eliminate a chargeable gain. Generally, these calculations must be done in sterling, so any foreign exchange gains and losses will be taxed (or relieved) on disposal.

Special rules apply to assets held at 31 March 1982.

Most acquisitions and disposals between UK group companies are treated as made on a no gain no loss basis (i.e. at base cost plus indexation). Otherwise, acquisitions from, or disposals to, affiliates are treated as made at fair market value, as are other acquisitions or disposals not at arm's length.

Capital losses are allowed only as an offset to capital gains. An excess of capital losses over capital gains in a company's accounting period may be carried forward without limitation but may not be carried back. Gains or losses arising on a particular asset can be allocated to another group member. So, the capital losses of one company can sometimes be set against the gains of a fellow group member in the same or subsequent period.

There is a good deal of anti-avoidance legislation concerning the computation of chargeable gains, notably to stop losses being created or gains avoided where assets are depreciated by intra-group transactions, or where losses are 'bought in' from third parties.

Gains realised on certain types of assets can be deferred where all or most of the proceeds are reinvested in other assets of those types within a specified period (generally three years). The 'rolled-over' gain then crystallises as and when the latter assets are sold. At present, the main asset categories qualifying for roll-over are land and buildings used for a trade.

Most disposals of shareholdings of 10% or more are exempt from tax. The main exceptions will be those of non-trading subsidiaries or subgroups, or of companies acquired within the previous year. Note that gains on goodwill and other intangibles acquired after March 2002 are taxed as income, not as capital gains.

Dividend income:

Most foreign and UK dividends received by UK companies are exempt from corporation tax; however, one of several criteria has to be met, but these are widely drawn (one test, for example, is that the recipient controls the payer). For non-exempt, foreign-source dividends, double tax relief (DTR) will be available on a dividend-by-dividend basis. It is unusual for companies to be taxed on UK dividends because of the breadth of the exemption; however, where they are taxed, there is no concept of DTR for UK dividends.

Royalty income:

Royalty income received by corporates will normally be taxed in the same way as other forms of income. To the extent it arises from a trade, it is taxed as trading profits. Royalties from intellectual property (IP) not comprising a trade will be taxed as income from intangible fixed assets.

Realised and unrealised exchange gains/losses:

Unrealised exchange gains and losses tend to arise on debts and derivatives; they are then taxed or allowed, together with realised amounts, on an accounts basis in the same way as other debits and credits arising out of loan relationships. Where gains or losses arise on other payables or receivables, to a trader or property investor, they will again generally be taxed or allowed on an accounts basis. For a trader, the taxable or allowable amount will become simply part of the trading profit or loss; for other companies, it will become a separate source of taxable profit (a 'non-trading credit') or loss (a 'non-trading deficit').

Where unrealised differences arise on other capital assets, they will not generally be taxable or allowable at that stage; instead, the exchange difference becomes part of the computation and is effectively taxed or allowed when the asset is disposed of and any difference is realised.

Partnership income:

In broad terms, if companies participate in UK partnerships (whether general partnerships, limited partnerships, or limited liability partnerships [LLPs]), they will be taxed on a flow through basis. This will, in very broad terms, mean that UK corporate partners will be taxed on trading, property, or financing income as it arises in the partnership accounts, and on non-exempt dividends on a receipts basis. There are specific anti-avoidance provisions in respect of LLPs with both corporate and individual partners.

When considering overseas entities, the UK authorities will not be bound by how the entity is classified in its country of origin. Case law has determined a number of matters that should be considered when establishing whether a non-UK entity should be taxed in the United Kingdom as if it were a company or a partnership. HMRC also maintains a public list of non-UK entities and the decisions it has previously made regarding their classification. However, if the parties have flexibility regarding the constitution of such entities, then their classification may be viewed differently, either by HMRC or the courts. This area is complex; consequently, specialist advice should be sought.

Foreign income:

In principle, the United Kingdom taxes on a worldwide basis, although non-UK PE profits can be exempted from UK taxation by election. The election applies to all accounting periods starting after the election is made and to all the PEs of the company (so it cannot be made on a PE-by-PE basis). The election is irrevocable and has the effect of exempting all profits of the PE, including gains, subject to certain adjustments. Equally, relief for PE losses will be denied. Profits will be measured by reference to DTTs, or, in absence, OECD principles. The adjustments required include:

· Gains attributable to a foreign branch of a close company are not exempt.

·  Profits attributable to a foreign branch of a small company are not exempt if the PE is in a territory other than a 'full treaty territory' (broadly, a territory that has a DTT with the United Kingdom that has an exchange of information article).

· If the branch concerned has previously been in a loss making position, loss transitional rules may prevent the exemption being available immediately.

·To the extent the branch profits are considered to have been artificially diverted from the United Kingdom, the anti-diversion rule will stop them qualifying for the exemption (akin to the CFC rules that apply to profits of subsidiaries).

Where no election is made, profits from non-UK PEs are computed and taxed in the normal way for UK tax resident companies. However, UK tax will generally be reduced by credit for local direct taxes paid, either under a treaty or via the UK's unilateral relief rules (see Foreign tax credit in the Tax credits and incentives section for more information).


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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.


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This blog is Created by CA Anil Kumar Jain.