Tax Benefits Guide of Having a Company in the United Kingdom
The United Kingdom is a global business hub with competitive tax rates for companies and investors alike
The United Kingdom is a very attractive location to establish a holding company since not only does it offer a relatively stable political, economic, legal, and economic system with London as a global business hub it also has an attractive tax regime in its own right and extensive tax treaty network with the rest of the world. With a globally unique capital gain tax relief scheme for investors plus further decreasing corporation tax over the next years, the location of a United Kingdom-based holding company is an important consideration in any international structure where there is a desire to minimise the tax charged on the income flow through tax optimised investment vehicles.
Compared to the rest of the G20 the United Kingdom is a low tax region
In terms of taxation, the United Kingdom has a number of benefits which are summarised here:
Following Brexit, Corporation Tax will drop under 15%
Exempts dividends received from subsidiaries in many countries from corporation tax
Does not charge capital gains tax on the disposal of trading subsidiaries
Does not levy withholding tax on distributions from the holding company to its parent or shareholder
Has no capital gains tax on profits arising from the sale of shares in the holding company by non-resident shareholders
Offers extensive reliefs for early stage businesses, expenditure on qualifying research and development
Option of a remittance basis of taxation for non-UK domiciled individuals who come to the UK, for example as holding company directors
Capital Gains Tax will be cut from 28% to 20% for higher rate taxpayers, and from 18% to 10% for those on the basic rate
Entrepreneurs’ Relief will be extended to long-term investors in unlisted companies, who will be able to access a 10% rate of capital gains tax on newly issued shares in unlisted companies purchased on or after 17 March 2016, provided they are held for a minimum of three years from 6 April 2016
From April 2017, Micro-Entrepreneurs who use websites like Airbnb to rent out rooms in their homes and sell items on sites such as eBay will get a £1,000 tax break
Commercial Property Stamp Duty cuts for about 90% of small businesses. Property worth up to £150,000 will be exempt, with a 2% levy on the next £100,000 and then 5% for properties of £250,000 or more
Class 2 National Insurance Contributions will be abolished from April 2018 for the self-employed
Tax relief for investors
To foster the startup eco-system, HMRC offers two tax incentive schemes for United Kingdom based investors who invest in United Kingdom-based holding companies and qualifying startups with permanent establishments in the United Kingdom.
The Seed Enterprise Investment Scheme (SEIS), encourages investment in new startups by providing private investors with 50% of investments (up to £150,000) back in income tax relief. Plus, in the 2014/2015 tax year investors benefit from 50% capital gains tax relief on gains which are reinvested in SEIS eligible shares; this relief applied to 100% of reinvested gains in 2012/2013. Also, any gain arising on the disposal of the shares may be exempt from capital gains tax, and loss relief is available if the disposal results in a loss.
The Enterprise Investment Scheme (EIS), is designed to encourage investment in slightly later-stage startups by providing investors with up to 30% of their investments (of up to £500,000) back in income tax relief. Plus, investors can defer any capital gains tax on gains which are reinvested in EIS eligible shares, gains arising on the disposal of the shares may be exempt from capital gains tax, and loss relief is available if the disposal results in a loss. Read more here.
Double tax treaties and No withholding taxes
The United Kingdom has the largest network of double tax treaties in the world. In many situations where a United Kingdom-based holding company owns more than 10% of the issued share capital of an overseas subsidiary, the rate of withholding tax from the subsidiary is reduced to 5%. As the United Kingdom is part of the EU, it can also benefit from the EU Parent/Subsidiary Directive, thereby reducing withholding tax to zero on dividends from many EU countries. The United Kingdom doesn’t impose withholding taxes on the distribution of dividends to shareholders or parent companies such as United Kingdom-based holding companies. This is regardless of where in the world the shareholder is resident.
Tax exemption for foreign income dividends3>
turnover less than €10 million
balance sheet total of less than €10 million
Small companies are defined as companies with less than 50 employees that meet one or both of the financial criteria below:
Small companies receive a full exemption from the taxation of foreign income dividends if these are received from a territory which has a double taxation agreement with the United Kingdom that contains a non-discrimination article.
Medium and Large Companies
In the United Kingdom, a full exemption from taxation of foreign dividends applies if the dividend falls into one of several classes of exempt dividend. The most relevant classes are:
dividends paid by a company that is controlled by the UK recipient holding company
dividends paid in respect of ordinary share
capital that is non redeemable
most portfolio dividends
Where these exemption classes do not apply, foreign dividends received by a UK company will be subject to UK corporation tax. However, tax relief will be given, including underlying taxation, if the United Kingdom-based holding company controls >10% of the voting power of the overseas company.
Value Added Tax (VAT)
Value Added Tax is an additional sum (currently standing at 20%) which is added to the price of most goods and services in the United Kingdom. Companies are not automatically registered for VAT and will not need to register or pay VAT unless their turnover over a 12 month period exceeds £81,000 (2014/15). If your turnover is less than £81,000 then you are under no obligation to register although you can still do so voluntarily as this allows you to claim the VAT on your business expenses back. For limited United Kingdom-based holding companies which have a turnover of less than £150,000 in a financial year, they may be inclined to register for the VAT Flat Rate Scheme and the benefits that come with it.
However, one thing you need to consider when voluntarily registering for the VAT Scheme is whether your clients are themselves VAT registered. The additional sum you’re charging may have a punishing impact on them financially and potentially lose you clients.
When calculating what you owe HMRC for your return, you need to deduct all the VAT you pay on expenses from the VAT you charge on invoices and the difference is what you owe.
VAT optimised flat rate scheme
For small companies with an annual turnover of less or equal to £150,000 the VAT Flat Rate Scheme was introduced. This allows you to pay HMRC a flat percentage of your sales depending on your industry, which often amounts to less than the standard VAT rate, but still allows you to charge clients at 20%.
As an additional incentive to immediately register your United Kingdom-based holding company for the Flat Rate, you will be granted a 1% discount during your first year from VAT registration.
When you come to reconcile your VAT, you pay HMRC a percentage of turnover rather than working out the VAT on all individual purchases, and your company can pocket any difference. This way you can optimise the tax burden of your United Kingdom-based holding company and even make a profit from charging your clients VAT.
For more information on submitting quarterly VAT returns, registering, either talk to your accountant or visit HMRC