United Kingdom: corporate tax guide

What the tax system covers

UK-resident companies fall within corporation tax on worldwide profits, subject to applicable exemptions and relief. Foreign establishments, dividends and foreign tax relief should be checked under the rules for the relevant accounting period.

When a company becomes tax resident

UK incorporation ordinarily establishes company residence, subject to statutory and treaty exceptions. A foreign-incorporated company can also become UK resident through central management and control actually exercised there. Board records must reflect the real decision-making arrangement.

Rates and the tax base

25% main rate; 19% small-profits rate. The ordinary thresholds are GBP250,000 and GBP50,000, with marginal relief between them. Short accounting periods and associated companies reduce those thresholds; ring-fence activities follow different rules.

Outbound dividends, interest and royalties

Dividends: 0% ordinary dividends. Ordinary company dividends have no UK withholding. UK REIT property-income distributions are a material exception and can require basic-rate withholding; do not classify them as ordinary dividends.

Interest: 20% where yearly-interest withholding applies. UK-source yearly interest within the deduction rules is subject to basic-rate withholding. Quoted Eurobond and other statutory exemptions, source analysis and approved treaty relief can change the result.

Royalties: 20% for payments within the royalty charge. Covered royalties and annual payments are subject to basic-rate income-tax deduction. The rights, source and applicable exemptions must be checked; treaty entitlement can permit a lower rate.

Company residence and a UK permanent establishment are different tests

A non-UK company can enter the UK corporation-tax charge through a permanent establishment even where its central management remains abroad. UK property business, land-development activity and direct or indirect UK land gains have additional charging rules. Concluding that the board is overseas does not answer those questions.

Map where staff work, who habitually deals with contracts, what premises are available and how profit relates to UK activities. Then apply the domestic definition and the actual treaty, if one is available. For a founder working from a UK home, the corporate residence analysis and the permanent-establishment analysis should both be documented before assuming that all revenue belongs outside the UK.

The taxable base and foreign branch election

A UK-resident company ordinarily brings trading profits, investment income and chargeable gains into corporation tax, subject to applicable reliefs and exemptions. Accounting profit is the starting point rather than an automatic tax base: tax adjustments can change the amount charged.

The legislation contains an elective exemption for qualifying foreign permanent-establishment profits. An overseas subsidiary and an overseas branch are different legal arrangements; a branch exemption must not be assumed merely because activity occurs abroad. Review the election, excluded activities, losses and anti-diversion provisions before modelling the branch as exempt.

Worked example: marginal relief on GBP100,000 profit

Assume an eligible company with a full 12-month period, no associated companies, GBP100,000 taxable total profits and GBP100,000 augmented profits. The ordinary limits are GBP50,000 and GBP250,000. Main-rate tax is GBP25,000; marginal relief is (GBP250,000 minus GBP100,000) multiplied by 3/200, or GBP2,250. The resulting corporation tax is GBP22,750.

The example does not apply 19% to the first GBP50,000 as though corporation tax were a personal income-tax band. Associated companies, short periods, distributions included in augmented profits, close investment-holding status and ring-fence activities can change the calculation. The effective rate in this example is 22.75%, before any separate shareholder tax.

CFC review: control does not by itself establish the charge

First determine whether a foreign company is controlled by UK persons using the legal, economic and accounting-control provisions, including relevant joint ventures. Next examine whether profits pass through the CFC charge gateway and whether an exemption applies. Finally identify any relevant UK chargeable company and its interest.

HMRC describes a charge only where chargeable profits exist, no applicable exemption removes it and an unexempt UK interest holder meets the relevant 25% interest condition together with connected companies. An offshore registration therefore neither proves a charge nor proves its absence. Retain the exemption or gateway analysis with the accounts and distinguish it from the foreign company’s own residence and permanent-establishment position.

Related-party pricing and the SME exemption

Related-party pricing requires the actual transaction, functions and risks to be identified before choosing a margin or management fee. The UK framework contains a small- and medium-enterprise exemption for many transactions, but that is not a blanket exemption for every business that calls itself small.

The size definition and group relationships must be tested. Transactions involving a territory without an appropriate treaty non-discrimination provision can fall outside the exemption. Other statutory exceptions also matter. Record why an exemption applies, or maintain support for the pricing where it does not; a contract describing a service cannot establish that the service was actually supplied.

Debt deductions and the corporate interest restriction

Groups with net interest and financing costs above GBP2 million for a 12-month period need to consider the Corporate Interest Restriction. Under the fixed-ratio method, capacity is linked to 30% of tax-EBITDA and is also constrained by worldwide net interest. An alternative group-ratio method and other elections can produce different results.

A company should not treat a commercially agreed interest payment as automatically fully deductible. Track the group, accounting period, financing classification and reporting-company responsibilities. Amounts below the allowance still need records; unused allowance and disallowed interest follow their own carry rules. Withholding tax on the payment is a separate calculation from deductibility.

Loss relief and the limits on carried-forward losses

A qualifying trading loss can generally be relieved against profits of the same period or carried back to the previous 12 months, with continuing-trade conditions; unrelieved amounts can be carried forward under the applicable rules. Group relief is a separate route with ownership and period conditions. Capital and property losses must not be mixed indiscriminately with trading losses.

Carried-forward loss use is subject to a deductions allowance of up to GBP5 million for the group and a 50% restriction above that allowance. Ownership changes and changes in trade require additional review. An acquisition model should therefore not value accumulated losses as though each pound necessarily offsets a pound of future profit immediately.

VAT and cross-border selling

The ordinary UK-established-business registration threshold is GBP90,000 of taxable turnover measured over the rolling 12 months, or an expectation of exceeding it in the next 30 days alone. Taxable turnover is not the same as profit, and zero-rated supplies can count even though no output VAT is collected on them.

A non-established taxable person making relevant UK supplies cannot assume the ordinary registration threshold applies. Place-of-supply rules, reverse charge, digital services, goods imports and marketplace arrangements require transaction-specific treatment. Keep the VAT analysis separate from corporation tax residence: being nonresident for one tax does not dispose of the other.

Company returns, accounts and payment dates

A Company Tax Return is ordinarily due 12 months after the accounting period ends, while corporation-tax payment is ordinarily due nine months and one day after that end. Large-company instalment rules can require earlier payments. A company does not receive an automatic tax bill that replaces its duty to calculate the liability.

A corporation-tax accounting period cannot exceed 12 months. First statutory accounts covering more than a year can therefore require two tax returns and different payment dates. Coordinate the tax return, Companies House accounts, VAT, payroll and any cross-border supplementary schedules rather than treating annual accounts as completing all obligations.

Moving the company can trigger tax without an actual sale

TCGA 1992 section 185 can treat a company ceasing UK residence as disposing of covered assets at market value immediately before migration and reacquiring them at that value. This brings unrealised gains into corporation tax even though no buyer has paid cash.

Certain UK assets continuing within a UK permanent establishment are excluded from that charge. Other deferral or payment-plan provisions have their own eligibility conditions. Obtain asset valuations, identify the exact residence-change event and model payment before moving decision-making functions. A shareholder’s personal relocation does not itself move a UK-incorporated company or extinguish its filing obligations.

Foreign companies and income attribution

The CFC framework tests foreign-company control, chargeable profits through the gateway, exemptions and relevant UK chargeable-company interests. Control can be legal, economic or accounting control. An identified regime does not mean every foreign subsidiary creates a charge.

Departure, migration and continuing obligations

Company migration can trigger a market-value deemed disposal of covered assets under TCGA 1992 section 185. Assets remaining in a qualifying UK permanent establishment and specific deferral/payment provisions require separate analysis.