Russell Gardner, Real Estate,
Hospitality and Construction
Lawrence Hall
Sarah Ho,
+44 (20) 7951-5947
Mobile: +44 7740-378-833
Email: rgardner1@uk.ey.com
+44 (118) 928-1321
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Claire Hooper
Tony Jones
Nina Maddows
Matthew Mealey, Global Content
Innovation Leader
Mike Michael
Sam Millichap
Richard Milnes,
Financial Services
Matthew Newnes
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Andrew Ogram, Mining and Metals, +44 (20) 7951-1313 Oil and Gas and Power
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Colin Pearson, Mining and Metals, +44 (20) 7980-0994 Oil and Gas and Power
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Mark Persoff, +44 (20) 7951-9400 Financial Services
Daniel Rees
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Jo Stobbs
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Darren Andrews, Financial Services
Simon Atherton
Amar Atwal,
+44 (20) 7951-3976
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+44 (20) 7951-4892
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+44 (20) 7951-4862 Financial Services
Jan-Paul Borman
Virginie Chambon
Joel Cooper
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Henrik Hansen,
Financial Services
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Financial Services
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David Jones
Tarunya Kumar
Ellis Lambert
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Andy Martyn
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Adrik Nicholls
Martin Powell,
Financial Services
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Evgenia Veter
Business Tax Services
Stuart Chalcraft,
+44 (20) 7783-0544
Mobile: +44 7385-958-478
Email: evgenia.i.veter@uk.ey.com
+44 (20) 7951-1190 Financial Services
Ruth Donaldson
Paul Gallagher
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+44 (20) 7951-8161
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James Guthrie, +44 (20) 7951-4366 Financial Services
Email: jguthrie@uk.ey.com
Anne Hamilton, +44 (20) 7951-1937 Financial Services
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George Hardy, +44 (20) 7951-0124 Financial Services
Stephen Heath, Capital Allowances
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+44 (20) 7951-0035
Mobile: +44 7747-454-958
Email: smheath@uk.ey.com
Stephanie Lamb, +44 (20) 7951-1700 Financial Services
Joseph Litten
Roxane Markarian, Incentives
Graham Richter,
UKI Tax Technology
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Email: slamb@uk.ey.com
+44 (20) 7951-8225
Email: jlitten@uk.ey.com
+44 (20) 7951-2588
Email: rmarkarian@uk.ey.com
+44 (20) 7951-0565
Mobile: +44 7920-245-377 and Transformation Leader
Email: graham.richter@uk.ey.com
Andy Roughan,
+44 (117) 305-7936 Leasing
Email: andy.roughan@uk.ey.com
Faye Ruffles,
+44 (20) 7980-0443 Research and Development
Mobile: +44 7765-683-905
Email: fruffles@uk.ey.com
Chris Sanger, +44 (20) 7951-0150 Global Government and Risk
Mobile: +44 7956-105-723 Tax Leader
Katie Selvey-Clinton,
Email: csanger@uk.ey.com
+44 (20) 7951 3723 Capital Allowances
Mobile: +44 7831-136-313
Email: kselvey-clinton@uk.ey.com
Julian Skingley,
+44 (20) 7951-7911 Financial Services
Amy Underwood
Mobile: +44 7785-996-764
Email: jskingley@uk.ey.com
+44 (20) 7951-3585
Email: aunderwood@uk.ey.com
James Wilson, +44 (20) 7951-5912 Business Tax Services
Mobile: +44 7932-644-086 and Tax Controversy and Email: jwilson8@uk.ey.com Risk Management Leader for UKI
Japanese Business Services
Masayuki Owaki
Jo Stobbs
+44 (20) 7980-9097
Mobile: +44 7552-271-425
Email: mowaki@uk.ey.com
+44 (20) 7980-0587
Email: jstobbs@uk.ey.com
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Atria One, 114 Morrison Street Fax: +44 (131) 777-2001
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Peter Ames,
+44 (131) 777-2262 Financial Services
Mobile +44 7795-126-726
Email: pames@uk.ey.com
Stewart Mathieson, +44 (131) 777-2400 Head of Tax, Scotland
Mobile: +44 7748-112-574
Email: smathieson@uk.ey.com
Lynne Sneddon, +44 (131) 777-2339
Business Tax Services Leader, Mobile: +44 7801-639-918 Financial Services, EMEIA
Email: lsneddon@uk.ey.com
Ian Wintour +44 (131) 777-2273
Mobile: +44 7468-745-602
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Claire Evans
Laura Mair
+44 (141) 226-9115
Mobile: +44 7715-104-135
Email: cevans2@uk.ey.com
+44 (141) 226-7423
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Tim West
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Craig Menzies
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Craig Cumpson
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Fax: +44 (191) 247-2501
+44 (191) 247-2747
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Mark Lee, Head of +44 (191) 269-4964
Private Client Services for
Mobile: +44 7392-106-682 Financial Services
Email: mlee5@uk.ey.com
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Gareth Anderson
Ian Dennis
Anna Fry
Caroline Macaskill
Damian Murphy
+44 (118) 928-1100
Fax: +44 (118) 928-1101
+44 (238) 038-2216
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The United Kingdom left the European Union (EU) on 31 January 2020, although an agreement on transitional arrangements continued until 31 December 2020. Following the end of the transition period, the UK is no longer a member of the single market and its relationship with the EU is governed by various agreements, including the Withdrawal Agreement and the Trade and Cooperation Agreement.
A. At a glance
(a) The rate of corporation tax is 25% from 1 April 2023 (19% previously) for companies with profits of over GBP250,000 per year. The small profits rate is 19% for companies with profits of less than GBP50,000 per year.
is expected to be enacted in summer of 2023. The general administration rules applying for corporation tax purposes also apply to the electricity generator levy.
An additional 3% (previously 8%) surcharge is levied on the profits of banks in excess of GBP25 million (before the offset of losses carried forward), from 1 April 2023, producing an overall rate on those profits of 28%.
Residential property developer tax is a tax on the trading profits of residential property developers charged in addition to standard corporation tax. It applies to profits arising from residential property development activity from 1 April 2022, including a proportion of profits of accounting periods that straddle that date. Companies not liable to corporation tax and companies that do not carry on a trade within the charge to corporation tax are outside the scope of the tax. For companies within the scope of the tax, residential property developer tax is charged at 4% on residential property development profits that exceed an annual allowance of GBP25 million.
Following extensive consultation, the United Kingdom has enacted legislation introducing a Multinational Top-up Tax and Domestic Minimum Tax that seeks to implement the Organisation for Economic Co-operation and Development (OECD) Global Anti-Base Erosion (GloBE) Model Rules. The legislation introduces a multinational top-up tax that will require in-scope UK headquartered multinational groups to pay a top-up tax if the jurisdictional effective tax in a foreign jurisdiction is less than 15%. The measures could also apply to non-UK headquartered groups with UK intermediary holding companies and certain other fact patterns, including certain split-ownership scenarios. The legislation also introduces a supplementary domestic top-up tax that will require large groups, including those operating exclusively in the United Kingdom, to pay a top-up tax if their UK operations have an effective tax rate of less than 15%.
These changes apply to large groups with over EUR750 million global revenues in at least two of the previous four accounting periods and take effect in relation to accounting periods beginning on or after 31 December 2023.
Legislation for the introduction of an under-taxed profits rule (UTPR) has not yet been enacted but it has been confirmed that it will apply for accounting periods beginning on or after 31 December 2024. It has also been confirmed that the United Kingdom will apply new anti-avoidance rules to prevent abuse of the Pillar Two transitional Country-by-Country Reporting (CbCR) safe harbor from 14 March 2024.
A special rate of corporation tax of 45% applies on restitution interest, which is compound interest received from the UK tax authorities on the repayment of tax (either by agreement or an order of a court) originally collected in breach of law, which applies to awards determined on or after 21 October 2015.
Capital gains. Gains on chargeable assets are subject to corporation tax at the corporation tax rate. For UK tax purposes, a capital gain is usually the excess of the sale proceeds over the sum of the
From 1 April 2022, there is a requirement for large companies or partnerships to notify HMRC of any uncertain tax treatments (UTT) if there is a “tax advantage” of GBP5 million or more in the relevant period for the relevant tax (which includes corporation tax). Notification must be made on or before the filing deadline of a related “relevant return” that is due after 1 April 2022. There is an exemption to this requirement if HMRC is already aware of the uncertainty and how the business plans to treat it.
A UTT may arise when one or both of the following two triggers are met:
• The amount relates to a transaction with respect to which a provision has been recognized in the accounts of the qualifying company or partnership, to reflect that a different tax treatment may be applied to the transaction.
• In arriving at the amount, reliance was placed on an interpretation or application of the law that is different to HMRC’s known interpretation or application.
The UTT only applies to large businesses with a UK turnover above GBP200 million and/or a UK balance sheet total more than GBP2 billion. It applies to partnerships and limited liability partnerships (wherever formed, incorporated, or managed and controlled) that satisfy these criteria, as well as corporates (wherever incorporated or tax resident).
Inward Investment Support. Significant inward investors can apply under HMRC’s Inward Investment Support service for written confirmation of the UK tax treatment of specific transactions or events. In this context, “significant” is regarded as an investment of GBP30 million or more, but smaller investments are considered if they are potentially of importance to the national or regional economy.
Dividends. Dividends paid by UK resident companies are not subject to withholding tax. For dividends received by UK resident companies, the United Kingdom has a dividend exemption regime. A dividend or other income distribution received on or after 1 July 2009 is generally exempt from UK corporation tax if all of the following conditions are satisfied:
• The distribution falls within an exempt class or, if the recipient is a “small” company, the payer is resident in the United Kingdom or a qualifying territory.
• The distribution is not of a specified kind.
• No deduction is allowed to a resident of any territory outside the United Kingdom under the law of that territory with respect to the distribution.
Interest. Interest payments on “short loans” (loans with a duration that cannot exceed 364 days) may be made without the need to account for withholding tax. All interest payments by UK resident companies may be made without the imposition of withholding tax if the paying company reasonably believes that the interest is subject to UK corporation tax in the hands of the recipient. See Section E for a summary of the UK’s rules on tax deductions for interest payments.
a general exclusion on cars, second-hand assets and assets held for leasing (excluding background plant and machinery).
Cars. The capital allowances rules for cars are based on their CO2 emissions per kilometer driven. From 1 April 2021, the 100% first-year allowance is available only for new cars that are either electric cars or have CO2 emissions of 0g/km. Cars emitting between 0g/km and 50g/km are added to the main pool (18%) while cars emitting above 50g/km are added to the specialrate pool (8%). For leased cars with CO2 emissions above 110g/km, 15% of the lease cost is disallowed for tax purposes. The 100% first-year allowance rate does not apply to cars that will be leased.
Nonresidential structures and buildings. A Structures and Buildings Allowance applies for new nonresidential buildings and structures (excluding land) at an annual rate of 3% on a straight-line basis. The allowance applies to contracts for construction works entered into on or after 29 October 2018.
Other. Capital allowances are also available for certain other types of expenditure, such as expenditure on mineral extraction and dredging.
Relief for losses
Trading losses. Trading losses may be used to relieve other income and capital gains of the year in which the loss was incurred and of the preceding year, provided the same trade was then carried on. Losses incurred prior to 1 April 2017 may also be carried forward without time limit but may only be relieved against future profits from the same trade. The use of losses that are carried forward as at 31 March 2015 by banks was restricted from that date to an offset of a maximum of 50% of profits and further restricted from 31 March 2016 to 25%. Anti-avoidance provisions exist to prevent the offset of losses carried forward in arrangements that are principally tax driven. A company that ceases trading may carry back trading losses and offset them against profits of the preceding 36 months.
For trade losses of the 2020-21 and 2021-22 tax years only, unrelieved losses can be carried back and offset against profits of the same trade for three years before the tax year of the loss.
The amount of trading losses that can be carried back to the preceding year remains unlimited for companies. After carrying back losses to the preceding year, a maximum of GBP2 million of unused losses will be available for carryback against profits of the same trade to the earlier two years. This means a cap of on the extended carryback of losses incurred in accounting periods ending in the period of 1 April 2020 to 31 March 2021 and a separate cap of GBP2 million on the extended carryback of losses incurred in accounting periods ending in the period of 1 April 2021 to 31 March 2022.
Non-trading losses. Relief is also available for non-trading deficits and management expenses. Specific rules provide how such losses can be used or carried forward and the order in which they can be used.
Rules relating to use of carried-forward corporate tax losses in periods beginning on or after 1 April 2017.
Nature of tax Rate
revenues attributable to such activities exceed GBP500 million and more than GBP25 million of these revenues are attributable to UK users; a group’s first GBP25 million of revenues derived from UK users is not subject to DST; an exclusion applies to online financial marketplaces 2% Economic crime levy; an annual charge on entities that are supervised under the Money Laundering Regulations (MLR) and whose UK revenue exceeds GBP10.2 million per year
Small (UK revenue does not exceed GBP10.2 million) No liability
Medium (UK revenue from 10.2 million to GBP26 million)
Large (UK revenues GBP26 million to 1 billion)
GBP10,000
GBP36,000
Very large (UK revenues more than GBP1billion) GBP250,000 (Increased to GBP500,000 from 1 March 2024)
Stamp duty; imposed on transfers of shares, securities and interests in certain partnerships; duty charged on the stampable consideration 0.5% Stamp duty land tax (SDLT); imposed on transfers of land and buildings and certain partnership transactions; tax is charged on the final consideration, but this may be replaced by market value in certain circumstances (not applicable in Scotland and Wales; see Land and Buildings Transaction Tax [LBTT] in Scotland and Land Transaction Tax [LTT] in Wales below)
Acquisitions of residential property by companies and certain other bodies (SDLT is charged at increasing rates for each portion of the price paid, but no SDLT is due if the consideration is less than GBP40,000); rates applicable from 23 September 2022
Consideration exceeds GBP1,500,000; SDLT is charged on the total consideration (subject to certain exclusions) 15% (There is also a 2% surcharge on residential properties in England and Northern Ireland bought by non-UK residents on or after 1 April 2021.)
(However, if a property costs more than GBP500,000, a 15% SDLT rate for corporate bodies may apply instead.)
Nonresidential or
Nature of tax
LBTT (Scotland)
Acquisitions of residential companies property by and certain other bodies (LBTT is charged at increasing rates for each portion of the price paid, but no LBTT is due if the consideration is less than GBP40,000); rates applicable from 16 December 2022
Portion up to GBP145,000
Portion between GBP145,001 and GBP250,000
Portion between GBP250,001 and GBP325,000
between GBP325,001 and GBP750,000
above GBP750,000
Nonresidential or mixed-use property
up to GBP150,000
between GBP150,001 to GBP250,000
above GBP250,000
LTT (Wales)
Acquisitions of residential property by companies and certain other bodies (LTT is charged at increasing rates for each portion of the price paid, but no LTT is due if the consideration is less than GBP40,000) rates applicable from 22 December 2020
GBP250,001 and GBP400,000
GBP1,500,000
Nonresidential or mixed-use property
up to GBP225,000
GBP1,000,000
and GBP250,000
Social security contributions, on employees’ salaries and wages (rates apply from 6 April 2024); payable on weekly wages by Employer; imposed on employees’ weekly wages exceeding GBP175
Employee; imposed on employees’ weekly wages
On first GBP242
On next GBP725 8% On balance of weekly wage
Bank levy; based on the total chargeable equity and liabilities (subject to various exclusions) as reported in relevant balance sheets at the end of a chargeable period; a half-rate applies to long-term amounts and a nil rate allowance is granted for the first GBP20 billion 0.1%/0.05%
Annual Tax on Enveloped Dwellings (ATED); a UK-wide levy on certain higher value residential property held by companies and partnerships with a corporate member; several reliefs are available to exempt genuine property development and
Nature
of tax Rate
investment rental businesses from the tax; the tax is levied at a flat rate per year; these rates apply from April 2024
Properties worth between
GBP500,000 and GBP1 million
Properties worth more than GBP1 million and not more than GBP2 million
Properties worth more than GBP2 million and not more than
GBP5 million
Properties worth more than GBP5 million and not more than
GBP10 million
GBP4,400
GBP9,000
GBP30,550
GBP71,500
Properties worth more than GBP10 million and not more than GBP20 million GBP143,550
Properties worth more than
GBP20 million GBP287,500
E. Miscellaneous matters
Foreign-exchange controls. No restrictions are imposed on inward or outward investments. The transfer of profits and dividends, loan principal and interest, royalties and fees is unlimited. Nonresidents may repatriate capital, together with any accrued capital gains or retained earnings, at any time, subject to company law or tax considerations.
Anti-avoidance legislation. UK tax law contains many anti-avoidance provisions, which include the substitution of an arm’s-length price for intercompany transactions (including intercompany debt) with UK or foreign affiliates, the levy of an exit charge on companies transferring a trade or their tax residence from the United Kingdom and the recharacterization of income for certain transactions in securities and real property. Some of these anti-avoidance provisions apply only if the transaction is not carried out for bona fide commercial reasons.
In certain situations, legislation provides a facility for an advance clearance to be obtained from HMRC. If legislation does not provide this facility and if uncertainty exists as to the tax treatment for a transaction, a non-statutory clearance facility exists under which companies may apply to HMRC in advance of the transaction for a written confirmation of HMRC’s view on how the tax law will apply to the transaction. HMRC undertakes to provide advance clearance within 28 days if evidence exists that the transaction is genuinely contemplated. It also aims to respond within this time period if certainty is sought for a transaction that has already taken place. HMRC does not provide clearance if it believes that the arrangements are primarily intended to obtain a tax advantage.
The United Kingdom has implemented a system requiring the disclosure of certain transactions and arrangements to HMRC. As a direct result of this disclosure regime, tax-planning arrangements are sometimes disclosed in advance to HMRC.
Although the United Kingdom had enacted legislation to implement the EU directive on mandatory disclosure (the Mandatory Disclosure Regime [MDR]) and automatic exchange of information regarding reportable cross-border arrangements from 1 July 2020, the UK’s position subsequently changed following the conclusion of the Trade and Cooperation Agreement with the EU in December 2020. The UK has replaced the EU rules (DAC6) with rules aligned to the OECD mandatory disclosure rules. From 28 March 2023, an arrangement will be reportable to HMRC if it involves the use of opaque offshore structures or if it circumvents reporting under the Common Reporting Standard (CRS).
A general anti-abuse rule (GAAR) has been in force since 2013. The GAAR targets artificial and abusive tax-avoidance schemes and applies to the main taxes but not VAT.
Anti-hybrid rules. The previous rules counteracting structures involving hybrid entities or instruments (the anti-arbitrage rules) were replaced with broader anti-hybrid rules from 1 January 2017 in response to Action 2 of the Base Erosion and Profit Shifting (BEPS) project of the OECD. The rules effectively target deduction or non-inclusion or double deduction mismatches resulting from hybrid entities or instruments, dual-resident companies or companies with permanent establishments. The rules also cover imported mismatches. This is a situation in which the UK corporate taxpayer is not directly party to a relevant mismatch, but such a mismatch exists within a wider arrangement. Unlike the previous anti-arbitrage rules, the new rules do not contain a purpose test, and it is only necessary for it to be reasonable to suppose that the mismatch arises as a result of the specified features.
In deduction or non-inclusion cases, the mismatches are countered by the following:
• Disallowing a deduction if the payer is within the charge to UK corporation tax
• In cases in which the United Kingdom is the payee jurisdiction, taxing the income if it is reasonable to assume that the deduction has not been counteracted by equivalent rules outside the United Kingdom
In cases in which a double deduction is in more than one territory, the outcome depends on the structure and whether the other territory takes action. However, the rules often result in the United Kingdom denying a deduction unless the deduction is offset against dual-inclusion income in the same entity. Additional reporting obligations in relation to hybrid mismatches have been introduced for all company tax returns filed after 6 April 2022.
Royalty withholding tax. Rules apply to deny the benefit of double tax treaties if connected-party arrangements have as a main purpose, or one of the main purposes, the avoidance of withholding tax on intellectual property (IP) royalty payments. The rules also treat IP royalty payments paid by a nonresident company in connection with a UK permanent establishment as having a UK source and being subject to withholding tax. If such royalty payments are made in connection with an avoided permanent
establishment, a diverted profits tax charge is imposed (see Diverted profits tax).
UK tax treatment of intangible assets. The intangible fixed assets (IFA) regime was introduced in 2002 and changed the way the UK corporation tax system treats IFAs (such as copyrights, patents and trademarks) and goodwill by, in general, aligning the tax treatment of assets within the scope of the regime with the accounting treatment. Broadly, the commencement rules to the IFA regime mean that it does not apply to assets that existed at 1 April 2002 unless the assets were acquired from an unrelated party on or after that date. However, the 2020 Finance Act brought pre-2002 IFAs transferred to the United Kingdom after 1 July 2020 into the scope of the IFA regime (subject to certain restrictions). A change to the regime in 2015 meant that relief for amortization for goodwill and customer-related intangibles was removed. Targeted relief for goodwill and certain other assets was then reinstated from 1 April 2019.
Offshore receipts with respect to intangible property. Legislation imposes a 20% tax on gross receipts that certain foreign companies receive with respect to their intangible property if such receipts are referable to the sale of goods or services in the United Kingdom (whether that be directly by the company or indirectly, including through an unrelated party). The legislation includes some exemptions to the tax, as well as an anti-avoidance rule and a formula for apportioning income between the UK and other countries. The measure does not apply to entities that are resident in states with whom the United Kingdom has a “full tax treaty” (that is, a tax treaty that includes a nondiscrimination article), provided that the territory does not tax only on a remittance or local source basis. The government has announced that these rules will be abolished with respect to income arising from 31 December 2024 but, no legislation has yet been brought forward to achieve this abolition.
Transfer pricing. UK tax law contains measures that substitute an arm’s-length price for certain intercompany transactions with UK or foreign affiliates. Companies are required to prepare their tax returns in accordance with the arm’s-length principle, and retain adequate records or other documentation to support their compliance with that principle, or otherwise suffer substantial penalties. For accounting periods beginning on or after 1 April 2023, new transfer-pricing documentation requirements apply. They require large multinational businesses operating in the United Kingdom to maintain a Master File and a Local File in a prescribed and standardized format, as set out in the OECD’s transfer-pricing guidelines. The transfer-pricing rules have other far-reaching consequences, and taxpayers should seek specific advice concerning their circumstances.
If both parties to a transaction are subject to UK corporation tax, and one is required to increase its taxable profits in accordance with the arm’s-length principle, the other is usually allowed to decrease its taxable profits through a corresponding adjustment. Companies that were dormant as of 31 March 2004 and remain dormant are exempt from the transfer-pricing rules. Although small and medium-sized companies (unless they elect otherwise)
are exempt from the rules with respect to transactions with persons in qualifying territories (broadly, the United Kingdom and those countries with which the United Kingdom has entered into a double tax treaty containing a non-discrimination article), they can be subject to the issuance of a transfer-pricing notice by HMRC. However, for small companies, this notice can be issued only if the company has undertaken a non-arm’s-length transaction with an affiliate that is taken into account in determining profits under the Patent Box regime (see Patent Box).
Persons that are otherwise independent but collectively control a business and have acted together with respect to the financing arrangements for the business are also subject to the UK transferpricing regime.
Interest restrictions. The United Kingdom’s transfer-pricing measures apply to the provision of finance (as well as to trading income and expenses). As a result, companies must self-assess their tax liability on financing transactions using the arm’s-length principle. Consequently, HMRC may challenge interest deductions on the grounds that, based on all of the circumstances, the loan would not have been made at all or that the amount loaned or the interest rate would have been less, if the lender was an unrelated third party acting at arm’s length.
In addition, for financial periods beginning on or after 1 April 2017, the amount of relief for interest is capped at the lower of 30% of taxable earnings before interest, depreciation and amortization (EBITDA) in the United Kingdom or the modified debt cap (the fixed ratio rule). This is tighter than the previous and now-repealed Worldwide Debt Cap and provides that a group’s net tax-interest amounts in the United Kingdom cannot exceed the global net adjusted interest expense of the group. Alternatively, groups can elect for the restriction to be based on the ratio of net interest (excluding interest paid to related parties) to accounting EBITDA for the worldwide group as opposed to UK taxable EBITDA (the group ratio rule, which is also subject to a modified debt cap). If a group’s net tax-interest expense exceeds its interest capacity, the excess interest is disallowed. However, the excess interest can be carried forward indefinitely (in the company in which it was disallowed) and treated as if it were an amount of interest in a subsequent period. If a group has spare capacity, it can carry this forward for up to five years. Restricted interest or spare capacity cannot be carried back.
Notwithstanding the above rules, groups may always deduct net tax-interest expense of up to GBP2 million per year (subject to existing anti-avoidance and thin-capitalization provisions).
Controlled foreign companies.
The controlled foreign company (CFC) regime was significantly revised in 2012, effective for accounting periods beginning on or after 1 January 2013. The regime applies to non-UK resident companies that are controlled by UK residents. Similar rules apply to non-UK branches of UK resident companies for which an exemption election has been made.
If a CFC has profits that do not meet any of the exemptions, those profits are taxed on any UK resident companies having a 25% or
more interest in the CFC, and the regime is focused on identifying artificial diversion of profits out of the United Kingdom. Consequently, it is necessary to examine a company’s income on a source-by-source basis to determine whether it falls within one of the “gateways,” or whether one of the entity exemptions applies.
The following are the five “gateways,” which must all be considered:
• Profits attributable to UK activities
• Non-trading finance profits
• Trading finance profits
• Captive insurance business
• Solo consolidation (for banking subsidiaries), which allows a UK bank to treat the foreign company as it were a division of the UK bank
For each gateway test, it is necessary to establish whether the test applies, and then determine which profits pass through the gateway and are chargeable profits of the CFC. Such profits are then subject to apportionment to the appropriate UK resident shareholders. Profits that fall outside one gateway may still fall within one of the others.
Several safe harbors and specific exemptions exist with respect to the gateways, intended to narrow the scope to only artificially diverted profits. In particular, a company may make a claim that between 75% and 100% of profits arising from certain “qualifying loan relationships” are exempt to the extent that they do not relate to UK significant people functions. The version of these rules as it existed up to 31 December 2018 is currently being considered in the context of the EU State Aid provisions.
The entity-level exemptions apply if any of the following circumstances exist:
• The CFC’s local tax liability is 75% or more of the equivalent UK liability.
• The CFC has low profits or a low-profit margin.
• The CFC is resident in certain qualifying territories.
• A foreign company has become a CFC for the first time (in certain circumstances).
Diverted profits tax. The diverted profits tax (DPT) is an antiavoidance measure, which is effective from 1 April 2015. It is aimed at perceived abuse in certain circumstances involving “insufficient economic substance” somewhere in the supply chain or avoided UK permanent establishments. The DPT is separate from corporation tax and is imposed at the rates listed below, on profits diverted from the United Kingdom, broadly in the following situations:
• A different transfer-pricing outcome allocating more profits to the United Kingdom and less to a low-tax entity would have resulted had all the facts, including the full supply chain and the activities undertaken by each entity in that chain, been considered.
• An alternative transaction would have been entered into in the absence of tax considerations, and it would have resulted in more taxable profits in the United Kingdom and less in a lowtax entity.
• A UK resident or nonresident carries on an activity in the United Kingdom in connection with the supply of goods, services or property by a non-UK trading company, and it is reasonable to assume that the activities are designed to ensure that no permanent establishment is established in the United Kingdom, and certain other conditions are satisfied. An exclusion applies if the total UK-related sales revenues of the company (together with connected companies) that are not already included within the charge to UK corporation tax in a 12-month accounting period are less than GBP10 million. Likewise, an exclusion applies if the total UK-related expenses of the company (together with connected companies) in a 12-month accounting period are less than GBP1 million.
Exclusions apply based on substance and the relative values of the tax and other benefits of the transactions. Transactions are also excluded from DPT if they only give rise to one or more loan relationships and associated hedging derivatives. Notification requirements (which are broader than the tax-levying measures) and a unique charging mechanism are imposed with respect to DPT.
The following are the DPT rates:
• General rate: 31% from 1 April 2023 (previously 25%)
• Diverted ring-fence or notional ring-fence profits: 55% (this stays the same from 1 April 2023)
• Diverted profits that would have been subject to the bank surcharge: 33%
Patent Box. The Patent Box regime was introduced in 2012 and is effective for accounting periods beginning on or after 1 April 2013. The regime (which is optional) taxes qualifying income relating to patents and certain other IP at a rate of 10%. This rate was phased in over five years. Therefore, the 10% rate has been available on all qualifying income from patents and certain other IP since 1 April 2017.
The Patent Box regime applies to patents granted by UK and European patent offices and certain other patent offices in the European Economic Area, as well as to patent applications that cannot be published for reasons of national security or public safety. Other innovative IP found in the medicinal, veterinary and agriculture industries is also included, such as regulatory data, marketing exclusivity, supplementary protection certificates and plant variety rights.
The 10% effective tax rate is achieved by creating an additional deduction from taxable profits and applies to all income arising from the patents, including royalties and income from the sale of patents. Significantly, it also applies to profits from the sale of products, services and processes with embedded patents.
Effective from 1 July 2016, the regime was amended in line with the recommendations of the OECD BEPS Action 5 report. For new entrants (new IP or new claimants) after 30 June 2016, an additional requirement is introduced into the regime. This requirement restricts the availability of the 10% tax rate if the claimant company has, to a significant extent, outsourced research and development (R&D) to related parties or has acquired the IP.
(aa) An adjusted amount (60% of the gross amount of the royalties) is subject to the 10% rate with respect to the right to use industrial, commercial or scientific equipment.
(bb) The 0% rate applies if the recipient of the interest is the government of the other state, its political subdivisions or local authorities thereof.
(cc) Relief may be restricted to 15% in certain circumstances (see Article 11(5) of the treaty).
(dd) The 0% rate applies if the interest is paid by the state in which it arises (including its political subdivisions, local authorities or statutory bodies), or if the recipient is any of the following:
• The other state (including its political subdivisions, local authorities, central bank and statutory bodies)
• An individual
• A company whose shares are regularly traded on a recognized stock exchange
• A company of which less than 25% of its shares are owned by persons who are not residents of the other state
• A pension scheme
• A bank or building society
• A financial institution
• A person who passes the “principal purpose test” set out in the treaty
The United Kingdom has also entered into tax treaties with British Virgin Islands, Cameroon, Cayman Islands, Congo (Democratic Republic of), Iran and Lebanon. These treaties do not have articles covering dividends, interest or royalties. Payments to these countries are subject to withholding tax at the non-treaty countries’ rates set forth in the above table.
The United Kingdom also has new treaties, amendments or protocols to treaties with Belgium, and Brazil which are signed but not yet in force. It has concluded negotiations with Peru and an agreed treaty is due to be signed shortly.
HMRC has indicated that it will prioritize renegotiation of treaties with EU Member States to try to replicate the benefits of the EU Interest and Royalty and Parent and Subsidiary Directives. In addition, it has been indicated that it has been undertaking negotiations with Estonia, New Zealand and Sri Lanka.