United Kingdom Tax & Business Guide - Deloitte

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Basic facts
Population 60.3m Inflation 2.3% (2006)*
Main languages English GDP per head US$39,034*
Currency Pound sterling (£) GDP growth 2.6% (2006)*
Economic communities European Economic Area, EU, WTO, OECD
GDP sources 1.0% agriculture, 25.6% industry, 73.4% services
*Economist Intelligence Unit estimates.
Political environment

The UK is a parliamentary democracy. Executive power lies with the prime minister and cabinet. Queen Elizabeth II is head of state. Parliament has an elected House of Commons and a non-elected House of Lords, which has been reformed to consist mainly of appointed life peers.

The Labour Party, headed by Tony Blair, was re-elected to a third term in May 2005. The next general election is due by May 2010.
Foreign trade and investment
Exports US$447.7bn (2006)* Imports US$597.0bn (2006)*
*Economist Intelligence Unit estimates.

Major exports: Manufactured goods, oil and chemicals.

Leading export markets: Other EU countries, particularly Germany, France, Ireland and the Netherlands, and the US.

The UK accounts for nearly one-quarter of total inward foreign direct investment into the EU, but inflows have dropped since 2000.
Business and financing
Business forms Partnership, branch, private limited company, public limited company

Private limited companies may not invite the public to subscribe for shares or bonds; public limited companies may. Public companies may choose to be quoted on the stock exchange or to be unlisted. A listing on any EU exchange entitles a company to be listed on any other exchange.

Other organisational forms exist (such as limited partnerships) but are not widely used. Most foreign-based businesses conduct business in the UK as private limited companies rather than as branches.

London, the capital, is a global financial centre and the UK is one of the worldÌs largest exporters of financial services.
Labour environment
Unemployment rate 5.4% (2006)* Minimum wage £5.35 (hourly)
*Economist Intelligence Unit estimate.

In October 2006 the minimum wage for adults (aged 22 and older) increased to £5.35 per hour.

Union membership has stabilised after two decades of decline, although there is a continuing trend in favour of local rather than national wage settlements.

National insurance levies apply up to 12.8% (uncapped) for employers, and for employees 11% on earnings up to £33,540 per annum and 1% thereafter.

Nationals of EU and other European Economic Area (EEA) countries do not need work permits, and must be treated on a par with British nationals. Non-EEA nationals usually require a work permit.
Taxation
Corporate tax
Main rate 30% (lower rates for small businesses)

A UK resident company is taxable on its worldwide profits, with a credit available for many overseas taxes. A company is resident if it is either incorporated in the UK or if its central management and control are located in the UK. A non-resident company is subject to tax on its UK profits and chargeable assets held for the purposes of the trade or permanent establishment. If a non-resident company carries on an investment activity, it is subject to income tax on UK sources of income. The main corporate tax rate is 30%. Companies with profits below £300,000 are taxed at 19%, and marginal relief applies in respect of profits up to £1.5m. If the company is associated with other companies (wherever resident), the thresholds are reduced proportionately.

Dividends from resident companies are not normally subject to tax. Under anti-avoidance rules, certain shares are taxed as though they were loan relationships (eg shares whose value is likely to increase at a rate that represents a return on an investment at a commercial rate of interest). From 2007, dividends from listed public companies that elect to be treated as real estate investment trusts are treated as taxable income. Foreign dividends are included in taxable income, with a credit for foreign tax paid.
Individual tax
Progressive rates up to 40%

Where an individual is resident, ordinarily resident and domiciled in the UK, that person is subject to UK income tax and capital gains tax on worldwide income and gains. Different treatment may apply where a person, although resident, is not ordinarily resident or is not domiciled in the UK. A person is regarded as resident if present for 183 days in a tax year, or if habitually visiting the UK for more than 90 days in four consecutive years (which also constitutes ordinary residence). Whether a person is ordinarily resident may also be determined by a personÌs future intentions with regard to staying in the UK.

For the 2006/07 fiscal year, the marginal rates of personal tax are 10% on the first £2,150 of annual taxable income, 22% on non-savings income from £2,151 to £33,300 and 40% on income exceeding that amount. Dividends are taxable at rates up to 32.5%. UK dividends attract a partial imputation credit, and credit is given for foreign tax deducted from overseas dividends. Savings income is taxed at rates of 10%, 20% and 40%. Persons who are not domiciled in the UK (generally individuals who do not regard the UK as their permanent home) may obtain favourable tax treatment in some cases.
Capital gains
Capital gains of companies and individuals are taxable, with an exemption for gains on the disposal by companies of substantial shareholdings

Chargeable gains of a company are included in profits for corporation tax. Gains of a trading company (or member of a trading group) on the disposal of a shareholding in another trading company are exempt, subject to certain conditions. Capital gains tax applies to individuals who are resident or ordinarily resident in the UK. Gains of individuals in excess of £8,800 per annum are taxed at rates that are broadly equivalent to the income tax rates that would be payable were the gain taxed as income. Gains on the sale of the principal private residence are exempt, subject to certain conditions. A taper relief applies to gains of individuals, so that on the disposal of business assets held for more than two years, only 25% of the gain is taxable. On the disposal of non-business assets held for 10 years, only 60% of the gain is taxed.
Indirect tax
Standard rate 17.5% Other rates 5%, 0%

The standard rate of value-added tax (VAT) is 17.5%, with a reduced rate of 5% for some items, including domestic fuel and installation of energy-saving materials. Zero-rating applies to the export of goods, some international services, food, water, books and newspapers, construction of new dwellings, passenger transport and some other items. Exemptions include transactions in land, some financial services, insurance, health and education. An option to tax is available in some cases. A reverse charge applies in respect of some services received from abroad.

Registration for VAT is compulsory for businesses whose taxable supplies are over £60,000, and voluntary registration is possible below that threshold. Deregistration is possible if turnover falls below £58,000.
Tax administration and compliance
Tax year Corporations: accounting year; Individuals: year to April 5th

Large companies (whose profits exceed £1.5m; reduced pro rata by number of associated companies worldwide) pay advance tax in four equal quarterly instalments, based on the expected liability for the year. Other companies pay tax in a single sum nine months after the end of their accounting period. A self-assessment corporation tax return must be filed within 12 months of the end of the accounting period.

Individuals are subject to withholding tax on wages. An individual must file a self-assessment tax return by January 31st following the end of the tax year (or September 30th if the taxpayer wishes the tax liability to be calculated by the tax inspector). Individuals receiving income not subject to tax deduction at source must normally pay two equal payments on account, on January 31st in the tax year and July 31st following the end of the tax year, based on the previous yearÌs liability. Any final balance of tax is due by January 31st following the end of the tax year.
Additional tax information
Withholding taxes Dividends 0%, Interest 20%, Royalties 22%. Rates may be reduced by tax treaty or EU directives.
Tax treaties The UK has more than 115 tax treaties.
Dividends Individuals are taxable on UK dividends (with an imputation credit) and foreign dividends. Except for share dealers and where anti-avoidance rules apply (see above), companies are only taxed on foreign dividends.
Revenue protection Transfer-pricing, thin-capitalisation, offshore subsidiary (CFC) and tax shelter disclosure legislation.
Groups Group relief for losses and asset transfers; VAT grouping is available.
Incentives Research and development; venture capital; investment by small and medium-sized companies.
Other taxes Excise taxes, Environmental levies, Import duties, Inheritance tax, Capital gains tax, Insurance premium tax, Property taxes, Stamp duty, Stamp duty land tax.