How does tax work in the UK?
International expansion is an attractive prospect for many organisations. The potential to find new customers, create new partnerships and, of course, do more business are just a selection of the factors contributing to businesses venturing beyond their borders and setting up operations in new jurisdictions.
When considering additional ventures in new territories you need to be aware of how that country's laws will affect you and any advice you may need to take. Taxation is just one of the legal areas you need to consider. Some of the different forms of taxation that could affect a business wanting to operate in the UK are set out below.
If your business is originally from another jurisdiction and begins operating in the UK then your profits will become subject to UK corporation tax. The tax is due if the business is trading through a permanent establishment (including a branch) in the UK (a "UK PE") or as a UK subsidiary. A UK PE is where a company has a presence in the UK for trading but it remains a part of the overseas company. A subsidiary is a legal entity in itself that is owned in some form by an overseas company. The taxation on these two types of trading is very similar.
For a business to be classed as a tax resident in the UK, it has to be incorporated in the UK or managed and controlled in the UK. If the business is not a resident in the UK and does not trade through a UK PE then it will be subject to UK income tax at the basic rate of 20% of any income generated in the UK.
If the business operates as a UK subsidiary its worldwide profits will be subject to UK corporation tax, no matter where in the world they have been earned. If those profits are also subject to tax in other jurisdictions, double taxation relief is usually available. Corporation tax is currently 19% and will reduce to 17% from 1 April 2020.
Similarly, a UK PE is also subject to UK corporation tax. The difference between a UK PE and a UK subsidiary is that a UK PE pays the tax on all profits earned from trading as a UK PE rather than the worldwide profits. Businesses that operate as a UK PE should be aware that these profits may also be subject to corporate income tax in their country of residence, although relief could be available for the UK taxation.
How does payroll tax work in the UK?
Any business operating as a UK PE or subsidiary that has employees that work in the UK will need to manage income tax. All salary and bonus payments are subject to income tax through the pay as you earn system (PAYE).
PAYE is used by UK employers and pension providers to take income tax and National Insurance Contributions (NICs) before an individual is paid their earnings. NICs need to be paid by both the employer and the employee. NICs enable individuals to qualify for a State Pension when they retire and other benefits when needed such as maternity and jobseeker's allowances.
NICs need to be paid by both the employee and by you as their employer. The business will need to deduct the employee's contribution from salary payments and then make its own contribution. You should note that this payment by the business is always in addition to the employee's; it cannot be taken from the employee's salary. Employer NICs are currently charged at a rate of 13.8% of the employee's gross salary.
What is the UK's VAT?
A sales tax is applied on supplies of goods and services produced by businesses in the UK called Value Added Tax (VAT). If your business is operating as a UK PE or subsidiary it will need to register with HM Revenue and Customs (HMRC) for VAT purposes.
Once registered for VAT, your business will be able to receive credit on any supplies used for business purposes. If your business operates as part of a supply chain, VAT should not have a financial impact as you will be able to recover any of the VAT that you pay on supplies.
There are different categories of supply for VAT purposes. Most supplies are rated at the standard 20%. It's recommended that you understand how these categories work and how they apply. For example, some goods such as food and drink are often charged VAT at a rate of 0% but some items that are considered "luxuries" such as alcohol, ice cream and confectionary are charged at the standard rate of 20%.
If your business makes taxable supplies that exceed the figure of £85,000 in a 12 month period you will need to register for VAT with HMRC or be at risk of financial penalties.
The UK tax system explained
When your business begins operating in the UK there will be multiple different tax requirements to consider, some in addition to what we have discussed. Gowling WLG's Tax team can help guide you through the different rules and understand the liabilities and risks when doing business in the UK.
Our Insights and Resources are recommended for businesses considering operating in the UK. We will update you regularly with information from our legal experts on tax, as well as other sectors and services you may be interested in.
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