The UK has a business focussed taxation environment with additional benefits for young or innovative companies that take advantage of SEIS (Seed Enterprise Investment Scheme), EIS (Enterprise Investment Scheme) or the ‘Patent Box’ initiative.
1. Corporation tax
1.1 Once you carry on business in the UK as a company, you will be subject to corporation tax on profits.
1.2 Taxable profits include profit derived from income and also from capital transactions.
1.3 Corporation tax rates for the financial year 2013/14 (i.e. 01.04.13 to 31.03.14) are:
|£300,000 at 20% (small profits rate)|
|£1,200,000 at 23.75% (marginal rate)|
|£1,500,000 at 23% (main rate)|
1.4 The main rate of corporation tax is due to fall to 21% for the 2014/15 financial year, and 20% the following year (i.e. there will be a single rate of corporation tax of 20%).
1.5 The marginal rate referred to in the table above, applies only to taxable profits which fall within the band of £300,000 to £1,500,000. Once profits exceed £1,500,000 corporation tax is charged at the full rate of 23%.
1.6 The limits referred to above are proportionately reduced for accounting periods of less than 12 months and by dividing the limits by the number of associated (non-dormant) companies. Therefore a company with two associated companies will start to pay the full rate of corporation tax when its profits exceed £500,000 (£1,500,000 divided by 3).
2. Patent box
2.1 A new ‘Patent Box’ regime for companies came into force in April 2013. If your business, or part of your business, will generate revenue by selling patented products you may be able to benefit from a lower rate of UK corporation tax on worldwide profits earned from your patents. This lower rate has been phased in from April 2013, and will be as low as 10% from April 2017.
3. Payment of dividends
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3.1 One of the primary ways to draw money out of your company is by the board of directors declaring a dividend. Dividends can only be paid out of accumulated realised profits, and any losses have to be made good before dividends can be paid.
3.2 A dividend paid by a company is made out of post-tax profits (and is therefore not deductible in computing taxable profits). There is no requirement for a UK resident company to withhold tax from a dividend.
4. Taxation for employers
4.1 If your company is going to employ individuals, one of the tax payment regimes of which you should be aware is PAYE. PAYE requires a company which employs individuals to deduct income tax under the ‘pay as you earn’ system from all payments of salary made to those individuals.
4.2 National Insurance Contributions (“NICs”) are also payable both by the employee and the employer. The employee’s contribution is deducted, by the employer, from their salary. The employer’s contribution is an additional cost to the business. Currently an employee’s NIC is charged at a rate of 12% or 2% depending on level of earnings, and employers’ NICs are charged at the rate of 13.8% of the gross salary paid to the employee.
4.3 As soon as your company employs any individuals it should inform HMRC and establish a payroll system (this can be outsourced to a payroll services provider).
4.4 establish a payroll system (this can be outsourced to a payroll services provider).
5. Value Added Tax (“VAT”)
5.1 Another tax which may be of relevance to a new business is VAT.
5.2 VAT is a sales tax designed in compliance with European Union requirements. It is charged, very broadly, on all supplies of goods and services made by a business in the UK. Where the customer is registered for VAT and uses the supplies for business purposes they will receive credit for this VAT so that, for most businesses through a supply chain, the impact of VAT is largely neutral as the business can recover the VAT that it pays on supplies.
5.3 VAT is also chargeable on the importation of goods into the UK from outside the EU; special rules apply for supplies within the EU. There are three main categories of supply for UK VAT purposes: standard-rated – 20%; zero-rated – 0%; and exempt – outside the scope of VAT. Most supplies are standard rated.
5.4 Where a person makes taxable supplies in the UK and the value of those supplies (which is the taxable turnover (i.e. standard or zero-rated)) exceeds at the end of any month:
(a) a specified limit (currently £77,000, from April 2013, £79,000) in the year then ended; or
(b) there are reasonable grounds for believing that the value of the taxable supplies in the next 30 days will exceed the specified limit, that person should notify HMRC and register for VAT. There are financial penalties for failing to do so. Where turnover is below the specified limit a person may voluntarily register for VAT.
5.5 In light of the numerous tax requirements outlined above, it would be sensible to retain a firm of accountants who can help you manage how much tax you are paying and ensure compliance.