The United Kingdom consists of Great Britain and Northern Ireland. Great Britain consists of England and Wales and Scotland. The legal systems in the territories of the United Kingdom do differ in certain respects particularly in connection with land law. Certain taxes are devolved or becoming devolved but basically the legal systems allow anything to be done that is not regulated or prohibited unlike the civil law jurisdiction in most of the rest of the European Union where anything is permitted if the law allows it. The UK is a member of the European Union and benefits from the internal market and is rated as the top global financial centre.
Business in the UK is usually carried on through a company incorporated in one of the constituent countries, which may be a limited company or a public limited company with a higher minimum share capital, or a quoted public company where shares are quoted on the stock exchange. Each company is a legal entity which can sue or be sued in its own right. Business could also be carried on through a UK branch of a foreign company and the branch profits could be subject to UK taxation. Other common business structures are partnerships where the partners have unlimited liability for the debts of the business, limited partnerships, where the limited partners’ liability is limited to their investment in the firm which must also have a general partner with unlimited liability, which can be a limited company. Limited liability partnerships are separate legal entities, like companies, but are taxed on the individual partners or corporate partners on their share of the profits or losses. There are other business structures such as cooperative societies, charities and other not-for-profit organisations. Certain business structures are subject to regulations such as those engaged in insurance and banking.
The UK has the dubious accolade of inventing Income Tax in 1798.
Unincorporated businesses and individual partners of limited partnerships are subject to Income Tax. Currently the first £10,600 is normally tax-free. The next £31,785 is taxed at 20%, the next £118,215 is taxed at 40% and the excess at 45%. There are allowances for married couples and blind persons. The number of personal allowances has been reduced in recent years as the nil rate band has increased. Employees are normally taxed under the Pay As You Earn system where tax and national insurance contributions are deducted at source by the employer on behalf of the government. National insurance contributions are also paid by the self-employed at different rates and the proceeds, in the main, are used to finance public health and pensions. Stock options are another complex area for employees, which may be taxed as income or capital gains depending on the circumstances.
Non-UK Residents and Non-UK Domiciliaries
Individuals who are not resident in the United Kingdom are only taxable on their UK source income and non-UK domiciled individuals may be taxable only on UK source income and remittances of overseas income and capital gains if they meet the necessary requirements. The UK recently introduced a complex statutory residence test to determine who is, and who is not, a resident in the UK for tax purposes. Domicile is a complex area and it is normally inherited from the father at birth, but in certain cases it is the mother’s domicile that prevails, and the individual can acquire a domicile of choice by living in a country and intending to remain there permanently or indefinitely. A non-domiciled individual who has lived in the UK for a number of years is subject to the remittance basis charge and after being resident in the UK for 17 out of 20 years is deemed to be domiciled in the UK for tax purposes.
The UK claims to have the most competitive rate of corporation tax in the G20, at 20% currently, but in the process of reducing to 18%. It also has the largest number of double taxation treaties of any country in the world and has been participating in the base erosion and profit shifting (BEPS) project sponsored by the OECD.
The UK does have anti-avoidance legislation through the controlled foreign company rules and it is possible to obtain an advance pricing agreement in some cases which enables royalty rates to be agreed with HM Revenue & Customs in advance. The UK anti-avoidance provisions have been extended by the introduction of a diverted profits tax. A number of international companies have paid very little tax, relative to their turnover in the UK, by avoiding a permanent establishment and concluding contracts on the internet in favourable tax jurisdictions such as the Netherlands, and delivering products to UK residents from warehouses in the UK which would not count as permanent establishments and under many double taxation treaties. The UK has also been active recently on a number of perceived abuses of the tax system.
A UK domiciled or deemed domiciled individual is subject to inheritance tax on assets in excess of the nil rate band of £325,000. The rate of inheritance tax for lifetime transfers is 20%, on the reduction in the estate as a result of the transfer, and the rate on death is normally 40%, but can be reduced to 36% where 10% or more of the estate is left to charity. The nil rate band may be increased from April 2017. An individual who ceases to be UK domiciled and dies within 3 years of that date is deemed domiciled in the UK for inheritance tax purposes.
Individuals coming to the UK for an extended period will usually be advised to transfer assets into a foreign trust before coming to the UK. Civil law based individuals may consider transfers into a suitable foundation. The UK Crown dependancies Jersey, Guernsey and the Isle of Man now have both trust and foundation laws, whereas the UK tends to treat foundations as trusts or companies depending on which would produce the greatest tax revenue.
Capital Gains Tax
The annual exemption for chargeable gains before capital gains tax becomes payable is currently £11,100 and half that rate for trusts. The basic rate of capital gains tax is 18% up to the basic rate limit of £31,785 and 28% thereafter on the taxable chargeable gain.
Value Added Tax
The UK has a typical European Union Value Added Tax system where supplies of goods or services are subject to VAT at a zero-rate, a 5% reduced rate and a 20% standard rate, with credit for VAT suffered on purchases. Some supplies are outside the scope of VAT.
The UK charges excise taxes on certain goods and services such as tobacco, alcohol and gambling.
The UK tax system now holds the dubious distinction of being the most voluminous tax legislation in the world and UK professional advice is essential for anyone contemplating setting up business in the UK.
The UK workforce is normally well-educated and the UK has four of the top ten universities in the world. Non-EU resident employees may need a work permit to work in the UK.
The UK is a highly technically inventive country and intellectual property is a major asset of many businesses. Copyright in the UK lasts for the creator’s lifetime and for 70 years after his death. Trademarks have an unlimited life and the UK trademark for Bass beer, which is a red triangle, is the first UK registered trademark and is still in use. Patents normally have a life limited to 20 years and it is possible to protect certain designs under the design rights legislation. Tax incentives are available for creative development and a lower rate of tax may apply to the profits from patented products under the patent box rules.
The UK has a worldwide reputation for the independence and expertise of the judiciary and a number of companies and individuals with major financial disputes seek out the English Courts to ajudicate on the merits of the case without fear or favour, which unfortunately is not the perceived norm in every jurisdiction.
The final but not insignificant benefit of the United Kingdom is its language, which has become, in many respects, the worldwide business language thanks to its use throughout the Commonwealth and former colonies including, most importantly, the United States of America. However this common language has to be used carefully as the same word may have different meanings in different circumstances and in different jurisdictions. For example, a “scheme” in the UK is merely a plan or arrangement which may be for a multitude of legitimate purposes, whereas a “scheme” in the US is normally regarded as a tax avoidance scheme and sailing too close to the wind for comfort.