Expanding to the UK: Taxes Your Business Will Face

5 Apr

Many companies are migrating to Britain and especially London to take advantage of the resources available to businesses. London has long been established as leading centre for banking and finance and with the emergence of tech city it is fast becoming recognised as the place to be for technology companies and the digital capital of Europe.

There are two main ways of expanding a business into the United Kingdom, it can be achieved by either setting up a branch of your company in the UK or by creating a new independent limited UK company.

Setting up a branch can incur many complications when applying taxation to the company, this is due to double taxation which is the levying of tax by two or more authorities on the same declared income.  There are treaties in place for the mitigation of taxes, the Organisation for Economic Co-operation and Development (OECD) has a model treaty in place which countries use to base their own tax treaties on. Foreign companies based in the UK may need to file a claim for relief on tax with their home tax jurisdiction if they have suffered double taxation.

When an asset is purchased by a branch, the benefit from a tax perspective is received by both the branch and the original company leading to splitting up of expenses.  Setting up a limited company adds more credibility to asset costing; the benefit received from an asset can be allocated entirely to the new company meaning there is no splitting up of costs. Creating a new limited company is often seen as a cleaner method of setting up in the UK from a tax perspective, although for both methods the same amount of tax is suffered.

Employers and Businesses in the UK are charged three main taxes:

Pay as you Earn Tax and NICs

Employers have an obligation to deduct PAYE tax and National Insurance contributions (NICs) from employees’ pay.  They are required to report this information to HMRC each time an employee is paid.

Employers pay NICs on the earnings provided to their employees.  Earnings include cash amounts and benefits provided to employees.  The business will need to make National Insurance Contributions (Employers NIC) of 13.8% on top of staff gross pay.  Employees will also pay NICs on their earnings, in addition to Income Tax.

VAT: Value added Tax

VAT is charged at 20% on most goods and services that VAT-registered businesses provide in the UK. It is also charged on goods and some services that are imported from countries outside the European Union and brought into the UK from other EU countries.

The VAT added to the sale price of a business’s goods and services is called output tax and the VAT paid on goods and services for a business is input tax. When VAT-registered businesses buy goods or services they can generally reclaim the VAT they’ve paid.

Corporation Tax

Corporation Tax is a tax on the profits of limited companies and is currently charged at 20-23%, although the upper rate is due to be phased out by the 1/04/2015 when all businesses will be charged a flat rate of 20%. Taxable profits for Corporation Tax include taxable income such as trading profits and investment profits as well as capital gains.

The geographical location of the United Kingdom means corporations from North America use it as a platform into Europe, for example Aon have recently moved their headquarters to London. In addition to this businesses from eastern European countries are establishing themselves in the UK before making the move to the US.  Britain is an effective prelude to the US due to a shared language and culture and it also presents the opportunity for European companies to streamline their future set-up costs when moving. Thanks to its well respected financial sector, emerging technology sector and competitive tax rates, Britain and especially London will remain an attractive market place for companies to expand to in the future.



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