OECD Model Tax Convention on Income and on Capital (Condensed version 2010) and Key Tax Features of Member countries 2011 United Kingdom 1. Corporate income tax I. Taxes on Corporate Income Corporate profits are subject to corporation tax. Companies incorporated under the Companies Act are taxable persons for corporation tax purposes. In addition, persons liable to corporation tax include unincorporated associations, building societies (housing loan financing associations), mutual insurance societies, state-owned industries, public utility companies, crown corporations, and permanent establishments of non-resident companies. Partnerships are transparent for tax purposes. 1.1. Residence Companies incorporated in the United Kingdom are treated as resident there. Other companies are resident if their central management and control takes place in the United Kingdom. If a company is resident in the United Kingdom under domestic law, but is treated as resident in another country for the purposes of a tax treaty, it is treated as not resident in the United Kingdom. 1.2. Taxable income Resident companies are chargeable to corporation tax on their worldwide profits, defined as income and chargeable (capital) gains. The computation of annual taxable profits and losses is based on commercial accounts, as adjusted for tax purposes. The main item of exempt income is intercorporate dividends. A distribution exemption applies to distributions received by large and medium-sized companies, irrespective of the source of the distributions, i.e. whether domestic or foreign. The exemption also applies to distributions received by small companies (as defined for EU law purposes) where the payer is also resident in the United Kingdom. Foreign-source distributions received by small companies also qualify for exemption if the paying company is resident in a country with which the United Kingdom has a double tax treaty containing a non-discrimination article. 2. Other taxes on corporate income Generally, there are no other taxes on corporate income. Companies engaged in oil and gas production may be subject additionally to petroleum revenue tax and royalty levy. In this respect, income from fields given development consent on or after 16 March 1993 attracts only corporation tax.
Companies engaged in North Sea oil and gas activities are liable to corporation tax at 30% of their adjusted ring fence profits. Where profits do not exceed GBP 300,000, the rate is 19%. These companies are also liable to a supplementary charge of 20% in respect of those profits. The Finance Bill 2011 contains measures to increase the supplementary charge to 32%. If passed, these measures take retrospective effect from 24 March 2011. 3. International aspects 3.1. Resident companies Resident companies are taxed on their worldwide income. Dividends received by large and medium-sized companies are exempt (see I.1.2.). The exemption is based on the dividends falling within one of five broad exempt classes, and subject to certain antiavoidance provisions. Where the exemption does not apply, the dividends are taxed in full, and credit is given for foreign tax suffered. A company may elect to disapply the exemption, in order to obtain relief under the credit method. This may be desirable if the dividends are sourced in a country which provides for a lower withholding tax rate if the dividends are subject to tax in the country of the recipient. An election for the dividends to be subject to UK tax would then ensure the application of the lower withholding tax rate in the source state. 3.2. Non-resident companies 3.2.1. Taxable income Non-resident companies trading in the United Kingdom through a permanent establishment are subject to corporation tax at the main rate, on income attributable to the permanent establishment. They are not eligible for the small companies rate, unless they are protected by a non-discrimination article in a tax treaty. If a non-resident company is not trading in the United Kingdom through a permanent establishment, it is subject to income tax on its UK-source income. In respect of a non-resident company trading in the United Kingdom through a permanent establishment, income tax is levied on any UK-source income of that company that is not attributable to the trade. 4. Anti-avoidance 4.1. Thin capitalization The thin capitalization rules form part of the transfer pricing legislation, which generally requires connected parties to use arm s length prices to calculate profits derived from transactions between such enterprises.
4.2. Controlled foreign company CFC legislation exists to impose a charge on UK resident shareholders having an interest of at least 25% in a controlled company resident abroad, and subject to a lower level of taxation than the United Kingdom would impose. The charge is made on a proportionate interest of that company s profits, but not its capital gains. Interests held by associated or connected persons are taken into account. A foreign company is controlled if UK shareholders have an interest of more than 50% in that company. If there is less UK control, the control test is nevertheless satisfied where there are two persons who control the company together, provided that the UK resident controls at least 40% of the company and the other controls at least 40%, but not more than 55%. 1. Individual income tax II. Taxes on Individual Income The United Kingdom imposes income tax and capital gains tax on individuals. Partnerships are treated as transparent for tax purposes. 1.2. Taxable income An individual who is resident and domiciled in the United Kingdom is taxed on his worldwide income on the arising basis. Income tax is assessed based on the nature of its source, e.g. income from a trade, profession or vocation, property income, savings and investment income, and miscellaneous income. An individual s taxable income is calculated by first ascertaining his total income. Total income comprises income from all sources, after all allowable deductions from each source of income have been made, and after also taking into account certain other specified deductions. Personal allowances are then deducted to arrive at taxable income. 1.3. Personal deductions, allowances and credits The main allowable deductions include: certain interest payments, premiums paid to pension plans (subject to statutory limits), and donations to UK charities. The main personal allowances are the basic personal allowance and the age-related personal allowance. The latter allowance is given to taxpayers aged 65 or over at any time during the year of assessment. Where such a taxpayer s income exceeds a statutory maximum, the age-related allowance is reduced according to a prescribed formula, but may not be reduced below the amount of the basic personal allowance. The main personal allowances are restricted in the case of taxpayers earning over GBP 100,000 in a tax year. At that point, the allowance begins to be withdrawn at a rate of GBP 1 for every GBP 2 of income exceeding GBP 100,000.
Tax credits at a rate of 10% are available to married couples as well as to same-sex couples in a civil partnership. The allowance is given where a spouse or civil partner was born before 6 April 1935. 1.4. Rates 1.4.1. Income and capital gains For 2011/12, the income tax rates are: Type of rate Bracket (GBP) Rate (%) basic rate up to 35,000 20 higher rate 35,001-150,000 40 additional rate over 150,000 50 Capital gains tax is charged at 28% in respect of gains arising to taxpayers who are not basic rate taxpayers. In other words, the 28% rate applies to gains made by taxpayers with taxable income exceeding GBP 35,000. Where an individual is a basic rate taxpayer, and his taxable income is less than GBP 35,000, any gains arising to him are taken as using up the unused part of the basic rate band, and are taxed at 18%. Gains exceeding the basic rate limit are then taxed at 28%. 1.4.2. Withholding tax There is no withholding tax on dividends. The withholding tax on savings income is 20%. Annuities, annual payments and patent royalties are subject to withholding tax at the basic rate of 20%. The withholding tax is creditable against the final tax liability. 3. International aspects 3.1. Resident individuals An individual who is resident and domiciled in the United Kingdom is, in principle, subject to tax on his worldwide income and capital gains. An individual who is domiciled abroad, while being resident in the United Kingdom, is subject to tax on the remittance basis in respect of foreign income and capital gains. This means that only the funds representing foreign income or gains that are remitted to the United Kingdom are subject to UK tax. The tax legislation provides for a wide definition of remittance. An individual who is resident but not domiciled in the United Kingdom, is only subject to tax on offshore employment income (i.e. an employment with an employer resident outside the United Kingdom, the duties of which are performed wholly outside the United Kingdom) on amounts remitted to the United Kingdom.
3.2. Non-resident individuals 3.2.1. Taxable income and capital gains Non-residents are liable to income tax on all UK-source income, subject to reductions or exemptions given in a double tax treaty. An individual who is ordinarily resident, but not resident, is not subject to income tax on non-uk-source income, nor is he subject to higher-rate income tax on his UK investment income (other than rental income). His tax liability is limited to the 20% rate. He is, however, subject to capital gains tax on his worldwide chargeable gains. 3.2.2. Withholding tax The withholding tax rates in II.1.4.2. apply unless a tax treaty provides otherwise. III. Taxes on Capital 1. Net worth tax / net wealth tax There is neither a net worth tax nor a net wealth tax. 2. Real estate tax There are two taxes levied by municipal authorities: business rates on non-residential properties, and council tax on residential properties. A tax on the occupation of non-residential property situated in the United Kingdom is payable by every occupier of business premises. The tax base is the annual rental value. The uniform business rate (UBR) is set annually by the government. The UBR for the year ending 31 March 2012 is 43.3% for England. Similar rates apply in Scotland and Wales. Each local authority charges annually a council tax on every property within its boundaries occupied as a separate dwelling. The council tax is payable by the occupier, or by the owner where the property is empty or is shared accommodation (such as a hostel or nursing home). The base of the tax is the value of the property. Tax is charged as a percentage of the valuation, which is determined by the local authority.