The United Kingdom is a historically rich capitalist country with a well-established tax system. After registering a business in the UK, it is essential to consider the following tax issues for actual operations:
1) After successful company registration, if the company needs to operate locally in the UK or engage in any business activities, it must register with Her Majesty's Revenue and Customs (HMRC);
2) From the day of successful company registration, there must be monthly records of income and expenses, along with accounting documents, and at least quarterly declarations to HMRC. (It is advisable for a local UK accountant to handle the declaration work);
3) Companies with an annual turnover exceeding £60,000 must apply for a Value Added Tax (VAT) number;
4) Companies with annual profits exceeding £60,000 must pay income tax, but unless the company intends to go public, UK accountants generally keep the declared profits below £60,000.
The main types of taxes currently in the UK include personal income tax, corporate income tax, value-added tax, national insurance contributions, petroleum revenue tax, inheritance tax, and gift tax.
1. Personal Income Tax
Personal income tax is a tax levied on individual income in the UK.
Taxpayers. The taxpayers of personal income tax in the UK are residents and non-residents. Anyone who resides in the UK for more than six months within a tax year is considered a UK resident; otherwise, they are classified as a non-resident.
Taxable objects and tax rates. The UK personal income tax taxes residents on all income sourced from both domestic and foreign sources; non-residents are taxed only on income sourced from the UK. The taxable income for personal income tax is defined as various sources of income as specified in the income tax classification table, after deducting allowable necessary expenses, and then summing up the remaining balance after deducting living expenses. Allowable living expenses include: basic deduction, dependent deduction, earned income deduction, elderly deduction, disability deduction, widow (widower) deduction, and donation deduction, among others. The amounts for these deductions are adjusted annually according to the price index as stipulated by law.
UK residents are entitled to a tax credit for taxes paid on income sourced from outside the UK (limited to direct overseas taxes) according to double taxation agreements or unilateral provisions of UK law.
Calculation of taxable income and tax payable. The structure of personal income tax in the UK operates through a system of deductions and tax brackets. Each individual has a personal allowance, which is deducted from the total income before tax to arrive at the taxable income, and expenses for various sources of income have already been deducted in the summation. The personal allowance increases with age; in 1995, the minimum personal allowance was £3,445. In addition to the personal allowance, there is also a married couple's allowance, which also increases with age. Furthermore, the brackets and allowances for UK personal income tax are adjusted for inflation based on the retail price index for the year.
Collection methods. The UK personal income tax employs two methods of collection: withholding at source and actual assessment. The former primarily applies to taxation on wages, salaries, and interest income. The latter mainly applies to taxation on other types of income.
2. Corporate Income Tax
The UK corporate income tax, also known as "corporation tax" or "corporate tax," is a tax levied on the profits of corporate entities. The introduction of corporate income tax in the UK occurred later than personal income tax, being established in 1947. Before 1947, UK corporate profits were included in the fourth category of income and were subject to annual profits tax. In 1947, the UK separately imposed a corporate profits tax in addition to corporate income tax. During the tax reform in 1965, the previous income tax and profits tax system was abolished, and a single corporate income tax was established, incorporating capital gains into the scope of corporate income tax. In the 1980s, the UK government introduced various tax incentives to stimulate investment and promote economic growth, reducing the tax burden on corporate income tax and implementing special policies for small and medium-sized enterprises to encourage their development.
Taxpayers. The determination of corporate income tax taxpayers in the UK is based on residency. Companies that have a registered office in the UK are considered resident companies; those without a registered office are classified as non-resident companies. All resident and non-resident companies are subject to UK corporate income tax.
Taxable objects and tax rates. The UK taxes resident companies on their worldwide profits; non-resident companies are taxed only on income derived from their branches or agents conducting business activities or handling property in the UK. UK tax law stipulates that the taxable objects for corporate income tax include income derived from business activities conducted under various names and forms, as well as capital gains. The UK corporate income tax operates on a proportional tax rate, which is fixed annually.
Calculation of taxable income and tax payable. The UK corporate income tax is levied at the rate specified for each fiscal year (from April 1 to March 31 of the following year), but the taxable income for corporate income tax is not determined based on the fiscal year; it is strictly calculated based on the income of the company's accounting year. Typically, the UK government announces the corporate income tax rate for the fiscal year before April each year. Taxable profits serve as the basis for calculating corporate income tax, and taxable profits are based on "accounting profits" adjusted according to tax law, with the main issue being the determination of deductible items. Taxable profits are calculated by subtracting deductible items from accounting profits, and the product of taxable profits and the tax rate equals the tax payable.
Collection methods. UK corporate income tax is generally paid according to the accounting year. The accounting year for UK companies can exceed 12 months, and any period exceeding 12 months is treated as a separate tax period. Newly established companies must pay taxes within nine months after the end of their first accounting year. Late payments incur a penalty of 9.5%, and if the tax paid exceeds the tax payable, interest is also paid at 9.5%.
3. Value Added Tax
Value Added Tax (VAT) is a tax levied on taxable goods and services. The UK began imposing VAT in 1973, and the "Value Added Tax Act" was enacted in 1983. VAT taxpayers include individuals, partnerships, groups, or companies that provide taxable goods and services in the UK with the aim of generating income through business activities; those engaged in import activities. The taxable scope covers industry, agriculture, commerce, and services. The taxable basis for domestic goods and VAT is the total sales amount and remuneration received from the sale of goods and provision of services. The taxable basis for imported goods is the payment made or the value determined by customs. In 1994-1995, the UK had three VAT rates: 17.5% (standard rate), 8% (lower rate), and zero rate or exempt. The 8% rate applies to fuel and electricity used domestically. The zero rate is equivalent to what many countries refer to as exempt with the right to reclaim VAT, primarily applicable to food, books and publications, passenger transport, and exports. Exemptions mainly apply to certain banking, insurance, and financial services, property transactions, education and health services, and certain non-profit activities. To avoid double taxation, VAT paid on taxable goods and services is allowed to be deducted. VAT taxpayers must file returns to the Customs and Excise Department four times a year, i.e., once every three months. Taxpayers must submit their tax returns within one month after each tax reporting period ends and pay the corresponding taxes simultaneously.
4. National Insurance Contributions
National Insurance Contributions (NIC) are also known as social insurance taxes and are levied on employers, employees, and self-employed individuals. Taxpayers include employers, employees, and self-employed individuals. The taxable object is the labor income paid by employers to employees, as well as the income earned by self-employed individuals from various independent service activities, which is subject to a fixed rate of collection, with no minimum living expenses or other exemptions. NIC operates on a proportional tax rate. The tax rates for employers and employees are the same, and employers are responsible for withholding and reporting. The calculation method for NIC in the UK adopts a non-cumulative system, meaning that the taxpayer's weekly tax amount is determined by their income for that week, unaffected by the income of previous or subsequent weeks.
