Personal taxation in Edinburgh
Effective personal income tax rate
Teleport city rankings for personal income tax
Individuals who are resident and domiciled in the UK are subject to tax on their worldwide income and gains. Different
A statutory residence test (SRT) applies that is based on a combination of physical presence and connection factors with the UK and other jurisdictions.
Individuals file tax returns separately, irrespective of marital status.
Income tax is charged at progressive rates. For 2015/16, the rates are as follows:
Deductions and allowances
Individuals are given a personal allowance deduction from total pre-tax income (GBP 10,600 for 2015/16; GBP 11,000 for 2016/17). A higher allowance is available to individuals born before 6 April 1938, depending on income levels. As from 2016/17, there will be a single personal allowance regardless of age. The basic personal allowance for income tax is gradually reduced to nil for all individuals with “adjusted net income” above GBP 100,000.
Individuals who are UK resident under the SRT and domiciled in the UK are subject to UK tax on their worldwide income. Residents who are not domiciled in the UK may make a claim for the remittance basis of taxation to apply to overseas income, in exchange for an additional tax liability of GBP 30,000 per annum for taxpayers who have been UK resident for seven out of the previous nine tax years, and rising to GBP 60,000 (increased from GBP 50,000 as from 6 April 2015) once resident for 12 out of the previous 14 tax years. As from 6 April 2015, a charge of GBP 90,000 applies for individuals who have been UK resident for 17 of the previous 20 tax years. The remittance basis also may apply without the requirement to make a claim, if (broadly) the unremitted overseas income and overseas capital gains is less than GBP 2,000 or if certain other conditions are fulfilled.
Individuals who are domiciled and resident in the UK are subject to capital gains tax on all chargeable assets, regardless of where they are situated. Similar to the rules for overseas income, an individual who is not domiciled in the UK may make a claim for the remittance basis of taxation to apply to any capital gains on non-UK assets (see “Taxable income,” above). An annual exemption is available to reduce capital gains (GBP 11,100 for 2015/16), except in tax years where a claim for the remittance basis is made. Where individuals who leave the UK to become nonresident realize gains in a tax year after their departure, such gains are not chargeable to UK capital gains tax, unless the individuals are absent from the UK for less than five years and they acquired the asset before they left.
Other taxes on individuals
Real property tax
The national nondomestic rate is payable by individual occupiers of business premises. Local authorities collect the tax by charging a uniform business rate, which is deductible in computing taxable income. Council tax applies to the occupation of domestic property.
Inheritance tax is charged on property passing on death, certain gifts made within seven years of death and some lifetime transfers (e.g. to most trusts). Where due, inheritance tax is payable on assets in excess of GBP 325,000 (2015/16 and 2016/17) at a rate of 40% (20% for certain lifetime transfers).
National Insurance Contributions (NIC) are payable by employers, employees and self-employed individuals. For example, for 2015/16, weekly paid employees pay NIC at a rate of 12% on weekly income between GBP 155 and GBP 815 and 2% on income exceeding this amount. For employers, NIC is payable at a rate of 13.8% on all income in excess of GBP 156 per week for 2015/16. For 2015/16, self-employed individuals pay NIC at a rate of 9% on annual income between GBP 8,060 and GBP 42,385 and 2% on the excess, together with a fixed charge of GBP 2.75 per week for 2014/15 (GBP 2.80 for 2015/16).
Stamp duty at 0.5% is imposed on the transfer of UK shares. Stamp duty land tax is charged on transfers of UK real property (residential and nonresidential). See “Other taxes on corporations,” above.
Compliance for individuals
Individuals are liable to a penalty of GBP 100 for failure to file a tax return by the due date. The penalties escalate if the return is filed more than three months after the due date. Tax-geared penalties also can be sought for late payment of tax and tax returns that are carelessly or deliberately incorrect. Interest is paid on tax paid late.
Filing and payment
Tax on employment income is withheld by the employer under the Pay As You Earn (PAYE) system and remitted to the tax authorities. Tax on income not subject to PAYE and capital gains tax is self-assessed. If an individual is required to file a tax return, it must be filed by 31 October (or 31 January, if filing online) after the tax year. Payment of tax is due by 31 January after the tax year. Payments on account of tax may be required on 31 January in that tax year and 31 July in the following tax year.
The tax year is 6 April to the following 5 April.
Corporate taxation in Edinburgh
Teleport city rankings for corporate income tax
A UK resident company is subject to corporation tax on worldwide profits and gains (see “Taxable income,” below), with credit given for overseas taxes paid. Foreign profits and losses (including those from certain capital assets) arising from a permanent establishment (PE) of a UK resident company may be excluded by making an irrevocable election. The effect of the election may be deferred where the PE has incurred a loss. Anti-diversion rules based on the CFC rules (see “Controlled foreign companies,” below) may restrict the profits that can be excluded from the charge to UK tax by virtue of the election.
Taxation of dividends
A dividend exemption applies to most dividends and distributions unless received by a bank, insurance company or other financial trader. Dividends received by a non-small UK company on most ordinary shares and many dividends on nonordinary shares from another company (UK or foreign) are exempt from UK corporation tax, with no minimum ownership period or minimum ownership level. The exemption also can apply to small companies receiving dividends and distributions from UK companies or foreign companies resident in a jurisdiction that has concluded a tax treaty with the UK which includes a nondiscrimination provision. (A small company is a “micro or small enterprise,” as defined by the EU).
A company is UK resident if it is incorporated in the UK or its place of central management and control is in the UK.
Trading losses generally can offset total profits of the year (including capital gains), with carryback of the excess to the preceding year permitted. Trading losses may be carried forward indefinitely unless there is a change of ownership of the company and a major change in the nature and conduct of the trade within three years, but can be offset only against trading income. Capital losses may be offset only against capital gains and only may be carried forward.
An enhanced tax deduction of 230% is available for certain R&D expenditure as from 1 April 2015 for small or medium- sized companies; the deduction is 130% for large companies. Alternatively, large companies may claim an “above the line” R&D credit at a rate of 11%. The above the line credit will become mandatory as from 1 April 2016.
The main rate of corporation tax is 20% as from 1 April 2015 (reduced from 21%). The main rate does not apply to “ring fence” profits from oil rights and extraction.
Most dividends, including foreign dividends, are exempt (see “Taxation of dividends,” above). In addition, capital gains on the disposal of substantial (i.e. 10% or more) shareholdings in certain companies are not subject to corporation tax (see “Capital gains,” above).
Foreign tax credit
A UK resident company is subject to corporation tax on its worldwide profits (including capital gains), with credit given for most overseas taxes paid. As noted above (see “Basis,” above), a UK company may elect to exempt the profits and losses of foreign PEs from UK corporation tax, provided certain conditions are satisfied. Where such profits are excluded from UK taxation, no credit is available.
Capital gains form part of a company's taxable profits. Gains or losses on the disposal of substantial shareholdings in both UK and foreign companies can be exempt. The main conditions, broadly, require the selling company to have continuously owned at least 10% of the shares of the company being sold for at least 12 of the 24 months before disposal and the selling company/company being sold both must be trading or members of a trading group (without, to a substantial extent, any nontrading activities) for at least 12 months before disposal (24 months in some cases) and immediately after the disposal. When an election has been made to exclude the profits of PEs (see “Basis,” above), the exclusion also may apply to gains and losses of certain capital assets of the PE. A nonresident company generally is not subject to tax on its capital gains unless the asset is held through a UK PE or, in certain cases, where UK residential property is owned.
Holding company regime
See “Participation exemption,” above.
Other taxes on corporations
Real property tax
The national nondomestic rate is payable by occupiers of business premises. Local authorities collect the tax by charging a uniform business rate, which is deductible in computing income subject to corporation tax. Council tax applies to the occupation of domestic property.
Employers are required to make earnings-related social security contributions, together with employee payroll deductions (see “Other taxes on individuals” below).
The ATED is an annual tax charge that applies where companies and certain other entities own UK residential property valued at more than GBP 1 million (GBP 500,000 as from 1 April 2016), regardless of the residence of the entity owning the property. The amount of ATED payable depends on the property value band in which the property is classified. Relief from ATED is available where, broadly, the property is used for business purposes and is not occupied by a person connected with the company or other entity that owns the property.
See "Stamp duty” above.
Stamp duty at 0.5% applies on the transfer of UK shares and is payable by the transferee.
Compliance for corporations
All companies file separate tax returns. However, losses may be “group relieved” between UK group companies (broadly, where one is a 75% subsidiary of another or both are 75% subsidiaries of the same corporate parent in terms of share ownership, rights to income and rights on a winding up, taking account of direct and indirect holdings). There are other group rules that apply to capital gains allowing, for example, the intragroup transfer of assets at no gain/no loss for tax purposes or the transfer of gains/losses between group members.
Companies are liable to a fixed penalty of GBP 100 for failure to file a tax return by the due date, plus an additional GBP 100 if the return is not submitted within three months of the due date. Further penalties may apply to returns filed at least six months late. Tax-geared penalties can be sought for matters such as tax returns that are carelessly or deliberately incorrect. Interest is paid on late paid tax.
UK tax legislation includes a number of anti-avoidance provisions for which advance statutory clearance may be sought. Also, under a nonstatutory clearance procedure, the UK tax authorities’ view of the tax consequences of specific transactions can be sought, on a named basis, with full disclosure, where there is both commercial significance and material uncertainty.
The tax year is the shorter of 12 months or the period for which the accounts are prepared.
The UK operates a self-assessment regime. Large companies pay tax in quarterly installments starting in month seven of their financial year (as from 1 April 2017, the first quarterly installment will be due in month three of the financial year). The tax return is due to be filed within 12 months of the period end. Electronic filing is mandatory for all company tax returns.
Other taxation in Edinburgh
Value added tax
Filing and payment
VAT returns generally are due on a quarterly basis (taxable persons are allocated one of three VAT return periods). A taxable person also may be allowed to complete returns on a monthly basis.
The standard VAT rate is 20%, with a reduced rate of 5% for certain items. There also are some specific zero-rated reliefs and exemptions.
VAT applies to most sales of goods, the provision of services and imports.
Registration is compulsory for businesses whose taxable supplies exceed GBP 82,000 (for 2015/16) in a given year or where a business expects that its taxable supplies will exceed this threshold within the next 30 days. Voluntary registration is possible for businesses making taxable supplies below this threshold. Deregistration is possible if taxable supplies fall below GBP 80,000 (for 2015/16). If a business does not have a place of business in the UK, the registration threshold does not apply. The registration date will be the earlier of the date the business makes taxable supplies in the UK or the date the business expects it will make taxable supplies in the next 30 days.
There are many specific anti-avoidance rules.
Comprehensive transfer pricing provisions apply to transactions with both domestic and foreign companies. The UK transfer pricing rules follow OECD principles. This includes a requirement to prepare documentation to demonstrate compliance with the arm’s length standard. Advance pricing agreements are possible in certain situations.
Certain tax arrangements that result in a UK tax advantage and fall within prescribed hallmarks must be disclosed to the UK tax authorities by, for example, a promoter and the user must note the use of such arrangements on the tax return. Separately, certain transactions valued at more than GBP 100 million must be reported to the UK tax authorities within six months of the transaction; these include, for example, the issue of shares or debentures by, or the transfer or permitting the transfer of shares or debentures of, a foreign subsidiary of a UK company. There is a list of excluded transactions that do not need to be reported.
Controlled foreign companies
CFC provisions are applicable where, broadly, a UK company has a direct or indirect interest of at least 25% in a nonresident company that is controlled by UK residents. The regime operates on an income stream basis. There is a “gateway” test and a number of provisions that may apply to exempt a company from the rules. Where the CFC rules do apply, the relevant profits of the CFC are computed as though it were UK resident and its UK shareholder is subject to tax accordingly. In
The arm's length principle applies. There are no safe harbor provisions. Advance thin capitalization agreements are available. (See “Taxable income,” above, for debt cap rules.)
Accounting principles/financial statements
UK GAAP/IAS. Financial statements must be filed annually.
Principal business entities
These are the public and private limited liability company, limited liability partnership, limited partnership, partnership, real estate investment trust (REIT) and branch of a foreign corporation.
There typically is no withholding tax on dividends paid by UK companies under domestic law, although a 20% withholding tax generally applies to distributions paid by a REIT from its tax- exempt rental profits (subject to relief under a tax treaty).
Interest paid to a nonresident is subject to 20% withholding tax, unless the rate is reduced under a tax treaty or the interest is exempt under the EU interest and royalties directive. A reduction of the withholding tax rate under a tax treaty is not automatic; advance clearance must be granted by the UK tax authorities.
Royalties paid to a nonresident are subject to 20% withholding tax, unless the rate is reduced under a tax treaty or the royalties are exempt under the EU interest and royalties directive. Advance clearance is not required to apply a reduced treaty rate.
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