Opening a company in the UK is the dream for many entrepreneurs. The reputation of the UK as a great place to do business is known around the world, which invariably attracts new business partners and clients. The flexibility of the UK tax system is also a huge advantage when choosing a country in which to operate a business.
In this article, you will discover the key tax rules for limited companies in the UK. If you're considering using a home address for business in the UK, we recommend taking a look at the services provided by The Hoxton Mix.
Limited company status and tax
When considering the different forms of doing business in the UK from a tax efficiency point of view, it's worth considering forming a limited company. There is no minimum authorised capital limit so could be as low as £1. Many businesses keep it below £1,000 to avoid paying stamp duty when selling shares. Small companies may be granted an exemption from auditing and simplified submission of financial statements. Such small companies include those that fulfil at least two of three conditions:
- annual income does not exceed £10.2 million;
- no more than 50 employees;
- the company's assets are worth no more than £5.1 million.
The main rate of corporation tax rate for enterprises with taxable profits over £250,000 is 25%. For those firms with profits of £50,000 or less, the small profits rate of 19% applies.
If a UK company owns another UK company or a company in another jurisdiction, and such company pays dividends to the main company, then under certain conditions these payments may not be subject to income tax. However, it is worth remembering that for small companies there are different rules so you should seek professional advice.
Tax reporting
Under UK law, a company must prepare and file financial statements with Companies House within 12 months of the end of the accounting period year. A tax return is also prepared and submitted to HMRC which determines the tax payable. These reports are based on the company's financial year, the end of which is determined by the last date of the month of registration of the company. In some cases, the period of a company's financial year may be changed. Failure to submit or pay any resulting tax on time can result in a fine.
If the founders of a limited company are non-UK residents, they may be exempt from paying UK tax, since the receipt of income occurs outside the UK.
Broadly speaking, if your company is based in the UK you will pay Corporation Tax on all UK and overseas profits. If your company is not based in the UK but has an office or branch in the UK, Corporation tax is only payable on profits from UK activities.
If in any doubt, you should seek specialist advice.
Registering for UK VAT
Value Added Tax must be added to the cost of all goods and services supplied within the UK. A company that produces goods or services is required to register for VAT if the value of goods or services exceeds £85,000 within 12 months. If the company's turnover does not exceed the specified amount, the company can voluntarily register for VAT. The standard VAT rate is 20%, but there are some categories of goods that are exempt from VAT or benefit from lower rates.
There are some situations where VAT registration is not required. For example:
- the company trades outside Britain and these goods are not brought into the country;
- the company's services are used by clients located outside the European Union and these services are not provided in the United Kingdom.
Once registered, VAT returns must be submitted online to HMRC every three months.
The principle of double taxation
There are several double taxation treaties in force in UK. This simplifies the exchange of tax payment data, making it more understandable and convenient. Moreover, each agreement specifies the conditions and possibilities for avoiding double taxation between countries. Any UK company can, if necessary, can use these agreements.
Limited company or sole trader?
An alternative for small businesses whose activities are carried out by one or more participants is to run the business as a self employed sole trader (a sole proprietorship). However, there are fundamental differences when doing this. A limited company is a separate legal entity; accordingly, all financial obligations of the company belong to the company. However, in sole trader businesses, the person running the business is responsible for the obligations of the business potentially putting personal property at risk.
Another key consideration when deciding whether to operate as a limited company or sole trader is that larger clients are more likely to trust businesses with limited company status.
Don't forget that for individual entrepreneurs there are no general tax benefits. Income tax is payable on all taxable income above the personal allowance of £12,570 (rates vary from 20% to 45%). For profits between £12,571 and £50,270 income tax will be 20%. For profits between £50,271 and £125,140, the rate payable is 40%. This increases to 45% on profits over £125,140.
Sole traders cannot reduce their tax payments or those related to National Insurance. In addition, they do not have the opportunity to defer tax payments by leaving profits in the company for later withdrawal. For this reason, many start ups decide to register as a limited company or switch to this form of doing business from sole trader status.
Wrapping up
The UK provides attractive conditions for doing business and favourable tax conditions. We recommend that you thoroughly study the different legal forms of doing business and paying taxes before entering the UK market. If you're considering starting a business in the UK and don't want to use your home address, we recommend turning to the Hoxton Mix, a reliable virtual office provider with several great plans.
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