The UK’s tax system is a complex and dynamic beast: it’s been criticised, copied, deconstructed and adapted over the years to try to ensure companies pay their fair share of tax contributions into the Exchequer, as well as encouraging them to employ staff, invest in their ideas and keep their activities in the UK.
It is one of the more efficient tax collection systems in the world, and it has some basic founding principles that every business should know before they set up and begin operating. This is not an exhaustive list but it covers the key business tax schemes and obligations.
1. Corporation tax
Once you begin running a business in the UK, you will be subject to corporation tax on profits. Those profits will include those derived from income as well as from capital transactions such as when you’re selling an asset – such as a business, property, shares or business goodwill. Under UK tax law, any increase in the value of the asset since you bought it represents a capital gain. It is only the profit or capital gain that is taxed, not the total amount of money you receive from the sale.
It has been confirmed by the Chancellor that the rate of corporation tax will be 25% with effect from 1 April 2023.
2. Patent box
This is an important tax scheme for small and growing businesses that are keen to invest in new innovative products and services. Simply put, the patent box allows eligible companies to apply a reduced rate of Corporation Tax to revenue generated from their patents. Under the current rules, the Patent Box reduces Corporation Tax on profits from patented inventions to an effective rate of 10%.
To be eligible to use the Patent Box, you must own either qualifying patents or exclusive licenses for the rights to those patents. To be clear, this doesn’t mean you must own the patents to qualify for the scheme – many patent holders license their technology to then pass on to other parties, for them to develop – but your company must have rights to develop and exploit rights in the patented invention; as well as have rights to defend the patented invention, should the terms of the patent be infringed; and finally you must have exclusive rights in at least one country
3. Payment of dividends
One of the most popular ways to draw money out of your company is through declaring a dividend, usually done through the board of directors. Those dividends must be paid out of accumulated realised profits, and any losses have to be made good before dividends can be paid. It’s important to understand that a dividend paid by a company must come from post-tax profits.
4. Taxation for employers
As soon as your company employs any individuals it should inform HMRC and establish a payroll system. Hopefully, as your company grows you will begin to take on employees. If you do, there are a variety of ways to employ them but the main tax payment regimes for permanent employees is Pay as You Earn (PAYE). PAYE requires you to deduct income tax from all payments of salary made to those individuals.
The other key employment tax is National Insurance Contributions (“NICs”) which are payable both by the employee and the employer. The employee’s contribution is deducted, by the employer, from their salary. Meanwhile, the employer’s contribution is an additional cost to the business. Currently an employee’s NIC is charged at a rate depending on level of earnings, employers’ NICs are charged at the rate of the gross salary paid to the employee.
5. VAT – Value Added Tax
Finally, you will need to work out whether you need to be VAT registered. VAT is an amount charged on most goods and services that are purchased in the UK and equivalent in Europe. It is very similar to GST (Goods and Sales Tax), but not the same.
A business registered for VAT will charge it on to other business and consumers in the UK. The good thing is that VAT registered businesses are able to recharge the amount of VAT that has been charged to them. The negative is that non-vat registered business and consumers are not able to claim back the VAT. Effectively it is a “sale of goods” tax to consumers. We have a great video that explaining how to become VAT registered in the UK.