UK

Market overview

Following the 2017 general election, the UK settled with a minority government after the Labour and Conservative parties failed to gain an overall majority. This added an extra twist to the political situation, just as the UK opened negotiations with the EU, generating even more uncertainty about the future direction of the country.

Yet, when the vote was called, incumbent Prime Minister Theresa May was the clear frontrunner in the polls and some even predicted a supermajority for the Conservative Party. This poll lead gradually eroded during the campaign and in the end the Conservatives were left with just enough seats to form a government, albeit with the support of the Democratic Unionist Party (DUP).

As this puts the Conservative government in a weaker position, the ruling party might be forced to postpone or even abandon proposed cuts to corporation tax. Although, the election outcome is unlikely to sway the UK's commitment to the OECD's BEPS project. In this regard, the market has some certainty about the parameters of policy set by the international community.

The UK has moved quickly to align its TP system with the OECD's BEPS initiative, which may give companies an idea of what TP rules will look like down the road. "We're just starting to see the fruits of the increase in transparency," said Wendy Nicholls, the head of transfer pricing at Grant Thornton.

"It has been a wake-up call for some businesses to look at the consistency of the story told by the information they file," said Nicholls. "It has been no bad thing to have to stand back and think about where the real value drivers are, rather than charging off producing voluminous reports that aren't really informative."

What is less certain are the fine details of domestic policy, such as what the rates of tax levied will be after the Brexit negotiations are concluded. A change in government could see the cuts in corporation tax reversed. Meanwhile, the economic impact of the UK's withdrawal from the European Union will be immense, particularly on trade relations. As a result, many businesses are considering their options.

The UK could face competition from Ireland and the Netherlands, especially if companies start to view the country as unreliable for business. On the other hand, there are few signs of a large-scale shift in investment so far.

"A lot of businesses are putting contingency plans in place and trying to get over the uncertainty," said Nicholls.

"This most often involves reviewing contracts, or seeking a foot in both camps rather than a wholesale decamping of operations," said Nicholls. "UK headquartered businesses are setting up new offices in the EU, and EU businesses in the UK. The UK has huge advantages for international business, not just for tax but also commercially and in the innovation arena, and will continue to do so for some time to come."

It's possible that the UK may choose to follow some of the same principles on transfer pricing as laid out by EU directives. In theory, the UK could also drop the measures it sees as unnecessary restraints on the market. These factors could determine whether the traffic of companies and financial assets heads towards or away from the UK.

However, it is also possible that the EU may find it easier to pursue fiscal integration once the UK has withdrawn. In the past, the UK has used its clout to obstruct EU initiatives to rein in member states with lower tax regimes. This could mean greater tax harmonisation among EU member states in the long run.


Tax authorities

Corporation Tax Services, HM Revenue and Customs
100 Parliament St, Westminster, London SW1A 2BQ
Tel: +44 (0)870 218 3803
Website: www.hmrc.gov.uk


Tax rates at a glance

(As of July 2017)

Corporate income tax 20% (a)(b)(c)
Capital gains tax 20% (d)
Branch tax rate 20/19%
 
Withholding tax
Dividends n.a.
Interest 20% (e)(f)
Royalties 20% (e)
Branch remittance tax n.a.
 
Net operating losses (years)
Carryback 1
Carryforward Unlimited

  1. The rate of corporation tax is 20% for both large and small companies. Effective from April 1 2017, the rate of corporation tax will decrease to 19%, and will decrease by a further 1% to 18%, effective from April 1 2020. The main rate of corporation tax for ring-fence profits (that is, profits from oil extraction and oil rights in the United Kingdom and the UK continental shelf) is 30% (small profits rate of 19%). The rates for ring-fence profits are not scheduled to change.
  2. The small profits rate of 19% for ring-fence profits applies in certain circumstances if taxable profits are below £300,000. This benefit is phased out for taxable profits from £300,000 to £1,500,000. These limits are reduced if associated companies exist.
  3. An additional 8% surcharge is levied on the profits of banks in excess of £25 million (before the offset of losses carried forward), effective from January 1 2016.
  4. Capital gains are subject to tax at the normal corporation tax rate.
  5. This tax applies to payments to nonresidents and non-corporate residents.
  6. A 45% rate applies to compound interest received from the UK tax authorities in certain cases

Source: EY and Deloitte