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Headline Tax Advantages of Establishing a Northern Ireland (NI) Company
- A lower 12.5% rate of corporation tax is proposed for certain NI companies if certain conditions are met (this is known as the NI corporation tax regime).
- For companies not within the NI corporation tax regime, falling corporation tax rates with a main rate of 17% by 1 April 2020 (19% in each of the Financial Years (FY) 2017, 2018 and 2019).
- A 10% rate of corporation tax on certain qualifying profits from qualifying patents.
- Substantial shareholdings exemption on disposals of subsidiaries by NI holding companies.
- Tax relief for Foreign dividends.
- Generous tax reliefs for expenditure on research and development for companies of all sizes and a 10% rate of corporation tax for certain profits from qualifying patents.
- Generous corporation tax reliefs for companies in the creative sector.
- Extensive Double Tax Treaty Network.
- Generous Income and Capital gains tax incentives and reliefs for entrepreneurial and philanthropic investments.
- Maximum 20% withholding tax rate on interest/royalty payments with the potential for a 0% rate
- Industry standard transfer pricing rules
- No withholding tax on dividends
How NI Companies Are Taxed
Corporation Tax
UK Corporation Tax applies to all profits (income and gains), wherever arising of a UK/NI tax resident company. A UK/NI tax resident company can, however, irrevocably elect to exempt its foreign branches from UK corporation tax. Such branches can still fall foul of the UK's controlled foreign company legislation.
A NI branch or agency of a foreign resident company is also liable to UK Corporation Tax on profits (including gains on assets situated in the UK used for the purposes of that trade) derived from its UK/NI based activity.
Download the brochure for the following:
- Rates of Corporate Tax
- The NI corporation tax regime
- NI Tax Residency
- Taxable Profits
- Losses
- Group of companies
- Consortiums
- Anti-avoidance legislation
- Public private partnerships
- Dividends Received
- Dividends Paid
- Royalties
- Interest
- EU Interest and Royalties Directive
Tax Compliance
The UK operates a self-assessment system for the payment and filing of tax returns for companies and branches. In general, there is one corporation tax return filing requirement per accounting year with one payment of corporation tax for smaller companies and four payments of corporation tax for larger companies. Tax returns and payments for companies must be electronically filed online using iXBRL.
From 1 April 2020, companies will be expected to make quarterly returns of business information to HMRC, as part of the Making Tax Digital for business ("MTDfb") project.
For other businesses not within the charge to corporation tax, the mandation of quarterly returns under MTDfB commences in April 2018. This includes self-employed individuals/certain partners and landlords not exempt from the MTDfB provisions. At the time of writing, only businesses and landlords with turnover less than £10,000 are completely exempt from MTDfB. Businesses with a turnover below the VAT registration threshold (currently £85,000) are exempt from MTDfB until 1 April 2019.
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Tax Incentives Available for Companies
CGT exemptions on share disposals
UK corporation tax at the prevailing rate applies to gains arising on the disposal of shares. The UK operates a substantial shareholdings exemption which exempts gains arising to a UK/NI based holding company on the disposal of shareholdings in another company. The exemption applies to shareholdings of at least 10% in trading companies or trading groups held for a period of 12 months out of the previous 24 months prior to disposal, where certain conditions are met. There are no territorial limits on the shares being disposed of.
Research and development tax relief
Certain companies incurring R&D expenditure of a specific nature are entitled to claim enhanced R&D tax relief. Companies that are small or medium-sized enterprises (or part of a small or medium sized group) are entitled to an enhanced deduction totalling 230% of qualifying R&D expenditure.
The company must have incurred qualifying R&D expenditure in the accounting period. Qualifying R&D expenditure is expenditure directly contributing to the R&D activity of the company.
Where a company has a ‘surrenderable loss’ and claims SME R&D tax relief, it may claim a payable R&D tax credit. Where the R&D tax credit is claimed, the trading loss carried forward is reduced by the corresponding amount. The R&D tax credit will be paid to the company by HMRC. Currently the credit is 14.5% of the surrenderable amount.
The payable R&D tax credit is available to companies who are within the charge to UK corporation tax and is therefore available to overseas companies with branches carrying on a trade in the UK/NI.
For a company not meeting the conditions to claim relief as an SME, relief for R&D expenditure is provided instead under the R&D large company regime. From 1 April 2013, a new taxable above the line R&D expenditure credit scheme (“RDEC”) for large companies was introduced for expenditure incurred on or after that date. The RDEC was initially set at 10% but increased to 11% from 1 April 2015.
Prior to 1 April 2016, companies claiming under the large regime had a choice between either claiming enhanced relief at 130% in total or the RDEC - but not both. From 1 April 2016, a claim is only possible under the RDEC scheme.
The above-the-line RDEC facilitates, in accounting terms, the set-off of the value of the tax relief directly against R&D costs in the profit & loss account that created the relief i.e. above the line accounting. For profit making companies the RDEC discharges corporation tax that the company would have to pay. In addition, it allows companies with no corporation tax to receive an immediate benefit from carrying on R&D either through a cash payment or a reduction of tax or other duties due.
The patent box regime
The patent box regime enables companies to apply a lower 10% rate of corporation tax to profits earned after 1 April 2013 from its patented inventions and certain other innovations. The full benefit of the regime is being phased in from 1 April 2013 meaning the appropriate percentage for each financial year will need to be applied to the profits a company earns from its patented inventions. From 1 April 2017, potentially 100% of qualifying profits may attract a 10% rate of corporation tax. The regime is intended to give companies a new incentive to protect and commercialise their patents.
From 1 July 2016, when calculating qualifying profits for the 10% rate, an additional step is needed to reflect the proportion of the development activity undertaken by the company itself (the ‘nexus fraction’). The changed legislation contains grandfathering provisions; companies with existing intellectual property which is in the patent box regime for a period prior to 30 June 2016 can continue to be taxed under the original rules until 30 June 2021.
Extensive double-tax-treaty network
The UK has signed and fully ratified comprehensive double taxation agreements with 126 countries and is negotiating several new agreements. These agreements cover direct taxes, which in the case of the UK are income tax, corporation tax, inheritance tax and capital gains tax.
The UK’s double taxation agreements contain the following important mechanisms for avoiding double taxation:
• Elimination or reduction of withholding taxes;
• Reduction in territorial scope of taxation of certain forms of income and gains from taxation, in particular by reference to permanent establishments;
• Credit for taxes;
• Residence tie-breaker clauses;
• Procedures for resolution of disputes between two competing claims of tax authorities, typically in transfer pricing situations; and
• Non-discrimination provisions
Where a double taxation agreement is not in place with a particular country, domestic UK tax law provides for unilateral relief against double taxation in respect of certain types of income.
As at April 2016, the UK had a current comprehensive double taxation treaty with the following territories. See the brochure for details of countries with which Britain has double taxation agreements.
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How Individuals are Taxed
Income tax
In the UK/NI, an individual is generally assessed for income tax for the tax year starting on 6 April in one year and ending on 5 April in the following year on income in excess of a personal allowance. For the 2017-2018 tax year, the basic personal allowance is £11,500. The UK personal allowance reduces at the rate of £1 for every £2 of income over £100,000.
From 6 April 2016, individuals are entitled to a £5,000 tax free dividend allowance (this is due to fall to £2,000 from 6 April 2018). Also from 6 April 2016, a tax free personal savings allowance of £1,000 is available to basic rate taxpayers with higher rate taxpayers entitled to £500. From 6 April 2017, two new tax free allowances of £1,000 each are being introduced for trading and property income.
Income tax is payable on UK/NI source income and on income for services performed in the UK/NI. The most common form of income tax is PAYE (“Pay As you Earn”) which is salary withholding tax deducted by the employer from the employee’s pay.
Income tax is operated under a progressive tax system which applies tax at rates of 0%, (savings income only up to a defined limit), 20%, 40% and 45% depending on income levels.
UK/NI tax residency for individuals
The system for taxing individuals moving to the UK is generally unique. An individual’s liability to UK tax depends on if they are UK tax resident. Previously the rules regarding UK tax residence were very complex, however from 6 April 2013 a Statutory Residence Test was introduced.
If a person is tax resident in the UK, then they will be subject to UK tax on the arising basis on their worldwide income and gains, irrespective of where these are situated. Individuals not domiciled in the UK may be taxed differently, effectively limiting their UK tax liability to their UK source income and gains and foreign source income and gains which they bring to or use in the UK (‘remittance basis’). The remittance basis may be automatically available to a non-UK domiciled individual or it may be claimed. A claim for the remittance basis must be made for each tax year, where relevant.
From 6 April 2017, a new concept of ‘deemed’ UK domicile applies to any non-UK domiciled individual who has been tax resident in the UK in at least 15 of the past 20 tax years. Such individuals become ‘deemed’ UK domiciled for income tax, CGT and inheritance tax purposes. This means that the remittance basis for foreign income and gains is not available for future offshore income and gains arising after the date they become ‘deemed’ UK domiciled.
Individuals not domiciled in the UK and not ‘deemed’ UK domiciled but who are long term resident are liable to pay the remittance basis charge for each tax year they elect into the remittance basis. The remittance basis charge is payable in addition to their UK tax liability for the relevant tax year.
From 6 April 2012 remittance basis users who bring their foreign income and gains to the UK and invest it in a target company may be able to claim Business Investment Relief.
Social security
Employed persons are compulsorily insured under a state-administered scheme of National Insurance Contributions (“NICs”). Contributions are made by both the employee and the employer on all employment income including certain benefits in kind. The NIC contribution for employers is 13.8% of the salary payments (above the secondary threshold) and is deductible in the calculation of taxable profits. Employers are generally entitled to a £3,000 employment allowance each tax year which reduces their employer’s NICs bill. In addition, no employer’s NICs are payable for employees under the age of 21 or apprentices under the age of 25.
The employee also pays NIC at a rate of 12% (on earnings between the primary threshold and the upper earnings limit) with a further 2% payable on amounts in excess of the upper earnings limit.
Under the Statutory Residence Test, an individual will not be UK resident if they meet any of the automatic overseas tests.
These are as follows:-
- Resident in the UK in one or more of the previous 3 tax years and spends fewer than 16 days the UK in current tax year;
- Non-resident in all of the previous three tax years and spends fewer than 46 days the UK in current tax year;
- Works full-time overseas and spends fewer than 91 days in the UK and the number of days in the tax year working for more than three hours in the UK is less than 31;
- Dies in a tax year, was non-resident in the previous two tax years and spent fewer than 46 days the UK in current tax year.
If any individual does not meet one of the automatic overseas tests, they are then required to examine the automatic UK tests which are as follows:-
Residency under the sufficient ties test depends upon whether individual is an arriver (not UK resident in any of the three preceding tax years) or a leaver (resident in the UK for one or more of the three preceding tax years). Whether or not the individual is UK resident will depend upon the number of UK ties that the individual has and the number of days spent in the UK.
If an individual is employed by a company outside the UK/NI and is sent to work in a UK/NI business, the UK/NI business must act as their 'host employer' and deduct NICs in the normal way. However, there are exceptions that apply to certain types of employee including employees sent to work in a business by their employer in a country in the EEA and employees sent from countries with which the UK has a Reciprocal Agreement or Double Contribution Convention.
If an employee comes from a country outside the EEA and without a Reciprocal Agreement or Double Contributions Convention and if certain conditions apply, then no NICs are due for the first 52 weeks after the employee arrives in the UK. There are also 52 week exceptions for certain students and apprentices. Once the initial period of 52 weeks finishes, NICs should be deducted in the normal way.
Effective tax rates for income tax and NIC can be summarised as follows in 2017/18:
• A single individual earning a salary of £30,000 will pay an effective rate of 21% in tax and national insurance
• A single individual earning a salary of £55,000 will pay an effective rate of 28% in tax and national insurance
• A single individual earning a salary of £200,000 will pay an effective rate of 42% in tax and national insurance
Taxation of foreign workers in NI
A foreign executive coming to work in the UK/NI will be tax resident in the UK/NI if he/she meets one of the automatic UK tests or the sufficient ties test for arrivers.
A foreign executive who is resident in the UK/NI is usually taxed on all earnings on an arising basis wherever the duties are carried out. However if he/she is non-UK domiciled (and not ‘deemed’ UK domiciled under the new rule from 6 April 2017) then overseas earnings are only taxable if remitted to the UK/NI, if the conditions for overseas workday relief are met.
An individual who is not resident is taxed on his/her general earnings in respect of UK duties only. There is no UK income tax on foreign earnings.
Usually, UK tax is payable on employments exercised in the UK/NI even where the employment is under a foreign contact of employment. However, double taxation relief may be available if the individual is UK resident where income is taxed in two countries via either unilateral relief, credit relief or expenses/deduction relief.
For more on all of this download the brochure.
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