Corporation tax for a foreign-owned UK company

A UK-incorporated company is resident in the UK for tax and pays corporation tax on its worldwide profits. The main rate is 25%. Profits of £50,000 or less are taxed at 19%, and profits between £50,000 and £250,000 get marginal relief so the rate climbs from 19% to 25% across that band.

The associated companies rule

Those thresholds are divided by the number of associated companies the company has, counting companies anywhere in the world under common control. A subsidiary whose parent has four other companies has five associated companies, so its small-profits limit is £10,000 and its upper limit £50,000. Most subsidiaries of established overseas groups pay 25% from the first pound of profit, and the company's first-year forecast should assume that. The same division applies to the £1.5 million profit level above which corporation tax is paid in quarterly instalments during the year rather than nine months after it. A subsidiary with £400,000 of profit and three sister companies is an instalment payer.

Registration and deadlines

• HMRC must be told the company has started to trade within three months. We do this at set-up and the tax reference comes to the registered office.
• Corporation tax is paid nine months and one day after the end of the accounting period, unless the company is large enough to pay by instalments. Where it is, four instalments fall due at six months and thirteen days after the start of the accounting period, then at three-month intervals, with the last one three months and fourteen days after the period ends. Two of the four are therefore paid before the year has finished, which is a cashflow point better known a year ahead than a fortnight ahead.
• The return, the computation and the accounts in the required digital format are filed within twelve months of the period end.
• The first accounting period can run up to eighteen months but a tax return covers a maximum of twelve, so a long first period means two returns.

What reduces the bill

• Intercompany charges. Management fees, licence fees and interest paid to the parent are deductible if they are at arm's length and documented. See transfer pricing and intercompany. Undocumented charges are the first thing HMRC disallows.
• Research and development. Since April 2024 a single scheme gives a taxable credit worth 20% of qualifying spend to the company doing the R&D. Work subcontracted overseas mostly no longer qualifies, so where the R&D happens matters to whether the UK subsidiary can claim.
• Capital allowances. Plant and machinery bought by the subsidiary can usually be deducted in full in the year of purchase.
• Patent box. Profits from patented inventions can be taxed at 10% where the subsidiary holds or exclusively licenses the patent.
• Losses. Start-up losses carry forward against later profits, and can be surrendered to other UK companies in the group.

Residence and where the company is managed

Incorporation in the UK makes the company UK resident. If in practice every decision is taken by the board abroad, the other country's rules and the treaty between the two countries can make the company resident there instead, which creates a second tax return and a dispute. We set the subsidiary up with its own board decisions minuted and kept, so its UK residence is clear on paper and in fact.