The UK taxes a subsidiary pays

Corporation tax

A UK-incorporated company is UK tax resident and pays corporation tax on its worldwide profits. The main rate is 25% on profits above £250,000. Profits up to £50,000 are taxed at 19%, and marginal relief bridges the gap so the effective rate rises across the band.

The rule that decides which rate you pay. Both thresholds are divided by the number of associated companies: companies anywhere in the world under common control, including the parent and its other subsidiaries. A group with five companies has a small-profits limit of £10,000. Most subsidiaries of established overseas groups therefore pay 25% on effectively all their profit, and a first-year forecast built on 19% will be wrong.

Tax is paid nine months and one day after the accounting period ends, and the return is filed within twelve months. Companies with profits above £1.5 million, again divided across the group, pay in four instalments instead, two of which fall due before the year has finished.

What reduces it: full expensing gives a 100% deduction for most new plant and machinery with no cap; the annual investment allowance covers up to £1 million of qualifying spend, once per group; research and development relief gives a taxable credit worth 20% of qualifying expenditure to the company doing the work; and documented, arm's-length charges from the parent are deductible. Undocumented charges are not.

VAT

VAT is charged at 20% on most goods and services. Registration is compulsory once taxable turnover in any rolling twelve months exceeds £90,000, or when it is expected to exceed it within thirty days. Returns are quarterly, filed through software linked to HMRC, and payment is due one month and seven days after the quarter ends.

Three points specific to a foreign-owned subsidiary:

• The threshold applies to businesses established in the UK. A business with no UK establishment making taxable supplies here has no threshold and registers from its first sale. This is a common reason for a group to be registered late.
• Services bought from the parent are usually taxed where the customer is, so the UK subsidiary accounts for the VAT itself under the reverse charge. Nothing is paid to the parent, but the entry belongs on the return and it counts towards the registration threshold.
• Imported goods need an EORI number and should use postponed import VAT accounting, which lets the company declare and recover the VAT on the same return rather than paying it at the border and waiting for it back.

Voluntary registration before the threshold is usually worth it where the company will spend on UK costs before it sells, because the VAT on set-up, rent, software and professional fees comes back.

Payroll taxes

The company deducts income tax and employee National Insurance from every payment to an employee and reports it to HMRC on or before the day of payment, not monthly or quarterly. On top of that the company pays employer National Insurance at 15% of each employee's earnings above £5,000 a year, with no upper limit. The Employment Allowance reduces that bill by up to £10,500 a year, claimable once across all connected UK companies in a group and not at all where the only employee paid above the threshold is a director.

A workplace pension is compulsory. Eligible employees are enrolled automatically and the employer contributes at least 3% of earnings between £6,240 and £50,270, with the employee contributing enough to reach 8% in total.

Money leaving the UK

Dividends carry no UK withholding tax, to a parent in any country. It is one of the simple things about the UK.

Interest and royalties do. UK tax is deducted at 20% from payments to an overseas company unless a double taxation treaty reduces the rate. The reduction has to be claimed from HMRC before the payment, not reclaimed afterwards, and there is a passport scheme for lenders who make many UK loans. Where tax is withheld it is paid over to HMRC on a quarterly return and the parent claims credit for it at home.

Two rules that limit deductions

• Transfer pricing. Charges between connected companies must be at arm's length. Small and medium groups are currently exempt from having to prove it, tested on the worldwide group, but the arrangements still need to be documented or HMRC will disallow them.
• The corporate interest restriction. Where a group's net UK interest expense exceeds £2 million a year, deductions are capped at 30% of UK tax earnings before interest, tax, depreciation and amortisation. Below £2 million it does not apply. Separately, a subsidiary funded with excessive related-party debt can have part of that debt reclassified, which is what thin capitalisation means, and an agreement can be reached with HMRC in advance where the position is uncertain.

What the UK does not have

No state or provincial layer. No franchise tax. No sales tax on top of VAT. No withholding on dividends. No separate registration in each part of the country. One company registry and one tax authority cover the whole of Great Britain, with minor variations in Northern Ireland.