The standard corporate tax rate is 25% for companies with profits exceeding GBP 250,000 (increased from 19%, effective 1 April 2023).

A small profit rate of 19% applies to companies with profits up to GBP 50,000. A marginal relief is provided for profits between GBP 50,000 and GBP 250,000 based on the number of ‘associated companies’ of fellow subsidiaries of the company, irrespective of whether they are located in the UK or outside the UK. The marginal relief can be calculated using a calculator available on the HMRC website.

A reduced optional corporate tax rate of 10% applies on income from patents (see Sec. 10.2.).

Pillar Two Global Minimum Tax

On 20 December 2021, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) released model rules called Global Anti-Base Erosion (GloBE). These rules basically provide for a co-ordinated system of taxation that is intended to reform international tax rules and ensure that large multinational enterprise (MNE) groups pay a minimum level of tax on the income arising in each of the jurisdictions where they operate.

The UK Finance Act 2023 implemented the pillar two framework in the domestic law in line with the OECD/G20 Inclusive Framework’s GloBE rules. The Act introduced a multinational Income Inclusion Rule (IIR) as well as a Qualified Domestic Minimum Top-Up Tax (QDMTT, referred to in the UK as a domestic top-up tax), both applicable for financial years beginning on or after 31 December 2023. The UK Finance Bill 2024-25 confirms the implementation of the Undertaxed Profits Rule (UTPR) for accounting periods beginning on or after 31 December 2024. The Finance Bill also provides for a UTPR safe harbor for one year (i.e., for accounting period beginning on or before 31 December 2025) if the minimum tax rate in the potentially undertaxed Ultimate Parent Entity (UPE) jurisdiction is at least 20%.

The UK GMT rules apply to members of MNE groups with annual consolidated revenues of EUR 750 million or more in at least two of the four fiscal years immediately preceding the tested fiscal year. If the effective tax rate is below the Global Minimum Tax rate (GMT) of 15% in a jurisdiction, the MNE Group is subject to a multinational or domestic top-up tax.

The multinational top-up tax applies to a UK entity that is the UPE of an MNE Group and holds (directly or indirectly) an ownership interest in an entity in a low-taxed jurisdiction. The top-up tax also applies to non-UK headquartered groups with UK members that are partially owned by third parties or where the headquartered jurisdiction does not implement the Pillar Two framework. The domestic top-up tax applies to MNE Groups, including those operating exclusively in the UK.

Excluded Entities

The following entities are excluded from the scope of application of the GMT rules:

Government entities, international organizations, non-profit organizations, and pension funds;
Investment funds and real estate investment vehicles but only when they are the UPE of an MNE Group; and
Qualifying non-profit subsidiaries, service entities, and exempt income entities.

Transitional Safe Harbor

A transitional safe harbor also applies during the transition period. Under the transitional safe harbor rules, the top-up tax is set at zero for a jurisdiction, if any one of the following three tests is met by the jurisdiction:

De-minimis test: Total revenue of less than EUR 10 million and profit or loss before income tax of less than EUR 1 million;
Simplified ETR test: The ETR is equal to or greater than 15% (in 2023 and 2024), 16% (in 2025), or 17% (in 2026); or
Routine profits test: The profit or loss before income tax is equal to or less than the substance-based income exclusion amount.

Filing of Returns

An information return is required to be furnished within 15 months (18 months for the first year of application) from the last day of the relevant fiscal year. The obligation to file the information return in the UK is waived if a constituent entity within the MNE group has filed the information return in another jurisdiction, provided there exists a competent authority agreement between the UK and that jurisdiction for the automatic exchange of information returns. In such cases, the constituent entity located in the UK must notify the tax authorities of the identity of the entity that has filed the information return;
A top-up tax return containing details of members of the group chargeable to top-up tax and the amount of top-up tax to be paid is required to be furnished within 15 months (18 months for the first year of application) from the last day of the relevant fiscal year; and
Failure to furnish the returns within the prescribed deadlines attracts certain penalties.

Payment of Taxes

Payment of top-up taxes shall be made by the last day of the 15^th month (18^th month for the first year) from the end of the relevant fiscal year.

Additional Surcharge on Banks

Effective 1 April 2023, an additional surcharge applies to banking companies at the rate of 3% on profits earned in excess of GBP 100 million. Until 1 April 2023, the surcharge applied at the rate of 8% on profits earned in excess of GBP 25 million.

Ring Fence Profits

Companies with income from oil extraction activities or oil rights in the UK and the UK Continental Shelf (ring fence profits) are subject to corporate tax at the rate of 30% for companies with profits exceeding GBP 250,000.

A small profits rate of 19% applies to companies with profits up to GBP 50,000. A marginal relief is provided for profits between GBP 50,000 and GBP 250,000 based on the number of ‘associated companies’ of fellow subsidiaries of the company, irrespective of whether they are located in the UK or outside the UK. The marginal relief can be calculated using a calculator available on the HMRC website.

A supplementary tax charge of 10% applies to adjusted ring fence profits in addition to the standard corporate tax. These activities attract 100% capital allowances on most capital expenditures and can also avail investment allowances that provide relief against the supplementary charge.

Energy Profits Levy

A new Energy Profits Levy (EPL) is introduced on the profits of oil and gas companies arising in the period between 26 May 2022 and 31 March 2030 (extended from 31 March 2028) at the rate of 38% (35% from 1 January 2023 until 31 October 2024, and 25% until 31 December 2022), with transitional provisions for accounting periods straddling these dates. The EPL applies in addition to the ring fence profits tax and the supplementary tax. However, an Energy Security Investment Mechanism (ESIM) is introduced which provides that the EPL will not apply if the six-month average oil and gas prices fall below a certain threshold for two consecutive reference periods. The threshold is calculated yearly based on the average oil and gas prices determined based on the consumer price index (CPI) for the month of December of the previous year.

A 29% investment allowance applied until 31 October 2024 to oil and gas companies, which are subject to EPL at the point of investment on qualifying expenditure. Effective 1 January 2023, an 80% investment allowance is provided for investment expenditure incurred in the de-carbonization of upstream petroleum production activities. The investment allowance is designed to encourage investment in the UK North Sea and is generated from ring fence capital (and certain operating) expenditure.

Electricity Generator Levy

A 45% charge applies from 1 January 2023 to 31 March 2028 on exceptional electricity generation receipts arising from non-fossil fuel sources to corporate groups with more than 50,000 MWh of in-scope generation per annum. It applies to wholesale receipts for electricity in excess of a benchmark price of GBP 75 per MWh. The benchmark will be adjusted in line with Consumer Price Index (CPI) from 1 April 2024. Exceptional receipts are calculated after deducting increases in generation fuel costs, and groups have an annual allowance of GBP 10 million.

An exemption is introduced until 31 March 2028 for electricity generation receipts that can be attributed to new or additional generation capacity or where substantially all of a plant in an existing station is replaced, provided the substantive decision to proceed with a project to create a new electricity generation station or expand an existing generating station is made on or after 22 November 2023. The exemption applies only if a new investment condition is met, namely that, on 21 November 2023, there is a significant likelihood of a project consisting of a qualifying new generating plant not going ahead.

The Electricity Generator Levy Manual published by HMRC can be accessed here.

Diverted Profits Tax

A Diverted Profits Tax (DPT) applies effective from 1 April 2015 on profits that have been diverted from the UK. DPT is separate from the corporate tax and is aimed at large groups (typically multinational enterprises) that use contrived arrangements to circumvent rules on permanent establishments and transfer pricing.

Note that HMRC, on 19 June 2023, released for consultation a draft which would, inter alia, amend the DPT regime. The proposed amendments include bringing the DPT under the ambit of the regular corporate tax system (instead of a standalone separate tax as is the case today) and revising the DPT application tests, notably the permanent establishment avoidance test and the economic substance test.

In general, the DPT applies in the following circumstances:

A UK company (or a permanent establishment of a foreign company in the UK) uses entities or arrangements that lack economic substance to exploit tax mismatches, either through expenditure or through diversion of income within the group; or
A UK company carries on activity in the UK in connection with the supply of goods, services, or other property by a foreign company, and such activity is designed to ensure that the foreign company does not create a permanent establishment in the UK and either the main purpose or one of the main purposes of the arrangements is to avoid UK tax or to secure a tax mismatch, such that the total tax derived from UK activities is significantly reduced. However, an exclusion applies (i.e., the DPT will not apply) if:

the total UK-related sales are less than GBP 10 million; or
the total UK-related expenses are less than GBP 1 million.

The DPT does not apply to the following entity types and arrangements:

Small and medium-sized companies (SMEs);
Arrangements where the tax mismatch arises from loan relationships; and
Transactions involving the receipt of payments by pension funds, certain investment funds, and charities.

The arrangements put in place to divert profits generally involve non-UK companies. However, the DPT may also apply in circumstances where wholly domestic structures are used if a UK tax reduction is secured. Profits that have been diverted from the UK are computed using the same principles which apply for corporate tax, including transfer pricing rules. The DPT is set at a higher rate than corporate tax to encourage businesses with arrangements within the scope of the DPT to change those arrangements and pay corporate tax on profits in line with their economic activity. The DPT rates are as follows:

The normal rate of DPT is 31% (increased from 25% effective 1 April 2023) of the diverted profits;
When taxable diverted profits are ring fence profits or notional ringfence profits in the oil sector, the DPT is charged at a rate of 55%; and
The rate of DPT is 33% on diverted profits of banking companies that would have been subject to the 3% bank surcharge (see above).

Companies are required to notify HMRC within 3 months of the end of an accounting period in which they are potentially within the scope of the DPT and do not meet the conditions for exemption. Upon receipt of such notice from a company, HMRC must issue a preliminary notice within 2 years of the end of the accounting period in which the DPT charge arose. If a company has not notified HMRC of potential chargeability, HMRC has 4 years from the end of the accounting period to issue a preliminary notice.

Dividends

Generally, most dividends and other income distributions received by UK resident companies are exempt from corporate tax, provided certain conditions are met. The exemption applies to dividends received by UK resident companies from other resident companies as well as from non-resident companies.

Capital Gains

Capital gains arising from the disposal of substantial shareholdings (10% or more) made by trading companies or trading groups in other trading companies or groups are exempt from corporate tax, provided the shares were held for at least 12 months (see Sec. 11. for details).

Capital gains arising from the disposal of chargeable assets and non-substantial shareholdings are subject to tax at the standard corporate tax rate. A limited indexation allowance is available for inflation up to 31 December 2017 on capital gains arising from the disposal of chargeable assets.

Digital Services Tax

Effective 1 April 2020, a Digital Services Tax (DST) applies on the revenues of businesses that provide a social media platform, search engines, or online marketplace to UK users. The DST applies at the rate of 2% if the worldwide revenues of the group from digital services exceed GBP 500 million and more than GBP 25 million of such revenues are derived from UK users. The first GBP 25 million derived by a group from UK users is not subject to DST.

The provision of a social media service, internet search engine, or online marketplace by a group includes the carrying on of any associated online advertising service, i.e., an online service that facilitates online advertising and derives significant benefit from its association with the social media service, search engine or online marketplace. However, for DST purposes, financial services providers are excluded from the definition of an online marketplace.

Real Estate Investment Trusts (REITs)

A Real Estate Investment Trust (REIT) is a vehicle that allows an investor to obtain broadly similar returns from their investment, as they would have, had they invested directly in property. A UK REIT must distribute 90% of its profits from the property rental business as dividends to its shareholders and withhold tax at the rate of 20% on such distributions. However, there is no withholding tax on distributions made to UK companies, pension funds, and charities.

The profits of a REIT are not taxable in the hands of the REIT itself. The profits from the property rental business and capital gains from the sale of investment properties are taxable only in the hands of the recipients of distributions from the REIT (as income from a UK property business).

Effective 6 April 2019, a UK REIT is also exempt from tax on capital gains on the sale of shares in UK property-rich assets by way of indirect disposal of property. The residual income and gains (that is, those not derived from its property rental business) of a REIT are taxed in accordance with the normal corporate tax rules.

HMRC has issued detailed guidance on the taxation of REITs, which may be accessed here.

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