ENGLAND & WALES Law and Practice Contributed by: James Ross, Paolo Palmigiano, Debbie Cloake, Helen Farr, Debbie Heywood and Louise Popple, Winston Taylor
rent nature (“annual payments”) at a rate of 20%. There is no withholding tax on dividends, except divi - dends paid by companies within the real estate invest - ment trust regime. Withholding tax liabilities may be reduced or eliminated under the UK’s double tax trea - ties, and certain additional reliefs apply under domes - tic law with respect to withholding tax on interest. Companies with a UK establishment are obliged to register for VAT and to charge VAT on taxable sup - plies of goods and services if the value of its taxable supplies exceeds the VAT registration threshold (cur - rently GBP90,000). Non-established persons are liable to register if they make any taxable supplies in the UK. 5.3 Available Tax Credits/Incentives The UK offers an “above the line” credit for expendi - ture on research and development, which was sub - ject to significant reform with effect from 1 April 2024. The amount of the credit is 20% of the qualifying expenditure, which is itself subject to corporation tax in the hands of the recipient, subject to a cap in many cases at three times the amount of the company’s PAYE and NIC liabilities for the accounting period plus GBP20,000. The former super-deduction regime for SMEs has been retained for loss-making, R&D-intensive SMEs. This provides an enhanced 186% deduction for qual - ifying R&D expenditure, which may be surrendered in exchange for a repayable tax credit amounting to 14.5% of the surrenderable loss. Similar reliefs are available for companies in the creative sector. An elective patent box regime applies for profits from qualifying patents, resulting in an effective tax rate of The UK does not have a consolidation regime for corporation tax purposes. However, the group relief rules allow companies to surrender losses within a group. Broadly, companies are members of the same group for this purpose if one is a 75% subsidiary of the other, or both are 75% subsidiaries of a third company (which need not be a UK company). Both current and carried-forward losses arising on or after 1 April 2017 may be subject to group relief surrenders. 10% on qualifying profits. 5.4 Tax Consolidation
The transfer of capital assets (including intangible fixed assets and loan relationships) between group companies will generally be viewed for tax purposes as taking place on a no-gain/no-loss basis, although the gain that would otherwise have been taxable on the intra-group transfer may be brought back into charge by way of a “degrouping charge” if the trans - feree company leaves the group within the next six years. A company that disposes of an asset outside the group may elect for the gain to be reallocated to another group company (eg, a company that has losses it can use to offset the gain). For VAT purposes, companies may elect to register as a group where one controls the other or the two com - panies are under common control (including control by an individual or partnership). The effect of group regis - tration is that all supplies to third parties are treated for VAT purposes as made by the representative member of the group, all supplies between group members are disregarded, and all group members are jointly and severally liable for the group’s VAT liabilities. 5.5 Thin Capitalisation Rules and Other Limitations The UK polices thin capitalisation through transfer- pricing legislation. Interest expense exceeding an arm’s length amount may be disallowed for tax pur - poses. The transfer pricing legislation provides that it should be read in line with the 2022 OECD Transfer Pricing Guidelines, which include the guidance on financial transactions approved in 2020. The capacity of companies within a group to bear interest expense is generally tested on a company-by-company basis, but, to the extent that a debtor company is unable to do so, other group companies can be treated as guar - antors and, as such, may take interest deductions for such interest expense. HMRC will consider entering into advance thin-capitalisation agreements to pro - vide certainty as to a company’s interest deductibility position – these have statutory force as advance pric - ing agreements. In addition, the UK has introduced a corporate interest restriction limiting interest deductions for UK group companies to the lower of 30% of tax EBITDA and the worldwide group’s interest expense, subject to a GBP2 million de minimis. Where the worldwide group
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