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The main forms of legal entities in the United Kingdom are Private Limited Company (LTD) and Companies Limited by Guarantee. There are also 3 other alternatives for legal forms of business (Sole trader, Partnership and Limited Liability Partnership), but each has different tax and liability implications for owners and shareholders.
The following legal forms of legal entities exist in the United Kingdom:
The most common form of business in the United Kingdom is a Private Limited Company by Shares. An LTD cannot be created without at least one shareholder. Additionally, it should also have at least one director, who may be the same as the shareholder.
The initial share capital is usually less that GBP 100, and there is no minimum capital requirement (other than the requirement that at least one share be issued upon incorporation). Small and medium-sized private companies have the option of submitting modified (i.e., simplified) accounts at Companies House, rather than full accounts.
Companies Limited by Guarantee require at least one guarantor and a ‘guaranteed amount’.
Guarantors can be company members who play an important role in the company by controlling the organization and making critical decisions. They typically do not take profit from the company; instead, the funds are retained by the company or are put to other purposes.
Guarantors make a promise of an agreed amount of money to the company if it fails to pay its debts. This is referred to as a ‘guaranteed amount’. The full amount of their guarantee must be paid to the company.
This payment covers guarantors for situations such as the company being closed down. The guaranteed amount is not linked to how much the company is worth – you choose how much they pay.
In the United Kingdom, there are 3 basic business structure types, and each has different tax and liability implications for owners and shareholders:
If you’re a sole trader, you are an individual that is self-employed and runs your own company. All business profits are yours to keep after taxes have been paid on them. You’re fully responsible for any losses your company makes. You must also stick to certain rules when operating and naming your business.
In a partnership, you and your partner (or partners) each share responsibility for your business.
This includes:
Each partner pays taxes on their share of the business’s income, which is divided between them. However, a partner does not have to be an actual person. An example of a ‘legal person’ that can also be a partner is a limited company.
A Limited Liability Partnership (LLP) can be set up (or incorporated) to manage a business with 2 or more members. A member can be a person or a company, known as a ‘corporate member’. As in an ‘ordinary’ business partnership, each member pays taxes on their share of the profits but is not personally accountable for any debts that the company is unable to pay.
The most common legal form in use for running a business is the Limited Company. Companies are ‘incorporated’ to create an organisation with a separate legal personality. This indicates that the organisation is able to run business and enter into contracts under its own name. When registering under the Companies Act 2006, a company must have two constitutional documents:
The Memorandum, which outlines the fact that the original members (subscribers) desire to establish a corporation and consent to become its members. The Memorandum cannot be amended; and
and Articles of Association, also known as the Articles, which serve as a kind of contract between the company and its members. The Articles establish the company’s legally binding rules, including the framework for decisions, ownership and control. According to the Companies Act 2006, a company can draw up its articles to suit the specific needs of the the same company, provided it acts within the law.
A Limited Company is owned by its members, those who made investments in the business, and as the name implies they enjoy limited liability. That means, that the company’s finances are separate from the personal finances of their owners and typically, creditors of the business may only pursue the company’s assets to settle a debt. The owners’ private property is not at risk.
There are two mechanisms for company membership:
Company Limited by Shares – almost all companies fit into this category. Members of such organisation are referred to as shareholders since each one of them owns one or more shares in the company. Shareholders’ limited liability means that they may only lose the money they have already invested or promised to invest (amounts unpaid on shares).
Members of the Company Limited by Guarantee give a guarantee to pay a set amount if the company should go into liquidation.
Online registration for a Limited Company can take as little as 24 hours.
Due to the nature of the UK Limited Company, it should have one director and one shareholder (who can be the same individual) who are both at least 16 years old and liable for all company obligations. Additionally, the company needs to have a UK registered office address. These are the basic requirements that must be met in order for a foreign resident to register a UK company.
Since an offshore company is one that is not incorporated in the United Kingdom, it is not permitted to own a UK company even though it is permitted to operate within the UK and create subsidiaries in the UK. You can separately register a company as a non-British national if you own an offshore company.
| Financial year 2020 to 2021 | Financial year 2021 to 2022 | Financial year 2022 to 2023 | Financial year 2023 to 2024 | |
| Main rate | 19% | 19% | 19% | 25% |
| Small profits rate | n/a | n/a | n/a | 19% |
| Lower threshold | n/a | n/a | n/a | GBP 50,000 |
| Upper threshold | n/a | n/a | n/a | GBP 250,000 |
Corporate Income Tax is paid on profits from doing such business as:
In the United Kingdom, the tax period is the accounting period. The deadline for tax return filing is 12 months after the end of the accounting period.
The United Kingdom possesses an extensive network of Double Taxation Treaties (DTTs). Typically, unilateral relief is available to credit overseas taxes paid on non-UK source profits against the UK tax on the same profits. While relevant treaties may occasionally extend relief, their primary function for UK companies is to limit overseas Withholding Taxes (WHTs) that would otherwise be payable on passive income.
In the UK, a complex regime allows for ‘underlying’ tax relief concerning foreign dividends, permitting the alleviation of tax suffered at lower levels, especially when dividends flow to the United Kingdom through a chain of companies. However, this relief is applicable only when the dividend in question is subject to tax, limiting its scope as most foreign dividends are tax-exempt.
Various tax incentives are provided through enhanced tax depreciation allowances, known as capital allowances. These incentives may be tied to expenditure or the size of the company incurring the expenditure.
All businesses, regardless of size, can claim a 100% AIA on the first GBP 1 million (previously GBP 200,000 before January 1, 2019) tranche per annum of qualifying capital expenditure. This allowance is now permanent at GBP 1 million, but it is restricted to a single allowance for groups of companies or associated businesses.
Expenditure of a revenue nature on R&D related to a company’s trade is wholly allowable as a tax deduction. In certain cases, enhanced relief or a credit may be available, offsetting against R&D costs in the company’s profit and loss account. Expenditure of a capital nature on R&D related to a company’s trade is also wholly allowable as a tax deduction, with 100% capital allowances available.
Significant changes were implemented for accounting periods commencing on or after April 1, 2023. Companies must now pre-notify their claims, share specific information, and adhere to new criteria, including the inclusion of cloud and data costs as qualifying expenses. Pure math research is now eligible for R&D relief, particularly benefiting those involved in data science or artificial intelligence-based R&D activities.
Further substantial changes are set to take effect for accounting periods commencing on or after April 1, 2024, including the introduction of a new merged scheme, which combines SME and RDEC schemes, and revised rules on subcontracting and overseas costs eligibility. The landscape for claiming R&D relief is evolving, with a focus on supporting businesses engaged in innovative activities.
Certain companies incurring R&D expenditure are entitled to claim R&D tax relief. To qualify as an SME, a company must meet specific criteria, including having fewer than 500 employees, an annual turnover not exceeding EUR 100 million, or an annual balance sheet total not exceeding EUR 86 million. Enhanced R&D tax relief for SMEs involves a 230% deduction for qualifying expenditure.
SMEs with a ‘surrenderable loss’ may claim an R&D tax credit, typically arising from trading losses. The cash payment is a percentage of the surrendered losses, with rates changing over time. From April 1, 2023, higher credit rates will be available for R&D-intensive SMEs, emphasizing the importance of R&D in their overall business activities.
Large companies and SMEs with funded or subsidised R&D expenditure may claim relief under RDEC. The credit, payable at a rate of 20%, is brought ‘above the line’ and reflected in the operating profits of the company, similar to a grant. A merged scheme effective from April 1, 2024, will unify incentives for SMEs and large companies, introducing new rules and rates.
The merged RDEC regime will generate a gross taxable credit of 20%, with changes in the rate at which tax is deducted from the repayable credit for loss-making companies. Overseas costs restrictions and complexities in subcontracting rules are key aspects of the merged scheme.
Companies exploiting patents may benefit from a lower effective rate of corporation tax, with a rate of 10% for the tax year 2023/24. The Nexus scheme links IP income to R&D activities, aligning with revised OECD principles.
Deductions equal to 150% of qualifying expenditure on the remediation of contaminated or derelict land are provided. Special tax reliefs exist for certain expenditures related to UK film production, high-end television, animation, video games, theatres, orchestras, and museum and gallery exhibitions.
Changes have been made to UK creative industry tax reliefs, aligning them with R&D Expenditure Credits. A new Video Games Expenditure Credit (VGEC) and audio-visual expenditure credit (AVEC) replace existing reliefs, with different credit rates for film, high-end TV, video games, animated film, and children’s TV.
These changes aim to enhance support for the creative sector, introducing new credit rates, expenditure credits, and eligibility criteria. Transitional rules are in place for existing productions, ensuring a smooth transition to the new system.
It’s crucial for companies claiming creative tax reliefs to be aware of evolving rules and compliance requirements, including the submission of an online information form alongside tax returns.
| DisclaimerPlease note that our publications have been prepared for general guidance on the matter and do not represent a customized professional advice. Furthermore, because the legislation is changing continuously, some of the information may have been modified after the publication has been released. Accace does not take any responsibility and is not liable for any potential risks or damages caused by taking actions based on the information provided herein. |
The United Kingdom does not offer tax holidays or foreign investment incentives, emphasizing the importance of the outlined tax relief programs for businesses operating within its jurisdiction.
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