Category Archives: Corporation Tax

The term permanent establishment (PE) is an important tax concept for businesses that operate across international borders. In simple terms, it determines whether a business has created a sufficient presence in another country for its profits to be taxed there. The concept is used by HMRC to determine if a non-UK resident company has created a taxable business presence in the UK.

A permanent establishment is usually a fixed place of business in a country other than where the business is based. Typical examples include an office, branch, factory or workshop. The location must be at a distinct geographical place with a degree of permanence. As a general guide, a place of business used for more than six months is more likely to be treated as permanent, although this is not a strict rule and longer periods may apply to certain activities, such as construction projects.

The rules are not based solely on how long a business operates overseas. A business that uses the same building or location may create a permanent establishment even if it works from different rooms within that building. Equally, temporary interruptions in business activities do not necessarily mean that a permanent establishment has ended.

Whether an overseas presence qualifies as a PE in the UK depends on four statutory tests, which take account of the relevant tax treaty or domestic tax rules in the jurisdiction concerned. For the purposes of the Multinational Top-up Tax (MTT) rules, a PE is treated as a separate entity from the main business.

Creating a permanent establishment can trigger overseas tax registration, reporting and tax payment obligations. If your business is expanding abroad, opening an overseas office or undertaking long-term work in another country, it is important to consider the permanent establishment rules before you start, as unexpected tax liabilities can arise even when your overseas presence appears relatively limited.

Research and Development (R&D) tax relief is designed to support companies that invest in innovation and seek to make advances in science or technology. The scheme offers businesses the ability to invest in new technologies and scientific development in exchange for generous tax reliefs. However, not every project will qualify, and businesses should carefully consider whether their activities meet HMRC’s requirements before making a claim.

Only companies’ chargeable to UK Corporation Tax can qualify for R&D relief. In addition, the company must be undertaking a project that aims to achieve an advance in a field of science or technology. 

For tax purposes, the requirements that must be met for R&D to qualify for relief include creating new processes, products or services, making appreciable improvements to existing ones and even using science and technology to duplicate existing processes in a new way. R&D activities can qualify for tax relief even if the project in question failed and both profitable and loss-making companies can benefit from making a claim. 

The advance must go beyond simply improving processes or products for the business itself and should contribute to overall knowledge or capability in the relevant field. Since April 2023, mathematical advances can also qualify as scientific advances for R&D tax purposes.

Businesses should keep clear records of the uncertainties faced, the work undertaken to resolve them, and the successes and failures encountered during the project. Once eligibility has been established, the next step is to identify the qualifying expenditure that can be included in an R&D relief claim. 

Many businesses take out “key person” insurance policies to protect against the financial impact of losing an important employee, director or other individual who is central to the success of the business. These policies may provide cover for death, critical illness, sickness, accident or injury.

Whether tax relief is available for the insurance premiums depends on the nature and purpose of the policy. HMRC guidance confirms that premiums will generally be allowable as a business expense where the sole purpose of the policy is to protect the business against a loss of the individual’s services (not a capital loss). 

For life cover, relief is normally only available for term insurance policies that provide pure risk cover with no investment element. The policy term should also not extend beyond the individual’s expected usefulness to the business.

Policies with an investment or capital element, such as whole life or endowment policies, are generally treated as capital expenditure and tax relief for premiums is usually not deductible. Similar restrictions can apply where key person policies are linked to long-term loan finance.

Where premiums qualify for tax relief, any insurance proceeds received are generally taxable as trading income. Conversely, where premiums are not deductible, receipts are often not taxed, although the treatment depends on the specific circumstances.

Separate rules may also apply where employers insure against liabilities to compensate employees or where benefits are paid directly to employees under sickness or life insurance arrangements.

Those responsible for the accounts and tax compliance of private limited companies must ensure they are fully aware of the relevant obligations and statutory deadlines.

Following the end of each financial year, a private limited company is required to prepare full annual accounts and submit a Company Tax Return. The deadline for filing the first set of accounts must be filed with Companies House within 21 months of the date of incorporation. Thereafter, annual accounts must be filed within 9 months of the end of each financial year.

Corporation Tax is payable 9 months and 1 day after the end of the relevant accounting period. As a result, the tax liability will typically fall due before the filing deadline for the Company Tax Return.

In most cases, the Company Tax Return must be submitted within 12 months of the end of the accounting period. Filing is required to be completed online in iXBRL format, using either HMRC’s own software or approved third-party software.

The Corporation Tax accounting period will generally correspond with the 12-month company financial year covered by the annual accounts.

Penalties may be imposed by both Companies House and HMRC for late filing or non-compliance, and it is therefore essential that all deadlines are carefully monitored and adhered to.

The rate of Corporation Tax payable depends on the level of a company’s taxable profits. The main rate is 25% and applies where profits exceed £250,000. At the other end of the scale, companies with profits of £50,000 or less benefit from the Small Profits Rate, which remains at 19%.

For businesses with profits between these thresholds, marginal relief applies. Rather than facing a sharp increase in tax, companies experience a gradual rise in the effective rate as profits move from £50,000 towards £250,000. This ensures a smoother transition between the lower and higher rates.

It is important to note that the £50,000 and £250,000 thresholds are not always fixed. They are reduced where a company has associated companies or where the accounting period is shorter than 12 months, which can bring more businesses into the marginal relief band.

In practice, Corporation Tax is initially calculated at the main rate of 25%, with marginal relief then deducted to arrive at the final liability. The relief is calculated using a standard fraction of 3/200.

The marginal rates help smaller companies to pay less Corporation Tax based on their profit level and circumstances.