UK companies can conduct cross-border trade tax-efficiently in their own right. The chief reason for this is that UK corporation rates are comparatively low.
The standard rate of UK corporation tax may change 1st April every year but it is currently 20-21%, payable on every £1 of profit when net profits equal or below £1.5 million.
However, depending on the net profits of a company in a given accounting period, lower rates of tax may apply. A nil rate of corporation tax now exists for companies whose profits in an accounting period do not exceed £10,000.
Small companies rate of tax
There is a small companies rate of tax of 20% for companies whose net profits exceed £50,000 but do not exceed £300,000. For companies whose net profits exceed £300,000 but do not exceed £1.5 million, there is also a marginal rate of tax, which has the effect of increasing the overall tax rate until the flat rate is reached at the £1.5 million profit level.
These thresholds (£10,000, £300,000 and £1.5 million) are reduced where the company in question is associated with one or more other companies (whether these companies are resident within or outside the UK) by being divided by 1 + the number of associated companies. In practice, therefore, a UK trading company with an offshore parent company will reach the corporation tax bracket when its own profits equal or exceed £750,000.
Advantages of UK trading companies in international tax planning
UK trading companies can pay dividends to offshore parent companies entirely free of UK withholding taxation.
Moreover, UK trading companies can claim relief from offshore taxation of overseas trading profits, and can often trade free of high foreign taxes in overseas countries in appropriate circumstances.
UK companies often trade as sub-contractors for offshore contractors. Personnel and consultancy fees paid from the UK company to an offshore contractor are tax deductible, and depending on where the offshore contractor is located, and the turnover and asset values of the business, the UK tax deduction may be free of transfer pricing constraints.
UK companies whose place of effective management is located in a country which has ratified a double tax treaty with the UK based on the OECD Model will be considered non-UK resident for UK tax purposes.
Treaty countries with low rates of corporation tax e.g. Cyprus, Mauritius or Malta therefore offer tax-efficient locations for the management of UK companies.
The advantage of this is that while UK resident companies are taxable in the UK on their worldwide profits, non-resident companies are subject to UK corporation tax only on the trading profits of a UK branch or agency.