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Basic charging provisionsThe UK has competitive corporation tax ratesof 20% for profits up to £300,000 and 24% forprofits in excess of £1,500,000 with a slidingscale for profits between £300,000 and£1,500,000 (the top rate is to reduce to 23%from 1 April 2013 and to 22% from 1 April2014), though the thresholds are yet to beconfirmed). These thresholds are reducedwhere there are a number of "associatedcompanies", including overseas companies butnot dormant companies and pure holdingcompanies. Dividends paid by a UK companyare not deductible in computing taxable profits,but dividends paid by a UK company aregenerally not subject to UK withholding taxes.The profits attributable to a UK permanentestablishment are liable to corporation tax atthe full rate of 24%, although if the overseas"parent" is resident in a country with which theUK has a relevant double tax agreement with anon-discrimination article, a lower rate may beavailable.2. Groups of companies –calculation of taxable profitsIt is not possible to artificially reduce profits ofa UK subsidiary by paying the overseas parentcompany more than the market rate for goods,management services or loans. UK tax lawcontains transfer pricing provisions whichenable the UK HM Revenue and Customs(“HMRC”) to adjust prices for tax purposes to amarket rate. These provisions can also applyto transactions between UK companies andother UK companies.The UK rules relating to group relief permitlosses made by a UK company to be set offagainst the profits arising in the sameaccounting period of another UK companywithin the same group, thereby reducing theoverall tax liability of the group. A group forthese purposes comprises a parent companyand its 75% subsidiaries (direct and indirect).The group relationship can be establishedthrough a non-UK resident parent company. AUK branch of a non-resident company mayalso take advantage of the rules relating togroup relief in certain circumstances. Recentcase law has permitted the use of group lossesfrom non-UK companies to UK companies inlimited circumstances, further advice should betaken where required.3. PAYE and NICsInsurance contributions from employees’salaries and remit this to HMRC. This systemis known as Pay As You Earn (PAYE). Suchdeductions are required in respect of salariespaid to UK employees whether or not thesalaries are paid in the UK.In addition to deducting PAYE and employeesNICs, as explained at paragraph 1.1, theCompany will also have to pay employers’NICs at 13.8% above a prescribed threshold(currently £5,564).4. Groups of companies - fundingA number of factors will determine whether theUK subsidiary should be funded with equity ora mixture of debt and equity. From a taxperspective, interest paid on debt is normallydeductible when computing taxable profits.However, where the interest payable exceedsa normal commercial rate or is paid in respectof a level of debt which would not have beenavailable from a third party lender, a deductionmay be disallowed in respect of the excessinterest or the interest payable in respect of theelement of the debt that would not have beenavailable from a third party lender. Where thedebt is provided by a non-UK Lender theremay be withholding tax implications in relationto the interest payments (see further below).Whilst HMRC generally consider the debtshould be matched by equity they havebecome more flexible on this, and although aratio of 1:1 remains their common startingpoint, they do recognise that particularcircumstances and industries can merit adifferent result.5. Capital allowancesThe UK tax system does not allow a deductionfor the depreciation of assets but there is asystem of "capital allowances" which aredeductible when calculating taxable profits.Writing down allowances are granted to tradingcompanies for capital expenditure on“qualifying items”. In particular capitalallowances are available in respect ofexpenditure upon “plant and machinery”,industrial buildings (though this is beingphased out over the next four years ) andbusiness premises renovation. The amount ofthe allowance will be dependant on the type ofasset, when the allowance is claimed and thecompany.Employers are obliged to deduct income tax atthe appropriate rate and employees’ NationalPAGE 11