Invest in the UK – Top 10 considerations. A guide to succeed in the UK

Top 10 considerations A guide to succeed in the UK

1.     Choose a trusted UK business advisor

Researching the UK and European market opportunities can be a minefield. In order to make sure  you are getting the most appropriate advice, you need to talk to the right people.

Ask yourself if they are a UK national or someone with experience of working in or with the UK? Do they understand the UK market? Are they able to advise on general business matters, as well as employment contracts, culture and tax.

So often these choices are predicated on an ad hoc basis, by talking to someone who knows someone who might help. Sometimes no help is requested, nor thought about. Yet key to a smooth entry into the UK, and ongoing success could well stem from having someone independent to help advise on a variety of aspects from a local perspective.

Doing business in the UK is a whole different challenge compared to doing business in your home country. The best way to succeed is to harness the local knowledge and experience necessary to guide you to success by avoiding pitfalls.

2.     The right market place

Of course it is – or else you wouldn’t be doing it. However, it is important to decide if you are targeting just one market (the UK) or using it as a gateway to Europe and, possibly, the wider EMEA market. For example, a company from Brazil may choose to set up in Portugal, or one from Quebec may favour France. The language and business culture factors in these cases may seem perfectly logical, but offsetting those decisions could be the difficulties of setting up in those countries, combined with non-flexible employment legislation.

Points in favour of the UK are the universal business and science language of English and the ease of doing business with the UK ranked fourth in the world (World Bank Doing Business 2011; www.doingbusiness.org).

Once successfully established in the UK then it’s time to look at forming branches or subsidiaries in other European Countries.

3.     The right business model

Many companies decide to invest overseas when they have established an export trade and a customer base. So the first step could be to use a British agent and /or distributor if you are selling products or services, depending upon whether sales will be as the principal selling direct to the customer, or as agent for the parent company.

If you decide to start in the UK with a marketing facility, finding someone who can generate leads and, can test the UK market and even facilitate sales before you reach the UK would be useful.

Simple enough criteria, but you also need to consider the tax implications when making the decision. The tax treatment in the UK books could result in a full profit and loss recognition (by buying and selling at arms length) through to a cost plus basis.

4.     Choose the best location when investing in the UK

The needs of your staff and your business model are the main drivers on this decision.

Your first hire may be key initially and a business could be built around that person, which can dictate the location. Using a managed office service, or a virtual office, could be useful until such time as the business becomes established.

When moving from a one person operation to a team environment then the travelling needs of the team as whole, and the location of your customers becomes important.

When it’s time for the company to expand you will want to take advantage of the available skills and synergy within your industry sector. The UK has a range of clusters that can provide these in world-recognised locations. For example, hi-tech in the Thames Valley; financial services in the City of London; pharma in Cambridge; green energy in the south-west; and low carbon in north-east England.

5.     The ideal business entity

For overseas companies the main choices are between a UK Subsidiary or a UK Branch.

A Subsidiary is a company in its own right and requires the establishment of a UK registered company. Most foreign companies set up a ‘private limited company’ that becomes a subsidiary of the foreign parent company. A company can be registered within a few days, if standard documentation is used. The subsidiary can be an immigration sponsor enabling it to obtain work permits meaning that key personnel can be sent from the home country to work in the UK on a regular basis. It will file its own accounts, although the content depends on the size of the group. Those accounts must be audited by a UK firm of accountants.

It is also possible to have a Limited company that is owned by an individual(s) not located within the UK, as an alternative to a subsidiary.

A Branch is an extension of its parent company, effectively an overseas company trading in the UK. Contracts are between the overseas company and its UK customers, employees, etc. Such contracts are subject to overseas law, and may be less popular in the UK. A condition of being registered as a Branch is that the Branch must file in the UK its immediate parent company’s accounts, including full profit and loss account. This is often unpopular with privately owned overseas corporations that do not have to publish their accounts in their home country.

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It is also possible to trade as an LLC – a partnership with Limited Liability – which requires a formal partnership agreement. An LLC is mainly used by firms of lawyers and accountants where the membership regularly changes. It may also be appropriate in certain circumstances, when its main use is to save the LLC paying Employers Social Security on the drawings (profit) attributable to the partners. Because the profits are subject to UK tax on the owner, LLP’s are not normal for ownership from overseas.

6.     UK Taxes – an overview

Taxation matters are dealt with by Her Majesty’s Revenue & Customs (HMRC). There are thousands of pages of tax legislation, but no general anti-avoidance rules. There is generally no system of prior clearance regarding the tax treatment of a particular event or procedure, although there are telephone help lines that can provide verbal advice. However, unless given in writing the advice may not actually be honoured by them! The normal procedure is that tax returns are submitted, and are then subject to checks.

There are a large number of different taxes in the UK, but this note concentrates on the three main ones that a UK business is exposed to.

Corporation Tax

Levied on the taxable profits of a business (for a Limited Company or Branch).
Rates vary between 20% and 28% (marginal rates are higher).
The lower rate would apply to a small company with taxable profits up to £300,000.
The higher rate would apply to a company with taxable profits in excess of £1,500,000. These profit limits are reduced proportionally by the number of associated companies in a group, such that a larger group could easily be paying tax at 28% on a relatively low UK profit.
Taxable profits are calculated after adding back disallowable costs such as depreciation and most entertaining, but after allowing for capital allowances on wasting asset purchases (such as machinery and computers).
The total tax has to be paid nine months after the year end, with the tax return itself being due 12 months after the year end. Larger companies may have to pay the tax in advance by quarterly instalments.

Value Added Tax (VAT)

VAT is charged on sales (known as outputs) and currently stands at 20%. This is not the same as a sales tax.

When dealing with businesses, they would expect VAT to be added to prices. However, unlike a sales tax, the VAT incurred on purchases (input VAT) can generally be recovered by offsetting those amounts. The net amount is then paid over to HMRC, usually on a quarterly basis. Most businesses generally can recover the VAT from HMRC in full, although there are some exceptions such as banks and insurance companies.

For businesses a reverse charge must be made in the accounts and VAT returns in respect of goods and services being received from abroad. This takes into account recent changes that have been introduced as a result of carousel fraud, which involved cross-border transactions of high-value items and incomplete payments.

When dealing with the public, VAT has to be included in the price, unless your terms of trade (which could be on your website for on-line sales) state that VAT will be added.

Employers National Insurance (NI) [social security] This is effectively a payroll tax.

People in the UK have to pay various taxes – mainly income tax – on their earnings from employment and other sources of income. Current rates of income tax start at 20% (10% on savings) and go up to 50% (more on a marginal basis). Employees also have to pay NI at up to 11% (there are allowances to mitigate this effect and caps).

The rate of Employers NI is rising from April 2011 to 13.8%, and without limit. UK employers must calculate and pay the taxes and NI on a monthly basis; this is known as the PAYE scheme (Pay As You Earn).

Some employers prefer to use self-employed people, often operating through their own one-man band Limited companies, to save employers NI. This is open to challenge by HMRC, particularly where the self-employed person does not work for other companies and is therefore considered by HMRC to really be an employee. Penalties for tax evasion are outside this general note. This is a complex area!

7.     Finding key staff

You may already have found the first hire to implement the set-up. If done through a personal network, the person may be good, although his recommendation is