Businesses entering the UK: getting it right, out of the box

Overseas companies coming to the UK find an environment conducive to business, with a stable regulatory environment and business-friendly policies. However, as with every new market entry, it is important to get the right advice about how to establish a business in the UK.

At Osborne Clarke, we advise many overseas clients coming to the UK for the first time. Whilst advice will likely be needed on a range of UK legal issues over time, from employment and real estate to data protection and IP, there are two principal considerations – registration requirements and tax – which will drive the initial choice of business structure. In most situations, the choice is between:

• operating in the UK through an “establishment” or “branch”, where the overseas company itself does business in the UK; or 
• establishing a UK subsidiary of the overseas parent to undertake business activities in the UK, which usually takes the form of a private limited company.

Companies House registration and filing requirements

Establishment/branch

Overseas companies with a “UK establishment” are required to register at the UK company registry (known as Companies House) within a month of opening the establishment. Registration brings with it ongoing filing obligations, including the obligation to file the overseas company’s accounts annually (although there are fairly broad exemptions to this general principle). This can be unattractive for overseas clients who are not required to publicly file their accounts domestically, and for many clients (especially those coming from the US) can mean that the subsidiary route is preferable.

The test of what constitutes an “establishment” is that there must be a “branch” or “place of business” – a “branch” is not defined for these purposes, but “place of business” is. A place of business is “anywhere that a company regularly conducts business or premises that indicate that a company may be contacted there” – so some sort of physical presence in terms of an office, business address or similar. This can mean that, in some cases, limited UK operations can be structured in a way which means that there is no obligation to register with Companies House.

UK subsidiary

UK subsidiaries are not required to file the accounts of their overseas parent at Companies House, but are required to file individual accounts on an annual basis. There are additional ongoing filing requirements which are largely administrative in nature, principally specifying basic corporate information such as the directors and shareholders of the subsidiary. The company is also required to maintain a registered office in the UK, although this can be a service address. The identity of the ultimate controllers of a UK company will be a matter of public record under new legislation currently under consideration by the UK Government – we have a microsite dedicated to this development here.

Tax

Analysis will be required as to whether it is preferable, from a tax perspective, to incorporate a UK subsidiary or operate through a non-incorporated establishment. The decision will be affected by a variety of factors, including the location of the parent company, the existence of relevant tax treaties and the anticipated profit (or loss) profile of UK operations.

Establishment/branch

For tax purposes, the test of what constitutes a taxable establishment is slightly different to the Companies House registration test, although in most circumstances they will produce a similar result. Very broadly, a taxable “permanent establishment” can be created if it has a fixed place of business in the UK through which the business of the company is wholly or mainly carried on. A permanent establishment can also come in to existence if an agent in the UK acts on behalf of the company and that agent has (and habitually exercises) authority to do business on behalf of the company in the UK.

If a permanent establishment is created, the overseas company would become liable to UK corporation tax (at 20%) on its UK activities. If UK activities are merely preparatory or auxiliary or if a single independent agent is in the UK, it may be possible to fall outside the definition of permanent establishment.

However, the UK is bringing in a new tax, the “Diverted Profits Tax” or “DPT”, which seeks to ensure that larger companies pay appropriate levels of tax on profits from their UK operations. We look at the DPT in more detail here. As the details of the DPT have not been fully worked out, the scope and impact of the tax may change prior to implementation. Looking further ahead, we also expect the current reforms being worked out by the OECD on the taxation of global corporates to impact on the UK’s tax regime for overseas companies.

UK subsidiary

UK resident companies are liable to UK corporation tax on their worldwide income, profits and gains. Companies are generally treated as resident in the UK for tax purposes if they are managed and controlled in the UK or they are incorporated in the UK.

In practice, it can often be simpler to establish a UK subsidiary to enable UK operations to be clearly delineated from the group’s wider overseas operations, creating greater certainty as to the group’s UK tax exposure through documented intra-group arrangements. However, there are a number of tax pros and cons between setting up a subsidiary and operating through a permanent establishment and so tax advice will be needed in each case. 

Setting up a private limited company and Osborne Clarke’s “UK in a Box” service

Setting up a private limited company in the UK is generally straightforward. Private companies can be set up with a single shareholder and have no minimum capital requirements (often being set up with a nominal capital of £1). In terms of management, private companies can be set up with a single director (who need not be UK resident or a UK national), although at least one director of the company must be a natural person.

Establishing a limited company subsidiary also means the parent has the benefit of limited liability in respect of its UK operations, although in practice parent company guarantees will often be required (for example, for the subsidiary’s liability under office leases).

Osborne Clarke offers a comprehensive company secretarial service, including incorporation and the provision of a registered address, for UK subsidiaries. For more information on our company secretarial services, please contact Fiona Sweeting, Director of Company Services at Osborne Clarke.

UK in a Box – a bespoke solution for US corporates

In order to address some of the common issues that US corporates face when coming to the UK for the first time, we offer US clients our “UK in a Box” service. This is a package of legal services designed to help US businesses set up in the UK quickly and efficiently through the creation of a UK subsidiary, including:

• online access to the key legal documents needed to set up in the UK;
• support from UK lawyers working in US timezones; and
• an introduction to our UK and European networks.

For more information on UK in a Box, please click here.