Setting up a business in the UK
There are a variety of ways for an international investor or company to set up business in the UK.
What works best depends on several things, including the appetite to accept direct liability for the actions of the UK entity and its tax obligations.
A business may consider, for example:
- setting up a subsidiary in the UK;
- opening an establishment in the UK;
- carrying on business in the UK without establishing any kind of presence here (e.g. by conducting your business over the internet); or
- carrying on business in the UK by appointing an agent (the agent’s activities may or may not constitute the establishment of a place of business).
When deciding which business vehicle is the most appropriate, it is important to consider factors such as the sector and the products or services being supplied. In most instances, a UK registered entity will be the most favourable in terms of managing international tax issues and can ordinarily be set up within 24 hours.
In this article we summarise the most commonly used business forms in the UK and briefly touch upon the impact Brexit and the Covid-19 pandemic may have.
Private Limited Company
Private companies are separate legal entities under UK law and the liability of their owners (also called “shareholders” or “members”) is limited to the amount they have agreed to pay for their shares. Each company has its own board of directors, can enter into contracts and own assets and can sue or be sued in its own name. It will generally be tax resident in the UK if it is incorporated in the UK or its place of central management and control is in the UK. It is liable for UK corporation tax on its worldwide profits and its profits are distributed by way of dividends.
The UK does not impose a tax withholding on dividends paid by UK resident companies to an overseas parent, but withholding does apply to interest and royalties (subject to the terms of an applicable double tax treaty).
A company must be registered (before trading) with the UK Registrar of Companies (“Registrar”). In return for its limited liability protection, a company is required to file certain information with the Registrar on a regular basis, including annual accounts and officer, shareholder and “people with significant influence or control” information.
Creating a UK subsidiary company is a very popular way for overseas businesses to establish themselves in the UK because of the limited liability protection it offers to shareholders.
Limited liability partnership (LLP)
An LLP is a partnership which is incorporated and has its own legal personality. Each partner’s liability is generally limited to their agreed contribution to the partnership. As with a subsidiary company, an LLP can enter into contracts, own assets and sue or be sued in its own name. However, in contrast with a company, the internal relations between the LLP and its owners (called “members”) will ordinarily be governed by an LLP agreement rather than by legislation. Such agreement can remain private as it does not need to be filed with the Registrar.
Two members are required to set up the LLP with “designated” members having particular administrative and filing responsibilities.
An LLP is generally treated as tax “transparent” for UK tax purposes, which means it has no tax liability; rather its members pay tax on their share of the LLP profits. The LLP must, however, file a self-assessment partnership tax return. Non-resident partners pay tax on the profits that the LLP generates from UK activity and must file UK tax returns on that basis.
Opening an Establishment in the UK
An overseas business can establish a presence in the UK by setting up a UK permanent establishment, which is a fixed place of business, such as a branch, factory or workshop in the UK from which it regularly conducts its business.
A UK establishment is not a separate legal entity from an overseas parent and does not have limited liability in its own right. It essentially forms part of the overseas business and all profits and losses of the UK establishment are automatically incorporated with those of its parent, as are all of its debts and liabilities (therefore, there are no restrictions on repatriation of profits or use of tax losses).
An overseas company trading through a UK permanent establishment is subject to UK corporation tax on the profits attributable to the permanent establishment. The UK has an extensive double tax treaty network and treaty relief will generally ensure that a company is not taxed on the same profits twice.
A UK establishment must be registered with the Registrar within one month of being set up.
The full impact of Brexit on business in the UK is not yet fully known, with some uncertainty remaining regarding the UK’s international trading relationships as the clock runs down on the transition period with the European Union. There will undoubtedly be a short period where UK businesses need to adjust to new international trade dynamics and regulations.
However, for a variety of reasons, the UK is expected to remain a very attractive country from which to do business. Those reasons include:
- the UK being a world leader for inward investment. The UK government has long recognised foreign investment as key to economic growth, generally adopting policies which facilitate and encourage this investment;
- the UK being likely to continue to have a very competitive tax rate system (currently set at 19% being one of the lowest corporation tax rates in the G20). The Government also has plans to reduce this rate further, creating a very tempting incentive for more businesses to incorporate themselves in the UK;
- the legal system in the UK is internationally recognised for its flexibility, stability and transparency of outcome together with the high quality of its practitioners. English law is the most popular choice of law throughout the world for commercial contracts and 40% of all global corporate arbitrations take place in the UK; and
- the UK having the second largest work force in the EU, with a highly-educated, diverse and innovative pool from which businesses can select.
These long-standing factors will continue to see the UK being a sought after jurisdiction in which to conduct business.
In the short term, the pandemic will inevitably result in a drop in the number of international businesses entering the UK market, with some practical or logistical difficulties in launching a new business in a foreign jurisdiction. The UK is by no means unique in that regard.
However, incorporating a business in the UK remains easy and quick. There is also an increasing use of video conferencing to recruit and train the required labour, to obtain professional advice and to form new trading relationships. If anything, the geographical remoteness of a businesses from its HQ is less of an issue now than it has ever been.
Created in 2000, TLT supports its clients across all three UK legal jurisdictions.
Our services support clients in three distinct areas:
- Advisory: helping with strategic and day-to-day legal issues
- Disputes: helping prevent and, where needed, manage conflict
- Transactions: helping organisations expand, restructure or sell
To find out more about setting up a business in the UK, please feel free to contact us at firstname.lastname@example.org.