Even in today’s interconnected world, businesses tend to start local and expand their geographic reach over time. Initially regulations seem relatively straight forward – everyone in the US knows what’s meant by a 401K, just as everyone in the UK knows what a P45 is – because they’re the ones everyone grew up with. Many of the rules affecting new businesses are ones its management is broadly familiar with. Managers know what they know, the better ones have a good feel for what they don’t.
The problems start to pile up when that geographic reach extends beyond home territory. Initially, there aren’t any – businesses find a third party agent with appropriate territorial expertise and stick to their home markets with little more than gentle forays into foreign lands. But over time, and as those forays become more regular, reliance on third party agents becomes increasingly unsatisfactory. They may not have done anything wrong, their service may be excellent, but they’re not you, their priorities aren’t yours, their flexibility doesn’t match your own, and if you’ve a growing presence in that territory, the day comes when you have to have your own facility. And that’s when the problems start.
A typical example is a US corporation that’s developed a significant and growing activity this side of the pond. Up to now it’s used third party agents to distribute goods to retailers / third party installers to install product / third party maintenance technicians to maintain its equipment / third party sub-contract professionals to help fulfil contracts. They might be in the UK, or Germany, or France – somewhere, anywhere, in Europe or the Middle East, or Asia or further afield.
The decision is taken – “we’ll set up our own support operation”. Easily said – but then the problems start. What form should that operation take? Does every territory require its own operation? Who do we send to set it up, how do we pay them, will they be taxed locally, and on what? Where will they live? Will we be taxed locally? If we are, how will profits be determined?
Over the years we’ve helped many such US businesses get their own European support operation off the ground. The answers to the questions are usually, but not always: a UK limited company, not necessarily, someone you trust, pay locally, yes they will, on what you pay them, London or home counties’ rented accommodation, yes you will, and “cost plus”. But there are variances – a US-owned UK registered branch rather than a UK limited company, everything overseas controlled through the UK establishment with no place of business elsewhere, wages paid in the US with a grossing-up process undertaken in the UK to ensure UK tax compliance, and business taxed on apportioned profits to reflect genuine revenue generation outside the US.
There are all the other issues as well – just how adequate are your US employment contracts when it comes to employing overseas (generally, not very!), are you obliged to register for VAT and how do you account for it (answer – not invariably, though it’s usually in your interest to do so), should your UK operation have authority to contract with third parties or should all third party contracts remain in your control (answer is, apart from contacts for overheads, best if authority vests in the US – the more arms-length activity initiated in the UK, the greater the “plus” in “cost plus” becomes).
Expanding your horizons to foreign climes? – you need the support of those who’ve grown up in them.
