UK subsidiaries Archives - London Chartered Accountants Blog

With the Brexit deadline looming we are finding greater amounts of interest from overseas businesses wishing to set up in the UK. For some of these businesses (e.g. those based in the Republic of Ireland) the reasons for expanding into the UK are self-evident. Others come to the UK for more subtle reasons, such as benefiting from the relative weakness of Sterling.

Ease of company incorporation in the UK

Features of the UK landscape are the ease of company incorporation and the ability to have company directors who are all non-UK residents. When compared to the Republic of Ireland our 17% corporation tax rate is unattractive. However this does not appear to dampen the appetite for Irish businesses setting up subsidiaries in the UK.

Structuring for expansion into the UK

When considering expansion into the UK there are a number of decisions which have to be taken about structure. As identified in my blog on the development of the UK corporate tax landscape it is important to model the impact of financing on the UK results as well as modelling the quantum of any opening year losses.

Withholding taxes after Brexit

Typically Irish ownership would access the benefits of the EU Interest and Royalties Directive in order to avoid withholding taxes on intra-group interest payments. In advance of the UK withdrawal from the EU in 2019 the terms of the UK tax treaty may be more relevant and making it more important to register as a borrower under the treaty passport scheme.

As the UK does not have an outbound dividend withholding tax, our departure from the EU does not make dividend withholding taxes a concern. Although this may be efficient as a mechanism for the repatriation of profits out of the UK the impact of dividend income receipts in the home state would still need to be understood.

UK Boards and non-UK Directors

Many inward investment groups have non-UK directors on their UK Boards and this is a common mechanism to enable commercial control of the UK subsidiary by home state persons. Like many countries the UK has a concept of management of control for company tax residency and the impact of our domestic rules should be considered when determining directors numbers, residence and their powers.

Audit requirements

Even if the UK company may not be expected to be particularly large, one still has to consider consolidated accounts and their audit requirements in the home state. This may lead to obligations to audit the UK subsidiary and for the UK auditors to have tight reporting deadlines in order to fit in with group timetables. Typically our audit teams are required to audit the financial statements of the UK subsidiary which have been prepared under UK GAAP and provide GAAP adjustments for overseas parent consolidation. Although this is not necessarily relevant for investment from the Republic of Ireland it can be an important factor to timetable into UK work when reporting to other countries, such as the US.

Future visa requirements

No business is a success without the right people. Expansion into the UK regularly results in staff coming to the UK to manage the early development of the UK subsidiary. Nationals from EU countries have not had to consider visa issues. This may change in the future. The group parent should not assume that its employees can come to the UK without visas. For example an Irish parent company may second staff to the UK to manage the early stage of the UK subsidiary without considering that the staff are, say, Australians working in Dublin. Visa requirements for any secondments need to be explored.

Sending staff to the UK

The UK has tax breaks for movements of staff which may be of benefit. The extent to which the transfer is a temporary matter of a few months or a long term matter should be identified at the outset. This is to ensure that social security is paid to the right country and any relevant terms of bi-lateral social security agreements are applied. Even a short term transfer may result in PAYE obligations or reporting requirements which need to be managed.

Longer term staff transfers inevitably result in the individuals falling into the UK income tax net. Planning for salary equalisation is important when offering the individual a long term transfer. Also whilst developing their total remuneration package it is important that the impact of share options granted to secondees is understood in the UK and home state.

For both secondees and UK employees the HR policies associated with UK employment need to be identified and where appropriate, group policies flexed to meet UK employment laws.

Plan for setting up in the UK

The decision to come to the UK is a relatively easy one for many overseas businesses faced with the uncertainty of Brexit. For our friends in the Republic of Ireland it is possibly an easier decision to make, especially given our close histories, legislative approach and common language. However that does not prevent the need for planning by any group considering coming to the UK at both the tax level and the employee level. We are finding that the most successful businesses are those which engage with us on these matters at an early stage.

I’ve commented previously on why the UK is the place to base your European activity.

The World Economic Forum recently issued its 2014-15 Global Competitiveness Report covering 144 economies with just five omissions including Liberia and Ecuador. Its analysis is prepared by locally-based academics and utilises statistical data from international organisations such as UNESCO, WHO and IMF. Its report weights economies according to their comparative rankings under three bands of “Basic Requirements”, “Efficiency Enhancers” and “Innovation and Sophistication Factors”, collectively sub-divided under twelve headings, each of which are further sub-analysed. The twelve headings are Institutions, Infrastructure, Macroeconomic Environment, Health and Primary Education – all under “Basic requirements”, Higher Education and Training, Goods Market Efficiency, Labour Market Efficiency, Financial Market Development, Technological Readiness, Market Size – collectively under “Efficiency Enhancers”, and Business Sophistication and Innovation – forming “Innovation and Sophistication Factors”. As an example of subheadings, Institutions is broken down into no less than twenty one heads, covering amongst others judicial independence, crime, trustworthiness of police, corruption in government, investor protection – the list goes on.

Whilst sub-analysis headings are weighted uniformly for all economies under the three principal bands, the weighting applied to the three principal bands varies according to the state of development of the individual economy. So the importance of “Basic Requirements” to Burundi’s underdeveloped economy has a 60% weighting, but only a 20% weighting to Sweden’s highly developed one. Weightings for principal bands “Efficiency Enhancers” and “Innovation and Sophistication Factors” span from 35% to 50% and from 5% to 30% respectively.

For the second year running, Switzerland and Singapore are numbered one and two in overall rankings. The rest of the top 10 comprise: the USA at third (fifth last year), Japan sixth as against ninth previously, and Hong Kong seventh (again). Remaining places are taken by EU countries – Finland 4^th (3^rd previously), Germany 5^th (as against 4^th), Netherlands 8^th (again), UK 9^th (versus 10^th) and Sweden 10^th (against 6^th). In other words, in terms of its Global Competitiveness Report, the World Economic Forum reckons the top 10 economies this year are the same top 10 economies as last year.

The WEF report includes statistical analysis to demonstrate an impressive correlation between the results of its report and GDP per capita growth from 1990 on.

So how does its analysis contribute to a business decision as to where to base its European operations?

Clearly certain subheadings used by WEF have no relevance to such decisions. The business impact of malaria, for example, is unlikely to influence a decision as to where to headquarter European activity. The number of fixed telephone lines per 1000 people is also unlikely to be a decisive factor. And principal bands weighting for all the major EU economies is uniform (20%, 50%, 30%) – so perhaps the simplest answer is to add the rankings across all 121 subheadings for all relevant economies.

What is meant by relevant economies for this purpose? They need two features – they must be major EU countries with sizeable local populations to facilitate local sales, and they must be sufficiently close to the economic centre of the EU to ease cross-border business. That gives us Germany, France, Italy and the UK.

Because the WEF rankings are best is lowest, the lower the total for the 121 subheadings, the better. And to put the rankings into perspective, these can be compared with the equivalent scores for the US.

The results are: