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Inward investment guide for practitioners

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31st Jan 2013
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Inward Investment is a key part of the UK economy. In 2012, the UK Trade and Industry reported that inward investment created or secured 112,000 jobs in 2011/12 - a rise of 19% on the preceding year.

With this trend set to continue, there will an even greater demand from overseas businesses looking for specialist financial and business practitioners.

Richard Churchill, a partner at accountancy firm Shelley Stock Hutter, offers a guide on the options available when setting up in the UK.

Setting up a branch

An overseas business may decide to set up a branch, which is not a separate legal entity but effectively an overseas division of the existing business operating in accordance with local laws and regulations.

The advantages of a branch are:

  • No statutory accounts need to be prepared or filed for UK results and therefore no public record
  • If operations initially generate a trading loss these can usually be utilised by the overseas company
  • A branch is often cheaper to operate, as there are reduced local compliance costs
  • More flexible for internal staffing as the employees are still employed by the same company
  • Should the business not work, then a branch is much easier to close rather than liquidating a company

However there are some downsides to setting up a branch:

  • If operations are profitable then the business will be subject to tax in the UK immediately and, most likely, the overseas country as well
  • The overseas company may not wish to prepare accounts and place them on public record, especially if there is not a similar requirement overseas

What you need to do to set up a branch

In order to establish a branch in the UK the overseas company will need to file a form (OS IN01) at Companies House giving details of:

  • Overseas companies corporate structure
  • Overseas companies directors
  • Overseas companies secretary
  • The place of business within the UK
  • Any appointed people able to accept service of documents in the UK 
  • A certified copy of the overseas companies memorandum and articles of association and, if necessary, translated into English

Going the subsidiary route

Alternatively establishing a subsidiary may prove to be a better option. A subsidiary is a separate legal entity usually owned 100% by the overseas company

The main benefits of this structure include:

  • Provides limited liability and operations will be ring-fenced
  • If operations are profitable then the business can normally avoid taxation on profit in both UK and the overseas country
  • The subsidiary can decide when to remit profits to parent in order this is done tax efficiently
  • Customers may feel more comfortable contracting with a UK entity
  • Owners can offer local staff share schemes which may help to retain and motivate key employees
  • The overseas company does not have to make corporate information public in the UK

The key disadvantages of a subsidiary are:

  • Normally there is no tax relief available for losses other than to carry forward against future profits within the same company
  • Annual accounts will need to be prepared and filed and could require an audit
  • Transactions between UK subsidiary and overseas parent will need to be well documented to ensure the relevant transfer pricing legislation is adhered to

What you need to do to set up a subsidiary

To establish a UK subsidiary a company should be incorporated with the overseas company as shareholder. Details on who will act as the company director and/or secretary in the UK will also need to be supplied. There is no requirement in the UK for a minimum level of share capital which is often different to overseas regulations.

Other factors to consider

Often the default in the UK is to form a limited company to provide limited liability. However as long as the overseas company is prepared to allow some level of public information to be available it may be more suitable to use the more flexible branch structure initially and potentially incorporate thereafter. This allows the market to be tested and flexibility in utilisation of losses.

The practicality of having overseas-based directors acting as signatories should also be considered. In either scenario of a branch or subsidiary it would make sense that there are local representatives appointed in order that day to day matters can be dealt with within the UK.

Another point which is sometimes overlooked is to consider the worldwide group of the overseas company as a whole. It may be that there are already UK entities in other business units of the overseas company which can take on the losses and this will have a bearing on the structure adopted.

Inward investment into the UK is an exciting opportunity and well thought out initial structuring can provide solutions which are both sensible from a taxation, corporate reporting and cultural perspective.

Richard Churchill is a partner at accountancy firm Shelley Stock Hutter specialising in audit with a particular emphasis on compliance matters and their regulatory implications.

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