UK tax & labour laws make UK attractive
You probably appreciate that the integrity of the English systems provides businesses established in the UK with a worldwide reputation and status. The UK is also a hub for international business across Europe, the Middle East and Africa.
What’s more, the UK offers multiple tax breaks for businesses based outside of the UK who establish a UK subsidiary. The current system of tax law is designed to encourage international business. The headline point is the rate of UK corporation tax is only 20%. This is very low compared to many jurisdictions
For lawyers, accountants and professional advisers to companies based outside of the UK, the salient features of our tax law are:
- When a UK tax liability will be established;
- Popular tax benefits available to UK companies; and
- Attractions of running a UK workforce.
Before incorporation of a UK subsidiary
Often companies want to establish a UK presence without incorporating a UK subsidiary. A common solution is through a branch, which in tax law is termed a permanent establishment.
Branch, or permanent establishment
The parent company will be deemed to have created a branch or permanent establishment if:
- It has a fixed place of business in the UK; and/or
- An agent is acting on the behalf of the parent company and has been given authority by the parent to conduct business in the UK.
The definition of a fixed place of business or branch has a wide meaning. For example a company sending some staff to the UK for a couple of months to oversee business development activities can constitute a permanent establishment.
Running a branch or permanent establishment has many advantages. Importantly, compared to a subsidiary, a branch is easier to establish and easier to close down. But, the parent must register a branch or permanent establishment with HM Revenue and Customs (“HMRC”) and file UK corporation tax returns. The parent can off set pre-trading expenses against pre-trading revenues to reduce any UK corporation tax liability. HMRC will not allow pre-trading expenditure as a relief from corporation tax unless the expenditure has been incurred wholly and exclusively for the purposes of business.
Visas for Staff
Staff sent over to set up the UK branch or subsidiary require Visas. Visas take time to process, which can be complicated and time-consuming. It pays to start the visa application early to avoid delays. We often obtain visas for clients.
Tax reliefs available for a UK subsidiary
Some popular tax reliefs available under UK tax law include the following. All reliefs work to reduce the UK corporation tax rate to below 20%, and in some cases to zero.
UK corporation tax relief for research and development (R&D)
UK subsidiary companies investing in research and development can now deduct 230% of their research and development expenditure. The deduction can be made against UK corporation tax, UK payroll tax withholding liabilities or by refund. This R&D tax relief is attracting overseas companies to set up UK subsidaries. Here is an outline of the R&D tax relief system permitted under UK tax law
Acquisition of intellectual property
The UK offers tax corporation tax relief on expenditure relating to:
- acquiring, creating or establishing title to an intangible asset,
- royalties and activities related to maintaining, preserving, enhancing or defending title to an intangible asset.
Corporation tax relief is also given for expenditure written off. This is particularly useful to companies which do not develop intellectual property IP in-house but rely on external sources to supply their IP, such as tech businesses.
Patents & patent box tax regime
The Patent Box tax regime reduces the rate of corporation tax on profits from patents granted by UK Intellectual Property Office, European Patent Office and EEA countries to 10%. To qualify for a reduced rate, a company must hold a “qualifying patent”. The regime reduces corporation tax on:
- Worldwide sales of patented item;
- An item incorporating it;
- licence fees and royalties;
- income from sale of patent;
- any money received from anyone who infringed a patent.
This tax break particularly suits IP intensive companies in tech and creative industries.
UK subsidiary sale
A UK company can sell 10% or more ordinary share capital in a trading subsidiary tax free provided certain criteria are met.Read about the substantial shareholding exemption criteria.
Profit extraction from the UK subsidiary to the parent
The UK tax law permits dividend and interest payments to be paid up to the parent free of tax.
Business activities and restructurings
When a business asset is sold any UK capital gain arising from the sale can be deferred when the sale proceeds are used to buy a new asset in the UK within 3 years of the initial disposal. The relief can be claimed on a variety of assets including land, buildings and fixed plant and machinery.
Benefits of running a UK workforce
Taking on employees in the UK is speculative for two reasons:
- The UK subsidiary may not prove to be as successful as hoped.
- The UK employee may not perform.
Under UK labour law, subject to some limited exceptions, it is not difficult to reduce your work force or remove under performers. This is because to claim unfair dismissal the employee must have at least two years continuous service. In practice, this allows the parent company time to assess if the UK subsidiary is working, and take corrective steps.
The parent can adapt existing contracts and policies for use in the UK. Read how to modify employment contracts and policies for UK employees.
Internationally mobile employees
HMRC offers special arrangements for short term business visitors to the UK who are not covered by a UK double taxation treaty. That is particularly relevant for directors or highly qualified specialists who visit UK regularly for short periods of time. This means that employees with no overall UK tax liability do not need to have tax deducted and then apply for repayments through self-assessment. The system for dealing with internationally mobile employees helps to make the UK competitive against other European jurisdictions which withhold taxes for internationally mobile employees.
Retaining UK employees and aligning them to the performance of the parent
Awarding shares to employees is a tax efficient mechanism to incentivise employees by aligning their interests to those of their parent company’s. The UK uniquely offers a wide range of tax efficient share plans and share option plans which confer considerable tax savings for the UK employees. There can also be tax savings for employers as well. The UK permits the share plans to be operated over the parent’s shares and still permit the tax savings for UK employees. To benefit the employees must be UK tax payers.
The type of plan will vary depending upon the size of the parent and the number of UK employees it is intended to benefit. As a rule of thumb start ups can qualify for enterprise management incentive (EMI) options but larger groups qualify for the different tax regime known as the company share option plan (CSOP). If shares rather than options are intended the employee shareholder shares regime can work well if the participants are senior executives.
Releasing UK employees
Read how, in practice, if employees are released, many UK employers decide not to take any risks and enter into settlement agreements. Under a settlement agreement the employee waives rights to sue his former employer. In the UK the first £30,000 of a genuine termination payment is tax free.