Setting up in the UK

A Hot Tip about Foreign Direct Investment in the United Kingdom

Last updated: 2 Feb 2011

Avoiding the technical and regulatory pitfalls

International Business Review Setting up in the UK Avoiding technical and regulatory pitfalls The UK is a premiere destination for international inward investment. Have you maximised your advantages and avoided all the potential pitfalls? If you are contemplating establishing a business in the UK Have you considered your business model? you will probably already have researched the market and The UK tax position will be affected by whether the parent discovered the many opportunities that exist. It is these which continues to act as principal. have made the UK a premiere destination for international inward investment. In 2008, the cumulative ?stock? of foreign Have any transactions between related parties been investment in the UK was the third highest level of FDI stock considered and documented by means of a transfer globally.* pricing study? Such a transfer pricing study is required for the majority of The UK enjoys a relatively favourable tax regime. There are, companies setting up in the UK. This can rarely be approved however, a number of tax and regulatory issues which you in advance but must be prepared and retained, to be available should consider. To ensure that you take maximum advantage as and when HM Revenue & Customs (HMRC) may require it. of opportunities you must avoid the potential pitfalls, which may impact on your business. Are you obliged to operate a PAYE payroll deduction system? In the following we set out a checklist of some of the issues An obligation to operate a PAYE (pay as you earn) system can that we suggest any business looking to operate in the UK arise when you employ even only one employee. This may should consider as early as possible: be the case even if the employee is paid outside the UK and/ or many of the activities are overseas. PAYE may also apply Do you, or will you, have a UK permanent if you do not have a UK permanent establishment but send establishment with UK taxation liabilities? someone to work for a UK employer. Sometimes an employee This can often happen in circumstances which have not been may have to apply these rules himself. Self-employed status planned or foreseen. Any substantive activity, even if it is quite claimed by a representative in the UK will often be challenged limited, can result in a taxable presence. by HMRC and requires careful consideration. Should you operate in the UK as an establishment, limited partnership or limited company? Each form of entity has corresponding obligations, advantages and disadvantages. * Source: UK Trade & Investment, ?UK Economy at a glance?, March 2010 (ref. UNCTAD:2009) Are you sending any employees to the UK for less Share schemes If you are going to grant options to employees, careful than two years? planning is necessary to reduce the tax cost for both the There are special opportunities for tax-free benefits for individual and the employer. employees from overseas seconded to the UK. This must, however, be carefully planned. Is the company undertaking any research and Are expatriate employees bound to pay UK national development in the UK? If so, the company may be able to claim tax credits against insurance contributions? this expenditure and potentially receive refunds from HMRC. Unless the employee has a ?certificate of coverage? or form ?E101? in place, or where special treaty rules apply, UK national insurance should be paid on earnings in connection Have you suffered VAT in the UK or elsewhere in the with the UK employment. Often this will require contributions EU, where you are not and have no requirement to be from both the employer and the employee to be made. registered? In such circumstances it may be possible for the VAT to Are employment benefits taxable and subject to be reclaimed. This can reduce the effective cost of VATable employer?s national insurance contributions? expenditure by 17.5% (20% from 4 January 2011) in the UK The UK definition of taxable benefits is very widely drawn. and up to 25% in some other EU countries. This can include accommodation costs, expense allowances, medical insurance, cost of living adjustments and tax Is the business expecting to have an annual UK equalisation payments. Some of these may be subject to turnover of over £70,000? PAYE. Others, including reimbursed expenses, may require to Where this happens the business is liable to register for VAT be reported on a form ?P11D? each year. It is often the case and must submit returns, which can be on a monthly or annual that certain of these benefits and expenses are taxable and/ basis, but are typically prepared quarterly. or subject to employer?s national insurance contributions when they would not be in your home country. A form P11D needs The above issues are intended to highlight some of the to be completed each year to report these expenses, whether matters which you should consider in the area of UK taxation or not they are taxable. and corporate regulation. Can liability to UK income tax be reduced by use of overseas employment contracts for employees sent to the UK? Where there are separate contracts with two group companies, ?dual contracts? can sometimes help in reducing personal tax liabilities. The rules and practice in this area are complex, and specialist advice should always be sought. 12 York Gate Regent?s Park London NW1 4QS In the first instance, please contact: United Kingdom Nilesh Shah Telephone: +44 (0)20 7544 8866 Tel: +44 (0)20 7486 0111 Email: Fax: +44 (0)20 7935 6852 Blick Rothenberg is authorised & regulated by This newsletter has been prepared for clients and contacts We have sent you this publication because you are listed on our database. the Financial Services Authority to carry on of Blick Rothenberg. Although we take every care to ensure Should you not wish to continue receiving this, if any of your contact details need investment business. that the information given is correct, it should not be taken amending, or if you wish to be removed from this mailing list, please contact Julia to be sufficient for making decisions and you should seek Fawcett: telephone +44(0)20 7544 8715 or email A list of partners is available for inspection at professional advice prior to reaching any decision. 12 York Gate.
Posted: 02 February 2011, last updated 2 February 2011

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