For many U.S. businesses seeking to expand into Europe, the UK is a natural place to start. Historic, cultural and language ties offer clear advantages. Over the years, both governments have worked closely to ease the burdens of entry through various government agreements, including on tax matters.
Like the U.S., the UK has a number of flexible structures for conducting business. Each of them will have tax consequences. A business that is merely exploring the UK as a potential source of expansion may wish to simply open a representative office. Registering a branch of an existing U.S. entity may be sufficient where you are ready to do business but the activity is a clearly defined, smaller piece of the U.S. company’s activity.
Once a U.S. business decides it wants to establish a presence in the UK, a number of key decisions must be made about how to create and register the most appropriate business entity.
Inevitably tax will play a role in these decisions. The news is good and bad. With corporate tax rates due to fall to 20 percent by 2015, the UK has one of the lower rates of corporation tax in the developed world. The UK does not have a withholding tax on dividends paid to non-residents of the UK and there are many provisions that encourage investment. However, Her Majesty’s Revenue and Customs (HMRC), the UK equivalent of the IRS, exists to collect tax from anyone doing business in the UK.
U.S. investors in particular face the challenge of balancing the most favorable structure in the UK with requirements and limitations imposed by the U.S. Internal Revenue Code. The UK and U.S. have long had a tax treaty to agree principles to avoid double taxation. However, the current treaty is over 13 years old and the passage of time means that issues and conflicts have arisen to which there is not always a clear answer. The observation that the British and Americans are two people divided by a common language has never been more apt.
CHOICE OF ENTITY
The simplest arrangement is to set up branch of the U.S. parent company. This branch must be registered as doing business and will be subject to corporation tax.
Most closely held companies in the UK will set up as limited companies. Unlike in the U.S., there is no tradition of having tax transparent corporate entities such as LLCs or S Corps. Generally this only becomes an issue where a U.S. individual with investments in an LLC or S Corp becomes resident in the UK. UK LLPs are similar to U.S. LLPs, but recent legislation may make them undesirable and it is worth noting that a UK LLP will not automatically be taxed as transparent for U.S. purposes.
Fortunately for U.S. entities, the entity classification or “check the box” election allows the most favorable structure to be adopted under foreign host location rules while allowing the owner to elect how that entity should be treated for U.S. purposes. This can be as simple as electing for a UK LLP to be taxed in the same manner or for a U.S. LLC to elect for a UK limited to be treated as tax transparent for U.S. purposes. This election has no impact for UK purposes, but does allow a U.S. owner or parent company to decide how to treat the foreign entity for U.S. purposes.
There are differences in accounting principles for reporting and tax. The most notable is that, under current rules, income must be reported on the accrual basis regardless of the size of the business.
Both corporate entities set up in the UK and foreign entities doing business in the UK must register with Companies House. Although the role of Companies House is similar to the role played by the secretaries of state where a U.S. company is set up, the level of information disclosure required for privately held companies often comes as a surprise. Details of ownership must be disclosed, although nominees can be used, and contact details must be provided for the company’s directors. Once an entity reaches a certain size, a formal audit may be required and financial information must be disclosed.
Although superficially similar to the sales taxes found in most U.S. states, the value added tax, or VAT is a complex additional tax that must be considered in virtually every transaction. The rate of tax is currently 20 percent on most goods and services, but exceptions abound, which can make compliance a challenge.
On the positive side, VAT incurred by a business can usually be recovered on the purchase of supplies and business assets such as IT equipment. It is important that a business understands where it is required to charge and pay VAT in the UK and perhaps also elsewhere in Europe where it may be charged on a final sale. VAT on goods and services being provided outside the EU are generally exempt, but care must be taken, as the business itself will be expected to make good where it fails to withhold and pay over the correct tax.
Location is not as relevant as in the U.S. from a tax standpoint. Corporation and income taxes generally do not vary by location within the UK. This contrasts to the challenges of operating in the U.S. where each of the 50 states have different rules, and tax rules may even vary within counties and municipalities.
SENDING EMPLOYEES TO THE UK
Many U.S. start ups will want to include locally hired personnel who know the UK and already have the right to work. Employing individuals in the UK can be expensive from a tax standpoint. The UK equivalent of FICA is called National Insurance. UK employers pay a National Insurance (NI) tax rate of 13.8 percent of payroll.
Very often, though, it will be desirable to have your own experienced managers and executives help set up and run the UK operation. In some circumstances, that can be done on a part time basis. However, once a business moves beyond sending employees and executives to the UK on occasional business trips, it needs to be understood that business visitors providing support to a UK entity will potentially become subject to UK tax on a portion of their salary.
Where an employee will be needed in the UK for an extended period of time, it will be necessary to help them manage the personal tax consequences as well as the consequences to the business.
The top rate of personal income tax is 45 percent compared to the U.S. rate of 39.6 percent, but there is no second layer of income tax comparable to state and local taxes in the U.S. At least for executives who move from the higher tax states of the North East U.S. and California, the UK can be very appealing from a tax standpoint. In addition, the UK will generally not seek to tax the personal investment income of an individual from outside the UK for the first seven years they are resident.
For U.S. employers, it is possible to second employees from the U.S. to the UK entity and claim benefit of the U.S./UK Totalization Agreement for social security taxes. This allows the employee to remain in the U.S. FICA system and both the employee and employer to only be subject to the lower U.S. FICA taxes as opposed to UK NI.
Expanding internationally will always be both exciting and challenging, but with proper advice and planning, there is nothing to stop any ambitious company from fulfilling its potential.
About Buzzacott Chartered Accountants
Buzzacott is a single office professional services firm based in the heart of the City of London. We have in excess of 270 staff working with 34 partners in specialist teams. Being under one roof gives clear advantages from easy communication, cooperative working and crosscutting service provision.
All of Buzzacott’s services are provided through our specialist teams, focused on and designed around the needs of our clients. Our Corporate & Business Services team provides a complete service of both tax compliance and advisory for a wide range of clients, covering all areas of corporate and business taxation.
Our Expatriate Tax Services team prepares UK and U.S. tax submissions for almost 1,000 people, each with different needs and circumstances. Not only is the service we provide personal and bespoke but it also takes full account of the liabilities, reliefs and allowances available to ensure compliance without overpayment of tax.
Buzzacott have also developed a market leading national and international VAT consultancy to help support clients who have to deal with differing rates and rules for VAT. The VAT service is especially valuable for businesses seeking VAT registration to trade within the European Union.
Despite being a single office firm, we still have an international reach. Buzzacott is an independent member of PrimeGlobal, a high-profile association of over 350 public accounting firms and business advisors in 90 countries which enables us to combine a multinational capability with the better informed, more personal approach of an independently successful local firm.
For further information on all of the considerations above visit www.buzzacott.co.uk or contact Scott Barber, Partner in the Expatriate Tax Services Team at Buzzacott LLP at email@example.com: