UK tax opportunities for non-UK businesses

There may never be a time like the present for opening new business in the UK. The economy as reported on 14 January 2022 is now larger than pre-Covid (growth of 0.7% since February 2020) and whilst the Omicron variant has put a brake on growth, this is generally considered to be temporary.

Additionally, the property market is extremely favourable for tenants. They are currently faced with a far friendlier legal regime and much more protection than pre-Covid times. There is also currently a surplus of commercial property available to let (and probably to purchase too).

Brexit has not had the dampening effect on trade and in fact, has created many job opportunities in the UK. And of course it has levelled the employment playing field as regards foreigners working in the UK inasmuch as new EU arrivers no longer enjoy favoured employment status.

Despite the historic challenges posed by both Brexit and the global pandemic, research suggests the UK is continuing to attract significant levels of foreign direct investment (FDI) across a broad span of industries.

UK foreign direct investment trends show that momentum appears to be building as investors regain confidence and look to capitalise on new opportunities, not just in London but also in key regions such as the North West and East of England. Digital technology, life sciences, food, transportation and logistics are among the industries performing exceptionally well despite the difficulties posed by the pandemic.

Here at Gerald Edelman, we’re noticing renewed interest in our International Tax services and Deal Advisory services, both of which factor greatly throughout the UK foreign direct investment process. With that in mind, let’s take a look at a few of the main areas in which we tend to support businesses when moving their operations to the UK.

So let’s consider some of the tax opportunities and advantages that new businesses can benefit from.

Ease of doing business

According to the 2020 version of the ease of doing business world index, the UK is currently in the eighth position globally. This index was created jointly by three leading economists at the World Bank Group. Clearly, the UK remains a preferred country in which to set up a business or to invest. This article explores some of the corporate tax reasons that enhance the UK’s favoured status.

Setting up a UK business from overseas

Business owners and entrepreneurs looking to establish a UK presence have a number of options when it comes to structuring their expansion and inward investment strategy. Two of the most common routes are to set up a branch or a subsidiary, each of which has its own set of legal and filing obligations.

A branch – also known as a permanent establishment – is a direct extension of the parent company that serves a specific geographical region.  Here, the overseas parent company and the UK branch are classed as the same legal entity and share liability for all operations. The parent company is therefore required to file their full overseas accounts with Companies House. Only the profits attributable to the UK branch will be subject to UK corporation tax, although losses can also be offset against the profits of the overseas parent company.

A subsidiary is different in that it’s classed as a separate legal entity with limited liability from the parent company. Subsidiaries are only required to file their own accounts with Companies House, not the annual accounts and financial information of the parent company. Any subsidiary that is classed as tax-resident in the UK will also be required to pay UK corporation tax on its worldwide profits.

It’s worth noting that all UK companies and Limited Liability Partnerships (LLPs) must prepare and submit an audit of their accounts with their year-end financial statements unless they qualify for an exemption (which the majority of smaller companies will). In the case of a branch, if the parent company is required to prepare and file an audit in their country then a copy of this must be submitted to Companies House.

Corporation tax rate

The UK has one of the lowest corporation tax rates in the G20. The rate is currently 19%, greater only than Singapore and Switzerland.  Whilst the rate will rise to a maximum of 25% in 2023, it will still be among the lower G20 rates.

Corporate tax advantages

• Dividends received by UK companies are generally free of corporation tax.
• There are no withholding taxes on dividends paid.  This is irrespective of where the shareholder is resident and irrespective of the nature of the shareholder, e.g. an individual, another company (UK or non-resident), a trust, foundation or any other.
• The UK is purported to have the largest Double Tax Agreement network in the world.  The consequence of this is much reduced, and often nil, withholding taxes levied by foreign subsidiaries of UK companies on dividends paid to the UK parent, as well as on other profit extraction payments such as interest and royalties.

The result of the above is very low or even no taxes on the flow of income through a UK company from a subsidiary right up to its shareholder.

A few specific tax reliefs

The Annual Investment Allowance (AIA)

This grants the UK a 100% tax deduction for the cost of qualifying capital expenditure in the year of acquisition. There is an annual limit for such expenditure of £1 million (up from £200,000 a few years back) but, subject to further confirmation, possibly reverting to £200,000 in 2022. There is currently in place, until April 2023, a new super deduction of 130% for many capital expenditure categories of fixed assets.

Research & Development (R&D) Relief

R&D relief is given in two different ways, either by an enhanced deduction for corporation tax purposes or by a payable tax credit.  Both are acknowledged as among the most generous tax reliefs in global corporate tax.

The enhanced deduction consists of an additional 130% deduction from profits subject to corporation tax of qualifying R&D expenditure. At the current tax rate of 19%, this equates to an additional tax saving of 24.7% of such expenditure. If the company is loss-making, the expenditure can be carried forward to be used in a future tax year or can be converted into a repayable tax credit. The credit is equal to 14.5% of 230% of the qualifying expenditure.

The UK Patent Box

The Patent Box regime is a corporation tax relief that gives a reduced rate of tax of 10% on profits earned from a company’s patented and other innovations.

Qualifying income includes the sale of patented items, licenced-in patent rights and compensation income from infringement of owned rights.

To calculate the tax relief, routine profits are deducted from total profits to arrive at “qualifying residual profit”.  Smaller companies, i.e. those with a qualifying residual profit of less than £1 million, may then deduct 25% for marketing asset return from residual profits.  Larger companies have a different basis of calculation.  In both cases, the balance is taxed at 10%.

How Gerald Edelman can help

Gerald Edelman works with global entities who want to establish a business in the UK and offers a wide range of services that simplify the legislative and regulatory complex requirements when considering the best financial vehicle for their UK operation, ensuring that our clients remain compliant and tax-efficient.

We are founding members of XLNC a worldwide association of independent accounting, law and management consulting firms, that enables us to operate seamlessly across borders, serving our clients’ cross border requirements with confidence, multi-jurisdictional expertise and efficiency.

Gerald Edelman has worked with businesses worldwide, offering a wealth of expertise in handling international tax matters for inward-investing companies of all sizes, from start-ups to large corporations, and high-net-worth-individuals and their trusted advisors, across a wide range of industry sectors.

Our Partners and Advisors are experts with commercial acumen and technical expertise, helping clients overcome their business challenges, offering exceptional tax guidance and advice by supporting our clients to think beyond their limits to achieve success and strategic growth.

The services offered include:

Tax Efficient Structuring

Assisting clients with both inward and outward investment business activities including acquisitions, disposals and reorganisations, that are specifically suited to our client’s needs, offering them tax efficiencies, and guidance.

Pre-Arrival Tax Planning 

Offering our clients support and advice on residence and domicile matters, structuring of assets and segregation of funds, UK tax issues including income international tax, HMRC and legislative matters, as well as capital gains tax, and inheritance tax, setting up a UK trusts, and other tax matters.

Post-Arrival Implementation

Ensuring that our clients are compliant with all your UK tax obligations.

Corporate Taxes

Establishing and structuring a UK presence, UK subsidiary or overseas companies, foreign branches, UK holding companies, profit extraction, exit strategies, cross-border transactions, transfer pricing and withholding taxes. Learn more here.

VAT & Customs Duty

We offer advice on all VAT registration, VAT liability and HMRC enquiries as well as more specific vat advice relating to property services and vat trade transactions, ensuring that our clients avoid costly mistakes and achieve maximum tax efficiencies.

Bookkeeping and Accounting

Gerald Edelman can manage bookkeeping, accounting and compliance, income tax and reporting requirements through their latest online cloud apps, identifying cost savings and ensuring clients’ business planning is a smooth and efficient process and can assist our clients with corporate governance matters.

Transaction Services

Our transaction services team has technical expertise in due diligence, business valuations, financial modelling, and transaction structuring, which is underpinned by real experience in working on deals of all sizes.

Deal Advisory

Gerald Edelman offers a full suite of Deal Advisory services for business owners and entrepreneurs at each stage of the business lifecycle.  We draw on decades of experience managing corporate deals across a broad range of industries and have built a substantial network of buyers and investors at both local and international levels supporting clients in raising capital, sourcing buyers and investors, acquisitions and transactions and exit strategies.

HR/Payroll Services

We can advise our clients on all aspects of HR and employee issues, including bringing employees, managers, directors and partners into the UK, and advise on relocation, tax, payroll, salaries, and pension matters, ensuring that all our clients HR processes are handled efficiently, accurately and meeting all UK compliance, tax and regulatory requirements.

Making the right choice for your business

There are pros and cons to every business structure and your decision will ultimately depend on the current structure of your overseas company, timeframes and the nature of your business activities.  That’s why drawing on the expertise of an experienced international tax advisor is so crucial to pinpoint the best route for your organisation. Our team consists of many multi-lingual experts who can make your enquiry into UK inward investment a simple, clear and transparent process, putting you at the heart of what we do, understanding your needs and offering you exceptional service.

If you’d like to arrange a free consultation to talk through your current situation with one of our UK foreign direct investment specialists then feel free to get in touch with one of our international tax experts.