26th May 2016UK Plc 101 – A practical guide for foreign companies acting in the UK

What makes the UK appealing?

English has long been recognised as the international language of business, which automatically makes the UK very attractive to foreign companies – particularly those from the US.

But language isn’t the only thing drawing businesses to the UK.

The UK’s stability (legal, financial and political) means it is very straightforward to set up a business here. This appeals greatly to foreign companies, especially those from less stable economies.

…corporation tax is a major fixed cost, and at 20 per cent, the UK has the lowest rate in the G7.

Furthermore, the administration involved in setting up a limited company is very modest. There are no minimum capital requirements and there is very little paperwork, making it a cheap and quick process.

Financially speaking, corporation tax is a major fixed cost, and at 20 per cent, the UK has the lowest rate in the G7 – a status it has enjoyed for most of the past 15 years. If a business can base itself in the UK and pay less corporation tax than it would in Germany or France, for example, then that will help improve the net return to shareholders.

Finally, the low level of bureaucracy in the UK, means there is no need to deal with multiple bodies when setting up a business. Instead, you deal directly with the central administrative bodies e.g. Companies House to form companies, HM Revenue & Customs for taxes, etc.

What changes may affect foreign businesses in the UK?

There are two main aspects that will have an effect here:

First, the Chancellor announced in the Budget that UK corporation tax rate will be progressively lowered to 17 per cent by 2020, a level half that of France, and which would give Britain the lowest corporation Tax rate in the G20.

Second, the most likely changes relate to the Base Erosion and Profit Shifting (BEPS) initiative. In order to combat tax avoidance, the Organisation for Economic Co-operation and Development (OECD) is co-ordinating the drafting of a package of measures that will be incorporated into domestic tax law and double tax treaties as appropriate.

The Budget also included sweeping reforms to the tax deductibility of interest for companies making profits of more than £5m. In addition, measures designed to clamp down on tax avoidance by multinational companies operating in the UK – officially known as the Diverted Profits Tax but generally referred to as the ‘Google Tax’ – are already being implemented.

The implications of Brexit

It is hard to say what consequences Brexit may have, as overall, leaving the EU would be a step into the unknown for the UK.

Some potential advantages for businesses are:

• The UK could have far more flexibility in how it develops its business environment;
• We would keep the Pound and avoid the risk of contagion from the Eurozone (there would be no requirement to bail out any failing EU economies);
• We could negotiate our own trading terms throughout the world;
• The value of Sterling could fall, meaning that exports would be cheaper.

However, the disadvantages could include:

• A period of uncertainty;
• It could take a while to negotiate new trading terms, meaning access to the EU market may be less straightforward;
•  Mobility of labour may be restricted;
• The value of the Pound could fall in the short-term meaning importing goods/services would be more expensive.

For now, the uncertainty created by the Brexit referendum has seemingly done little to put off foreign investment in the UK. In fact the Pound’s steady depreciation since the referendum was announced may have helped, by making the UK relatively better value to overseas investors.

But while the UK remains a relatively easy and cost-efficient place for foreign companies to set up operations, the many unknowns that would face a non-EU Britain could cause some investors to think twice – making it all the more important for those weighing up an investment decision to take expert advice.

Toby Ryland, Corporate Tax Partner
T 020 7874 7959
E tryland@hwfisher.co.uk