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Date of publication: September 2012

When choosing to trade with the UK you have the following choices, each with their own merits and issues:

• UK trading entity (Limited Company, Limited Liability Partnership, Sole Trader or Partnership)
• UK establishment
• Trade direct

UK Corporate Vehicle

This is a common choice for foreign companies looking to create a serious offering within the UK/European marketplace; in particular the Limited Company route.

See ‘OC Quick Guide Setting up a Business – Choice of Vehicle’ for more details on the differing corporate vehicle options.

The Limited Company route is a readily recognised and trusted entity in the marketplace. It signifies a commitment to the market which some potential customers/employees may desire, and this may assist with a successful launch in the market.

It offers protection to the expanding parent company. What you stand to lose if the UK does not work out, is restricted to the share capital put in, together with any loans from the parent which the entity is unable to repay. It is very simple to establish the entity.

Accounts have to be filed for the UK entity, and go on public record in the UK. The costs of doing so for statutory reporting and tax compliance are comparable to those of a UK establishment, that has to draw up accounts for the UK only.

The necessity to audit the UK entity is based on group-wide turnover and gross assets. Thus a small UK entity may need to be audited as a result of being part of a larger group.

UK Establishment

UK establishment is an official representative of your parent company in the UK. It is registered with the tax authorities and Companies House.

The registration process is cumbersome, with the need to submit certified documents relating to the parent company, its business and its officers to the UK authorities. This will include financial data.

The parent company financial reports are made public on an annual basis, whilst the UK results are reported separately for tax calculations. Audit would not be required of the UK results.

The UK permanent establishment will only be able to take advantage of the small profits rate of corporation tax if the parent company’s results are themselves below the thresholds. However, losses may be offset within the parent providing the opportunity to more readily relieve opening losses.

The UK establishment is part of the ‘parent company’ and therefore activities in the UK/Europe carry unlimited liability, the whole business is exposed.

There is a perception that a UK establishment is temporary. Commercially this may prove restrictive in terms of obtaining new customers and recruiting the right team.

Trade Direct

In limited cases, generally where there are a handful of large customers, trading directly from the home country may be an appropriate way to do business.

Anyone employed by a foreign entity, but based in the UK, has to be paid through a UK payroll. If there is no physical presence it may be possible to avoid employer’s National Insurance contributions which are calculated at 13.8% of the gross salaries of your employees. This is increasingly difficult as the view will generally be that UK employees mean than you have a UK presence.

You may still find you are making sales in the UK and therefore need to register the foreign company for Value Added Tax. VAT would then be chargeable on all of your relevant supplies and additional reporting would be necessary. Depending who your customers are, they may be able to reclaim this Value Added Tax.

If the aim is growth in the UK/Europe markets, this route is likely to hinder it due to a perceived lack of commitment and difficulties in dealing with any disputes.

You are not liable to corporate taxes in the UK if no UK establishment is created.