You are a successful US tech business. You have seen increasing demand for your product from European customers. At a recent conference you met with a sales manager looking to relocate to England.
Should your company establish a subsidiary in the UK and offer employment terms to the potential recruit? Should you set up an establishment and offer a consultancy arrangement? Should the possibility of an agency/distribution agreement be explored?
Below we set out some practical tips for overseas companies facing such questions to reflect on:
1. Professional team in place
Being surrounding by a strong and competent team will not only make your life easier, but will also increase the chance of success. This not only includes the company’s key employees, but also involves putting in place the right set of professional advisers (e.g. accountants and lawyers).
Before you take any steps to set up a business in the UK, you should speak with both local and UK advisers to try and establish what options work.
2. Choice of vehicle
The choice of vehicle will be impacted by factors such as tax; legal risk; customer perception; and running costs.
You may decide to establish a separate UK entity such as:
- a UK establishment (or branch);
- a UK company; or
- a UK partnership.
Alternatively a business which is not looking to be heavily based in the UK may want to consider entering into a contractual business relationship by appointing an agent, distributor or franchisee and/or licensing intellectual property rights.
3. Consider using an establishment…
This is an umbrella concept which includes both branches and places of business. The fact that any overseas company is carrying on business in the UK does not necessarily mean it will have to formally register as a UK establishment: registration is only required where there is some degree of physical presence in the UK. For example, passively investing in property or using an independent agent who conducts business on behalf of an overseas company will not give rise to a place of business for that company; neither will an occasional location such as a hotel where a director may conduct business on visits to the UK. Setting up a warehouse, however, would give rise to a place of business.
An overseas company that intends to have an establishment within the UK is required to register with Companies House and comply with certain requirements under the Companies Act 2006 (the “2006 Act”). In addition, a UK establishment is normally seen as a “permanent establishment” in the UK for tax purposes and the overseas company will be liable for UK corporation tax on the establishment’s profits.
The overseas company which sets up the UK establishment is directly responsible for all debts and liabilities incurred by the establishment. As such, the opening of a UK establishment does not provide the protection of limited legal liability which would be afforded by the creation of a UK company.
4. …or setting up a subsidiary
The majority of companies in the UK are private limited companies (especially those which are subsidiaries of other UK or overseas companies). They are subject to far less regulation than public limited companies and are therefore often the preferred entity when an overseas company looks to start business in the UK. A private company must have at least:
- one member/shareholder; and
- one natural officer (a director).
There are many considerations to take into account when choosing who to appoint as directors including that they will be able to bind the company and maybe exposed to personal liability if the venture fails.
There are no requirements as to the amount of share capital or value of each share and the appointment of additional directors or a company secretary is optional. Once incorporated, a private company can commence trading without requiring the issue of a trading certificate.
5. Opening a bank account
Deciding to establish a subsidiary company in the UK is likely to require the opening of a UK bank account by means of which, transactions and business will take place. When choosing a UK bank, researching the various packages they provide is of paramount importance; different banks offer a wide range of services tailored to particular business models.
Since the financial crash in 2008, there has been a very significant increase of the regulation of banks. This has been reflected in the problems of opening up a bank account. In our own experience, banks are applying much tougher “know your client (KYC)” checks on setting up accounts for customers with an overseas aspect.
In order to facilitate the running of your company’s finances, it is advisable to conduct research into payment integration initiatives such as the Single Euro Payments Area (SEPA) which aims to simplify bank transfers denominated in Euro.
6. Intellectual Property and services agreement
The protection of intellectual property (“IP”) may be crucial to a business’ success. Whilst you can’t protect an idea, you can protect how that idea is applied by seeing whether you have a product that can be patented or registered as either copyright or as a trademark. Advice will be needed as to whether any further IP registrations are needed having regard to the protection already put in place by the parent company.
It may also be sensible to have an intra-group services agreement to cover issues such as the licensing of IP rights to the new venture.
As a company expanding internationally, it is crucial that all aspects of employment are considered and managed. It is important that the company has in place service/consultancy/employment agreements with key individuals which will outline, amongst other things, remuneration, restrictive covenants and termination notice provisions. The determination of employment status is of importance as the level of taxation of income and the payment of National Insurance Contribution are subject to this.
The UK Government’s policy on and administration of immigration control has moved away from the relatively relaxed and liberal approach of the late 1990s and early 2000s. International security worries, economic pressures and public concern about social and labour market impacts have driven successive legislative and systemic changes in the past decade. Now, the dominant theme is a deliberate policy of reducing net migration with an emphasis on security, compliance, regulation and due process, enforced by inspections and penalties.
That is the overall picture, but for businesses looking to establish themselves in the UK the legal environment is more positive. The UK Government wishes to encourage genuine entrepreneurs and business relocations and has refined checks and balances in the system to enable those which bring genuine investment and create UK jobs to do so, subject to meeting the criteria.
Inevitably, large-scale systematic change and more rigorous testing of criteria translate into more complex and time-consuming process and business risk. For this reason, thorough evaluation of the viability of investment from an immigration perspective is required at the outset. Obviously, key people must be able to work lawfully in their roles in order for a business to be viable.
Before the company even begins to trade in the UK, it needs to consider whether it needs to apply for any particular consents or approvals. Sectors which are heavily regulated include financial services (where often both the company itself and the persons running it may need to be authorized by the FCA) and certain businesses operating within the food industries (overseen by the Food Standards Agency and local authorities).
Further, depending on the nature of the company’s business, various specific rules and regulations may need to be adhered to. By way of example, if you handle personal information about individuals, you have a number of legal obligations to protect that information under the Data Protection Act 1998.
10. Networking & Trade and Investment
The UK Government department “Trade and Investment” seeks to support and enable the expansion of global businesses with subsidiaries in the UK. By means of this initiative, assistance and grants are readily available. For example, the “Tradeshow Access Programme”enables the promotion of overseas businesses and is a scheme through which financial help may be gained to help subsidize costs such as conference fees.
Networking events and opportunities are also available through Trade and Investment.
Joining other networks, such as East London’s Tech City provides the opportunity to meet like-minded people to bounce ideas off.
The above pointers are far from an exhaustive list of the issues to be considered and again it is essential that proper advice is taken.
Having been founded by entrepreneurial lawyers, Fox Williams LLP is uniquely positioned to help you set up and grow your UK business. We are experts at advising entrepreneurs and businesses setting up new companies, and have a specialist Start Up team on hand who can assist you with all legal aspects of your venture. As we understand that budgets are often limited, we are also happy to discuss the services which we can provide on a fixed price basis. Please contact Paul Taylor if you would like to know more.