Investing in the UK – eight tips for foreign investors

Tuesday, August 30, 2011 | Posted by: Nick Farr
Categories: China , Thought leadership | Tags: tax, investment, China, UK, investors, funding, subsidiary, Hong Kong, regulatory, supply chain, foreign investment, holding companies, structures, entity, employees, staffing, inbound, inward, foreign exchange

What do investors and businesses from China (and other emerging economies) need to know before investing or setting up in the UK? Our quick guide covers the main issues: from choice of entity and location, to employment considerations, regulatory issues and foreign exchange controls.

The United Kingdom remains a popular destination for inward investment with regulations more straightforward than many other European countries. Tax rates are low by G8 standards, and although the tax regime can be onerous it can be overcome by careful management of the tax position of a UK subsidiary, which will allow the company to take full advantage of the reliefs available.

1. Choose your entity
There are two main ways for a foreign investor to invest into the UK, either through the use of a Limited Liability Company or setting up a branch in the UK. One consideration when using branches, is that the accounts of the parent company must be filed with Companies House in the UK. The setting up of a Limited Liability Partnership is also becoming more common, particularly for joint ventures and in the professional practices sector. It is also common for a UK company to be held via intermediary holding company, usually based in Hong Kong.

2. Set-up and regulatory approval
The UK is regarded as a ‘free market’ with comparatively few restrictions on a foreign entity setting up or acquiring a UK business, or operating in the UK. Regulatory approval is required for some industries, however; this includes financial services. The process for setting up a new company is quick, easy and inexpensive. There are various filing requirements with Companies House and the UK tax authorities, and an independent audit must be undertaken where the company is of a certain size.

3. Choosing your location
Many think of London when considering the UK as a place to invest. It is recognised as having a skilled and diverse workforce, excellent infrastructure and specialist industry clusters, such as financial services. It is also seen as leading global financial centre. There are, however, advantages to investing into other parts of the country. Labour and land are significantly cheaper outside of London, and there are various incentive schemes and tax breaks to encourage investment in various regions. Certain specialised industries are particularly strong in the regions, such as manufacturing and niche precision engineering industries, including automotive and aerospace.

4. Employing staff
London has the largest Chinese population in Europe. Visas will be required for non-European Union (EU) Chinese nationals who are seconded to work in the UK. The UK has various employment regulations including health and safety regulations, a national minimum wage and certain employment law rights although these are less onerous than much of the EU. Generally, the UK has a high employment cost with the average UK salary being around £25,000 per annum. Payroll taxes are also relatively high, rising to 50% for income over £150,000 and careful planning is recommended to take advantage of reliefs, particularly for expatriates.

5. The UK as a regional hub
As well as being a good place to do business, the UK is also seen as a gateway through which to invest into Europe. The UK has good infrastructure with several airports, along with a developed and long-established legal and political system. It has a good tax regime for locating a holding company with an excellent tax treaty network and in most cases no tax on the through-payment of dividends. It does however have a complex taxation system, which requires careful navigation. It also has sophisticated capital markets for those businesses looking to raise funds.

6. Managing the supply chain
Many Chinese companies look to the UK either as a regional distribution and holding company for Europe, and/or to undertake M&A activity with local businesses as a way of accessing technology and intellectual property. The UK, however, must fit into the wider supply chain of the group, and it is important to ensure that the businesses are fully integrated from a financial and operational perspective. Both the UK and China have sophisticated transfer pricing regimes and cross-border charges or transfers of assets much be priced on an arm’s length basis.

7. Funding
Both equity and debt funding are possible. Debt is often preferred due to its flexibility, however there are restrictions on tax deductibility, which must be carefully managed.

8. Foreign exchange controls and cash extraction
There are no significant UK exchange controls but UK companies should ensure that solvency requirements are met – or heavy penalties could apply to company directors. Companies can now operate offshore renminbi bank accounts in London, allowing for free conversion to and from pound sterling to renminbi.

Who should I contact for further help and advice?
For further information about investing into the UK, visit our China Britain Services Group page or contact:

Nick Farr
Partner and Head of China Britain Services Group
Grant Thornton UK LLP
T +44 (0)207 728 2691
E .(JavaScript must be enabled to view this email address)

Image: © The Laird of Oldham

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