Doing Business In United Kingdom

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LOCATION & CLIMATE

The United Kingdom, consisting of Great Britain and Northern Ireland is twice the size of New York State. England, the South-East part of the British Isles, is separated from Scotland on the north by the granite Cheviot Hills, from them the Pennine chain of uplands extends south through the centre of England, reaching it’s highest point in the Lake District in the Northwest.

Important rivers flowing into the North Sea are the Thames, Humber, Tees and Tyne. In the West are the Severn and Wye, which empty into the Bristol Channel and are navigable as the Mersey and Ribble.

Mean daily sunshine figures reach a maximum in May or June, and are at their lowest in December. The key factor is of course, the variation in the length of the day through the year, but wind and cloud play their part as well.

POPULATION, LANGUAGE & CURRENCY

The UK has an estimated population of 60,609,153.

In Britain, the main language is English (British English). The English language is a West Germanic language, originating from England. Over 50% of the English language is derived from Latin. English is the third most common “First” language, with around 402 million people in 2002.

The currency used in the UK is British Pound (GBP)

ECONOMY

The United Kingdom has the fifth largest gross domestic product in the world in terms of market exchange rates and the sixth largest by purchasing power parity (PPP). It has the second largest economy in Europe (after Germany), as well as being a member of the European Union and the G8. The capital, London, is one of the two largest financial centres in the world, along with New York City. The British Economy is often described as an ‘Anglo-Saxon economy’.

The British economy has in recent years seen the longest period of sustained economic growth for more than 150 years, and is one of the strongest European Union economies in terms of inflation, interest rates and unemployment, all of which remain relatively low. However in common with the economies of other English – speaking countries, it has higher levels of income inequality and weaker social services and public service sectors compared to Europe’s other large economies.

THE PARLIAMENT AND GOVERNMENT

The UK Parliaments is one of the oldest representative assemblies in the world. At the end of the 20th century, legislation was passed by the UK Parliament to create devolved Parliaments / Assemblies in Scotland, Wales and Northern Ireland.

The houses sit separately and are constituted on different principles. The relationship between the two Houses is governed largely by convention but is in part defined by Parliament Acts.

The Parliament consists of three constituent parts:

House of Commons
House of Lords
The Crown

The people of the UK directly elect the Members of the House of Commons in General Elections. Parliament has a maximum duration of five years and at any time up to the end of the five years a General Election can be held for a new House of Commons.

When the results of a General Election are known the Queen invites the leader of the party winning the most seats in the House of Commons to become Prime Minister and to form a Government. The Prime Minister is the leader of the Government and must be a member of either House. The current Prime Minister is Rt. Hon. Gordon Brown MP.

The Government is primarily responsible for arranging the business of both Houses. As the initiator of policy, it indicates what action it wishes Parliament to take, and explains and defends its position in statements and public debate. Parliament is responsible for making the Government accountable for its actions.

The most senior members of the Government are known as the Cabinet and are chosen by the Prime Minister. The work of the Government is divided among Departments, which specialise in a particular subject such as Health, Defence and Transport. The Prime Minister can change the number and responsibilities of Government Departments.

STEPS TO INCORPORATE A COMPANY IN THE UK

Companies House is responsible for company registration in Great Britain. It also has a key role in providing information about British companies. A new company must:

Give details of its constitution in the form of a Memorandum & Articles of Association
Give details of its directors, company secretary and members
Have a registered office

These documents are often prepared by private sector formation agents, but there is no requirement in law to use agents.

A new company comes into existence when the Registrar of Companies issues a Certificate of Incorporation. A standard incorporation fee levied by Companies House is £20.00. Same day incorporation is also available for an additional fee.

There are detailed rules in relation to the requirements for the incorporation of different types of companies and the formation documents, membership, capital and officers that each requires.

EMPLOYMENT REGULATIONS

Employment rules in the UK are designed to ensure that there is no discrimination or unfair treatment of employees. Under the legislation an employer cannot compel an employee to work more that 48 hours per week over a 17-week period, unless the worker has agreed to do so in writing. All workers are entitled to paid holiday from the day they start work at the rate of 1/12 of their annual entitlement per month worked.

WORK PERMITS

Other nationalities excluding the ones stated below will need a visa to enter the UK, issues initially for six months. Their prospective employers will have to apply on their behalf for a work permit from Work Permits (UK), part of the Home Office, before they arrive in the UK.

European Economic Area (EEA) nationals (Some may need to register with the Home Office)
Citizens of British Overseas Territories
Swiss Citizens
Commonwealth Citizens with leave to remain in the UK on the grounds of a grandparent born in the UK
Asylum seekers with permission to work
People with a right of abode or settlement in the UK
Spouses, dependants and unmarried partners of people in a category allowing work
People with exceptional or indefinite leave to remain in the UK for humanitarian reasons, or who have limited leave to remain on the same basis, provided it hasn’t expires.
Students – although if they are from outside the EEA, they can work only for up to 20 hours per week during term time (and full time during vacations) unless the work is a placement or part of their studies.

Employers can be fined if their employees do not have a valid work permit. From May 2004 documents checks have to be made on every worker they take on, in order to ascertain they are not employing an illegal worker.

RESIDENT PERMITS

All non - EEA nationals wishing to stay in the UK for more than six months now require a residence permit. This is an authorisation issue by a member state of the European Union allowing third country nationals to stay legally in its territory. The Home Office through the Department of Immigration and Nationality

Directorate (IND) issues UK residence permits. Their website can be accessed at www.ind.homeoffice.gov.uk.
Your spouse or eligible partner and children will also need to apply for entry clearance or a residence permit as appropriate if they wish to stay with you in the UK.

FOREIGN EXCHANGE CONTROL

The UK lifted controls in 1979 and then Germany in 1984. The last European countries to lift controls were Portugal and Ireland in the early 1990s. European countries pegged their currencies to each other and traded in a band known as the European Exchange Rate Mechanism.

In November 2001, the IMF’s new first deputy managing director, Anne Kreuger, acknowledged that it might be desirable to impose capital controls in the event of a crisis. The debate over capital controls has remained highly contentious, but even mainstream economists have began to say that capital market liberalisation should be done slowly and only after certain conditions had been met such as:

Development of a strong banking sector that is able to handle large inflows and channel them to productive investments.
A restructured and efficient corporate sector that can use inflows effectively and not throw “good money after bad”.
A strong regulatory and legal regime that restricts monopolistic practices, ensures prudential banking practices, and, when needed, regulates bankruptcy of debt-burdened corporations.
A sound macroeconomic environment that avoids large fiscal deficits, which exacerbates the overheating associated with capital inflows, and inflexible exchange rate regimes, which can not handle the volatility of capital flows.
A strong system of prudential, and laws that mandate proper accounting, auditing, and reporting.
No implicit government guarantees that encourage excessive inflows of short term capital.

FOREIGN INVESTMENT

The UK attracted the most foreign investment in Europe in the last year and inward investment rose by 14%.

Investment and expansion projects by overseas companies created more than 25,000 jobs in 2003/04, with the number of projects rising from 709 to 811.

Almost one third of the projects were in manufacturing. Other sectors with growing investment included IT, software, electronics and biotechnology / pharmaceuticals.

The figures were published by UK Trade & Investment, the government’s trade and inward investment operation. They are supported by figures published by consultants Ernst & Young in May 2004, which show that:

The UK remains the top investment location in Europe
The UK is the top European investment location for research, development, headquarters operations, software, electronics, pharmaceuticals, financial services & telecommunications, including call centres
It has also increased its market share – the UK won 23% of investment into Europe in 2003, compared to 19% in 2002.
International investment projects into Europe rose by 2% in 2003, halting the decline seen since investment last peaked in 2000

LEGAL SYSTEM

The UK is a constitutional monarchy whose titular head is Queen Elizabeth II. Her Government is democratically elected by the populace and is ruled by Parliament. Parliament is compromised of the House of Lords and the House of Commons. Its Constitution consists of unwritten: partly statutes, partly common law and practice; the legal system comprises common law tradition with early Roman and modern continental influences. The legal voting age is 18.

The United Kingdom of Great Britain and Northern Ireland consists of four countries forming three distinctive jurisdictions each having its own court systems and legal profession: England & Wales, Scotland and Northern Ireland.

The constitutional law of the UK consists of:

Statute Law - Acts of Parliament
Case Law - Where judicial precedent is applied in the courts by judges interpreting statue law
Constitutional conventions - these do not have statutory authority but do have binding force

The UK is a signatory of the European Convention of Human Rights, and this has recently been incorporated into UK law with the passing of the Human Rights Act 1998. This allows for the provisions of the Convention to be applied directly by the UK courts.

SOURCES OF FINANCE

Listed are a number of the many banks operating in the United Kingdom:

Barclays Bank plc
NatWest Bank plc
Lloyds TSB Bank plc
HSBC Bank plc
Royal Bank of Scotland

www.barclays.co.uk
www.natwest.com
www.lloydstsb.com
www.hsbc.co.uk
www.rbs.co.uk

TAXATION

Taxation in the UK may involve payments to at least two different levels of government: local government and central government (RM Revenue & Customs). Local government is financed by grants from central government funds, business rates, council tax and increasingly from fees and charges such as those from on-street parking. Central government revenues are mainly Income Tax, National

Insurance contributions, Value Added Tax (VAT), Corporation Tax, Stamp Duty and Fuel Duty.

Corporate Tax - Companies pay Corporation Tax on their worldwide trading profits, income and capital gains, usually within nine months and one day from their accounting year-end. Large companies pay full rates with lower rates applicable if the company profits pass as being small. Large companies are expected to pay tax in four instalments starting approximately 28 weeks after the beginning of the tax period with the final instalment due 15 weeks after the end of the accounting period. In the event of tax payments or instalments being late interest is chargeable or repayable.

Losses - In general, trading loses may be carried back for twelve months or carried forward indefinitely, subject to change in ownership and the nature or conduct of the trade. Current year losses may also be surrendered between group members to offset against their profits for the same period. Similar relief is available for excess interest costs, but excess management expenses of investment companies may not be carried back.

Capital Gains & Losses - Companies are chargeable to corporation tax on the excess of the sale proceeds for assets over their cost, after taking into consideration indexation relief which is based on published rates linked to inflation over the period of ownership. Losses arising on the disposal of assets in the same period or losses brought forward may be offset.

National Insurance Contribution (NIC) - In addition to collecting employees income tax and NIC by withholding the relevant amount from their wages, an employer has to bear the cost of further employees NIC on both remuneration and benefits in kind provided to employees. The collection and remittance of these taxes by the employer is done under a system known as ‘Pay As You Earn’ (PAYE).

UK Real Estate - UK Property income is not subject to withholding tax for resident individuals or companies, however the surplus is chargeable at their marginal rate of tax. Rent payable to non-residents will be subject to withholding tax at the basic rate (Currently 22%) unless the owner enters into special arrangements with the Inland Revenue regarding the submission of tax returns.

Double Tax Treaties - The UK has entered into a comprehensive range of double tax agreements, covering residence status, permanent establishment, business profits, income from land and property, dividends, royalties and interest, personal direct and indirect income and capital gains. These agreements can enhance the already favourable UK Tax regime.

Domicile - An individual normally takes the same domicile at birth as his/her father and it is usually where he/she has his/her permanent home. To change domicile the individual must indicate that he has severed his/her ties with his/her country of origin and intends to live and remain in the country of his/her choice.

Personal Tax, Resident/non resident - Individuals present in the UK for more than 183 days in the fiscal year will be treated as resident for tax purposes, therefore taxable on their worldwide income and gains. Except in the case of persons not domiciles in the UK where the income or gain is not remitted here. Non residents will normally be taxable only on UK source income, subject to relief under an appropriate double tax treaty.

Income Tax - Salary, including benefits in kind, trading profits, dividends, investment and property income are subject to income tax at various rates, based on the income arising in the fiscal year ended 5 April. Full employment taxes are collected at the time of payment whilst investment income may suffer a flat rate withholding tax, but dividend income has notional credit, which is not refundable. Property income paid to non-residents may be subject to basic rate withholding tax.

Higher rate on tax investment income and tax on profits are normally payable by instalments due 50% on 31 January in the fiscal year and the following 31 July. These instalments are based on the liability of the previous year, with the balance of income tax for the current year being payable on the following 31 January together with any capital gains for that year. Reduced instalments or repayments may be made as soon as the claim can be justified.

Capital Gains Tax - Capital gains realise by individuals are now subject to taper relief, which reduces the quantum of the gain chargeable to tax in line with the nature of the asset and the period of ownership. For non business assets the relief does not become available until the asset has been held for at lease three years, with up to 40% relief for assets for more than 10 years. For business assets held more than two years only 25% of the gain is chargeable. Net gains after all reliefs and annual exempt amount are taxed at the marginal tax rates for interest income (currently 10%, 20%, and 40%).

Inheritance Tax - Subject to certain exemptions, inheritance tax (IHT) is chargeable on the aggregate value of an individual’s estate at the date of his death, and the value of any gifts and similar transfers of wealth made by him during the seven years prior to his death. Except in respect of gifts made in the seven years before death, no IHT is payable on gifts made during the individual’s lifetime if the gift is made to an individual or a trust with an interest in possession. A UK resident and domiciles individual is taxable on his world estate. For non-UK domiciled individuals only UK assets are chargeable.

Non-UK domiciled individuals can lose that status for IHT purposes if they have been resident in the UK for 16 years.

IHT is charged on all property, wherever situated owned by an individual domiciled in the UK, or on property situated in the UK of individuals domiciled elsewhere, or on certain gratuitous transfers made by close companies (mainly companies under the control of five or fewer directors).

STAMP DUTY

Stamp Duty is the tax you pay when you buy property or shares. You pay ‘Stamp Duty Land Tax’ when you buy property and either ‘stamp duty’ or ‘Stamp Duty Reserve Tax’ when you buy shares.

The main duty is 0.5% on share transfers.

If you buy a property in the UK over a certain purchase price you have to pay Stamp Duty Land Tax (SDLT) – previously known as Stamp Duty. This is charged on all purchases of houses, flats and other land and buildings.
You don’t have to pay any SDLT on Residential property costing £125,000 or less. Above this amount you pay between one and four per cent of the purchase price.

Purchase price of residential property	Rate of SDLT (Percentage of total purchase price)
£0 - £125,000	0%
£125,001 - £250,000	1%
£250,001 - £500,000	3%
£500,001 more	4%

ACCOUNTING

Limited Companies – Limited or incorporated companies, including subsidiaries of parent companies incorporated outside the UK, are governed in the first instance by the companies Act 1985 which includes provisions relating to:

The maintenance and retention of accounting records
The maintenance of registers and minutes relating to directors and shareholders and their meetings
The form and content of annual accounts
The publication to shareholders and the public filing of annual accounts
Requirements for Annual Accounts to be audited
Enforced correction of unsatisfactory Annual Accounts

Limited Liability Partnerships (LLPs) - LLPs are governed in the first instance by the Limited Liability Partnerships Act 2000. Detailed regulation for accounting and reporting are similar to those for ordinary limited companies, but there are some differences.

Overseas Companies - Overseas Companies are businesses incorporated outside the UK but operating within the UK through a branch or representative office, and not through a UK subsidiary company. They are also required by the Companies Act to register their place of business and to file annual accounts of the company with the Registrar of Companies.

Accounting Standards - Public Companies with shares traded on the Stock Exchange are required to prepare their consolidated accounts in accordance with EU adopted International Accounting Standards (IFRSs). Other companies are permitted to adopt international standards for accounting period beginning on or after 1 January 2005. Companies quoted on the AIOM must make the change from 1 January 2007.

For Companies and LLPs that have not been adopted international accounting rules, generally accepted accounting practice in the UK (UK GAAP) is determined by the Accounting Standard Board (ASB). The ASB plans to secure the convergence of UK GAAP with International Standards over the medium term, but differences will remain until the present reviews of international standard have been completed.

Period End Accounts - Every UK Company registered under the Act is required to prepare a set of accounts that give a true and fair view of its profit or loss for the year and of its state of affairs at the year end. Annual accounts generally include the following:

Director’s Report
Audit Report
Profit and Loss account
Balance Sheet
Statement of total recognised gains and losses
Cashflow statement
Comprehensive notes to the accounts

Consolidated accounts must be prepared if a UK company is a parent company, although there are exemptions from this requirement for certain medium-sized and small private companies. In addition, in certain circumstances, if an overseas parent prepares and published group accounts that include the UK holding company, the UK parent can be exempted from preparing consolidated accounts for the UK sub-group.
Comparative figures should also be given for almost all items and analysis given in the year end financial statements.

All of the required information above applies equally to LLPs except that no director’s report is required.

The accounts must be provided to each shareholder or member of a limited company of LLP, although there are regulations permitting a quoted company to send only a summary financial statement to its members.

AUDIT REQUIREMENTS

The Act requires that the annual accounts include a report suitably qualified, registered auditors to the shareholders (of members of an LLP) stating in particular whether or not, in the auditors’ opinion:

The balance sheet gives a true and fair view of the company’s state of affairs
The profit and loss account gives a true and fair view of the company’s profit or loss for the year
The director’s report is consistent with the of the financial statements

In appropriate circumstances Dormant and some small private companies and LLPs may be exempt from the requirement to have their accounts audited.

Filing of the Accounts - All Limited companies and LLPs must place a copy of their annul accounts on the public record by filing them with the Registrar of Companies.

For public and large companies and LLPs, the filed accounts must be identical to those sent to the shareholders. For medium-sized and small companies and LLPs the accounts filed with the Registrar at Companies House may be in abbreviated format.

The accounts on the public file must bear the manuscript signatures of each of the secretary, director or auditor who have approved the accounts or any part of them.

There are time limits starting from the end of a company’s accounting reference period for the filing of the accounts with the Registrar of Companies. These are:

Public company - seven months
Private company of an LLP – 10 months

Penalties are incurred when there is a breach of these time limits.

Clarkson Hyde is a member of CH International, an international organisation of accountants and auditors, with members in many countries.

To find out more about CH International please visit www.chint.org