Types of UK entity – UK Establishment

The most commonly encountered corporate structures for overseas companies looking to enter the UK market are the UK company and UK Establishment.

An overseas organisation wishing to set up a UK Establishment, such as a ‘Permanent Establishment’ (also known as a branch) or a ‘Representative Office’ (also known as a place of business), must register it with Companies House.

Registration

The main UK legislation relating to UK corporate structures is the Companies Act 2006. The UK government agency responsible for the incorporation and registration of entities is the Registrar of Companies, and the company registry is commonly known as ‘Companies House’ http://www.companieshouse.gov.uk

A UK Establishment must be registered at Companies House as part of the process of incorporation. The information about UK Establishments is held on the public register, which is available for anyone to see.

Note: The expression ‘UK Establishment’ is a legal term, used in the Companies Act and the Overseas Companies Regulations. The expressions “Permanent Establishment’ and ‘Representative Office’ are Tax terms. Broadly, a Permanent Establishment creates a taxable presence in the UK, while a Representative Office does not.

The use of ‘UK Establishment’ in the law has ended the different registration and disclosure regimes for a branch and a place of business that were in place before 1 October 2009.

A UK Establishment

A UK Establishment means that the overseas entity itself is doing business in the UK. Accordingly, the UK Establishment is not a separate legal entity. In simple terms, a UK Establishment is an extension of the overseas company.

UK Establishments can be a useful alternative to a UK company. There may be commercial or other reasons why a business might choose a UK Establishment. Often this is because a UK Establishment is seen as a lighter form of entry into the UK market with lower regulatory requirements than a UK company. This can be an attractive option for inward investors who want to make a tentative first step into the UK market or where the levels of activity in the UK are likely to remain limited.

The choice of UK Establishment’s financial year is entirely up to the UK Establishment. The financial year in the UK is usually expressed by stating the year-end date; the most common financial year in the UK is the year-end 31 March (April to March). However, most international organisations choose the year-end 31 December (January to December) in order to keep it aligned with the financial year of the parent company or the whole group.

Registration of UK Establishments

An overseas company must establish a permanent physical presence in the UK before it registers its UK Establishment with Companies House. Having established a physical presence, it must then register it within one month.

Prior permission to register is not required. However, there are restrictions on the use of certain words and expressions in business names. Advice should be taken on whether a particular proposed name is likely to be accepted by the Registrar, before a formal application for registration is submitted to Companies House.

An overseas company setting up an Establishment in the UK must submit to Companies House, with its formal application for registration:

  • A certified copy of its constitutional documents.
  • A copy of its latest financial statements, if the company is required by the laws of its ‘parent country’ to prepare, audit or disclose financial statements.

If these original documents are not in English, certified English translations must be provided.
The application for registration is submitted on a statutory registration form, which requires the following information.

  • Details about the overseas company (including corporate name, trading name if different from its corporate name, whether it is a credit or financial institution, legal form, country of incorporation, registered company number, governing law & accounting requirements, capital structure and statutory accounts obligations).
  • Details of the directors and secretaries (names, residential addresses, service addresses if applicable, and other personal details).
  • The address of the UK Establishment, the date on which it commenced activities and a brief explanation of its activities.
  • Details relating to compliance with accounting requirements.
  • Permanent representative – Details of each individual (wherever resident) with authority to represent the company’s UK Establishment.
  • Person authorised to accept service – Details of the UK resident individual (if any) nominated to accept official correspondence on behalf of the company.

Once the required documents have been filed and accepted, the Companies House registers the UK Establishment and issues a registration certificate. The certificate provides evidence of the registration and states the registration numbers assigned to the overseas company and its UK Establishment.

The registration number of the overseas company begins with “FC” and the registration number of the UK establishment begins with “BR”.

Continuing obligations of UK Establishments

After registering a UK Establishment with Companies House, the overseas company is required to submit annual Statutory Financial Statements (accounts) to Companies House.
The accounts that must be filed at Companies House (and which will be made available for inspection by any member of the public) are those of the overseas company as a whole, and not those relating only to the activities of the UK Establishment. The rules vary regarding the form & content of the accounts that should be filed, and depend on whether the company is required, in its home country, to prepare accounts, to have them audited and to disclose them publicly.

Statutory changes (including changes to details provided in the initial UK Establishment registration papers) must be notified to Companies House on an appropriate form. These include changes to details of the company directors, address changes, and changes to the company’s name or constitution.

The details of these changes must be submitted to Companies House within certain statutory deadlines. For changes affecting a UK establishment, Companies House must be notified within 21 days after the alteration is made. For changes affecting the overseas company, Companies House must be notified within 21 days after the date the notice of the alteration could have been received by post in the UK (if dispatched with due diligence).

A Permanent Establishment (also known as branch) has ongoing obligations to the UK tax authorities. Please see the UK taxation section below for details.

Seek professional guidance early

The rules (including tax rules) are complex and their application does depend on context and the nature of the business. Care should be taken by overseas companies with operations in the UK, either directly, to ensure that those UK operations do not amount to a permanent establishment (a branch) unless and until that is intended by the parent company. We strongly advice you to seek professional guidance before making any decisions.

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UK TAXATION

In the UK, the most important taxes are:

  • Corporation tax on profits
  • Value Added Tax (VAT), which is a sales tax
  • Pay As You Earn (PAYE) and National Insurance Contributions (NICs)

PAYE is a tax on the earnings of employees. It is deducted from pay by the employer, and paid to the tax authorities. NICs are social security payments, payable by employees and employers to the tax authorities. NICs payable by employees are deducted from pay by the employer, together with PAYE income tax, and paid to the tax authorities.

Corporation tax

The rate of Corporation Tax in the UK is between 19% and 25%, depending on the profits. Companies and Permanent Establishments pay corporation tax on their taxable profits. Taxable profits are based on the business’s reported profit in its annual financial statements, but with some adjustments. These adjustments could relate to one or more of a number of UK tax incentives – for example, to support innovation or encourage investment in capital assets.

Capital gains arising from the disposal of capital assets at a profit are subject to tax, assuming an exemption does not apply, at the same rate as trading profits, and this tax is included within the overall computation of corporation tax payable to HMRC.

Useful introductory information about UK taxes is available on the HM Revenue & Customs (HMRC) website, at: https://www.gov.uk/business-legal-structures/limited-company and at https://www.gov.uk/government/organisations/hm-revenue-customs/services-information

Liability for corporation tax

UK establishment – Permanent Establishment (branch)
Corporation tax is payable on UK attributable profits only.

UK establishment – Representative Office
The overseas company does not have a taxable presence in the UK and is not subject to UK corporation tax.

Corporation tax filing requirements

A UK Permanent Establishment (branch) of an overseas company must provide HMRC with certain initial information within three months of starting up in business.

A corporation tax return must then be submitted to HMRC annually within 12 months of the end of the entity’s financial year. Returns must be filed electronically, with financial statements submitted in Inline Extensible Business Reporting Language (iXBRL).

The corporation tax liability must be paid within 9 months from the end of the entity’s financial year.

HMRC charges penalties for late filing and interest on overdue amounts.

PAYE and NICs

The UK operates a tax withholding system called PAYE. It is the employer’s or UK host employer’s responsibility to report PAYE information, as well as deduct tax from the employee’s income and remit the funds to HMRC.

In addition, certain ‘benefits’ enjoyed by the employees are subject to income tax, such as the private use of a company owned car and company payments for private medical insurance. In addition to the annual statement of gross pay and tax deducted (P60) the employer must also provide the employee with a statement of the benefits provided from which tax was not deducted, as notified to HMRC on the P11D.

The employer and tax affairs of migrant workers
When an organisation is planning to set up a UK Establishment, it will have to deal with various issues relating to migrant workers. Issues to consider are:

  • Compliance with PAYE and NIC requirements.
  • Securing cost efficient accommodation and salary arrangements for the employee.
  • Issues relating to visitors to the UK on business visitor visas, and ensuring that the work they do in the UK is permitted by the visa regulations.
  • The tax implications of assignments of non-UK residents to carry out work in the UK.
  • Supporting the employee by providing information to enable them to submit an annual personal tax return to HMRC.

VAT

VAT is the UK’s sales tax. Goods and services that are subject to VAT are known as taxable supplies. Non-taxable supplies may either be VAT exempt or outside the scope of UK VAT.

The VAT rate applicable depends upon the goods or services you supply. The standard rate in the UK is currently 20% and is applied to most taxable goods or services.

Registering for VAT

A business must register with HMRC if the value of its sales of taxable supplies exceeds a minimum threshold level. This level is currently £85,000 in any 12 month period.

  • A business must register for VAT if at any time it expects its taxable supplies to exceed the threshold in the next 30 days alone. In addition, due to a special rule called the reverse charge, a business can exceed the threshold as a result of services bought in from suppliers outside the UK.
  • A business that has not exceeded the threshold (and is not required to register) may register voluntarily for VAT.
  • Where it is known that taxable supplies will be sold at some point in the future, it is possible to register as an ‘intending trader’. This will enable the entity to recover VAT on purchases made wholly for business use.

Charging VAT on sales
Businesses that are registered for VAT must charge tax on the taxable supplies that they sell, at the appropriate rate. The standard rate of VAT is currently 20%, but some goods and services are taxed at a different rate.

Reclaiming VAT on purchases
Businesses registered for VAT may also reclaim the VAT that they have paid on purchases of taxable supplies from other VAT registered businesses. However, if the business makes exempt supplies there is a restriction on the amount of VAT on purchases that it can recover.

Other tax considerations

Transfer pricing
UK transfer pricing rules require that transactions between affiliates (such as an overseas parent company and its UK establishment) should be conducted on an arm’s length basis. This means that the pricing of transactions between them should be the same as if the two affiliates were completely independent from each other.

The rules equally apply to UK-UK transactions.

Where transactions between affiliates are not made on an arm’s length basis, an adjustment to the prices may be required for corporation tax purposes.

Base erosion and profit shifting (BEPS)
Base erosion and profit shifting (BEPS) refers to corporate tax planning strategies used by multinationals to “shift” profits from higher-tax jurisdictions to lower-tax jurisdictions, thus “eroding” the “tax-base” of the higher-tax jurisdictions. The Organisation for Economic Co-operation and Development (OECD) define BEPS strategies as “exploiting gaps and mismatches in tax rules”.

The Base Erosion Profit Shifting (BEPS) regime was the international communities’ response. The outcome of the Action Plan included changes to international tax rules, such as Double Tax Treaties and the OCED’s Transfer Pricing Guidelines, and also recommendations from the OECD for tax legislation that should be adopted by countries in their national tax law.

In the UK we have seen a number of new measures introduced. However, to properly comply with the new rules, it often requires detailed knowledge of the overall group position, including how other group members (both UK and overseas) treat certain items for tax purposes.

UK Subsidiary Company vs UK Permanent Establishment (Branch)

Broadly, a permanent establishment (branch) is an extension of the overseas company, while a subsidiary company is a separate legal entity and therefore carries less risk towards the parent company. Let’s look at some of the differences between the two.

  • Registration: Both a permanent establishment (branch) and a subsidiary company require registration with the UK authorities.
  • Filings: An overseas company may prefer the relative anonymity of a subsidiary company as it is only required to file its own annual financial statements whereas a permanent establishment (branch) is required to file the financial statements of the overseas company.
  • Closing the business: If a permanent establishment (branch) proves unsuccessful it is automatically closed when its trade ceases. On the other hand, closing a subsidiary company involves a few more steps.
  • Tax Considerations: From a tax perspective, a permanent establishment (branch) will only be subject to UK corporation tax on the portion of its profits. A subsidiary company is subject to UK corporation tax on its worldwide profits.

The choice between a subsidiary company and a permanent establishment (branch) will ultimately depend on practical factors (separate legal entity, visas, bank accounts etc.) and commercial factors (general ease of interaction with other UK businesses, scale of planned operations etc.). From a tax and filing requirement perspective, there are certain differences between the two structures but often these do not outweigh the other considerations.

Other tax considerations

  • Own legal entity in the UK – so more autonomous
  • Perceived as having more substance than a permanent establishment (branch) as they are wholly governed by UK law
  • UK company has limited liability so can be ring fenced from overseas parents
  • Relatively easier to engage in legal arrangements and open bank accounts
  • Closure time can be 3-6 months or longer
  • More reporting requirements and procedures

Other tax considerations

  • Not a separate legal entity
  • Perceived as having less substance than a subsidiary company as they are not wholly governed by UK law
  • Overseas parent company liable for obligations and liability
  • Difficulty in engaging in legal arrangements and opening bank accounts
  • If unsuccessful, can be closed without formal notice
  • Requirement to file financial statements of the parent company

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