• Introduction
• Business Environment
• Economic Environment
• Offshore Environment
• Taxation
• Corporate Legislation
• Banking

Introduction

The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom, the UK or Britain, is a sovereign state located off the northwestern coast of continental Europe. It is an island country, spanning Great Britain, the northeast part of Ireland, and many small islands. Northern Ireland is the only part of the UK with a land border, sharing it with the Republic of Ireland.

United kingdom (UK) is ranked 21st in the world in terms of population with 61.28 million people residing there in mid 2004. The country covers 244,820 km2 .

The main language of the UK is English. In Wales, the Welsh language has equal status. Other indigenous languages that still survive as a medium of everyday communication in parts of the UK are (Scottish) Gaelic and Irish. Efforts are being made to revive the Cornish language.

The currency of the UK is the pound sterling (GBP), which is subdivided into 100 pence.

The UK is a parliamentary democracy. Executive power lies with the prime minister and cabinet. The monarchy is head of state. Parliament has an elected House of Commons and a non-elected House of Lords.

The United Kingdom is a permanent member of the United Nations Security Council, a member of the G8 and NATO, and a member state of the European Union. The UK has a “Special Relationship” with the United States. Apart from the US and Europe, Britain’s close allies include Commonwealth nations and other English speaking countries. The UK is one of the largest economies in the world. As in most other developed countries, the manufacturing sector has been declining while the services and communications sectors have grown in importance.

London Heathrow Airport, located 15 miles (24 km) west of the capital, is the UK’s busiest airport and has the most international passenger traffic of any airport in the world

Business Environment

There are more than 2 million limited companies registered in Great Britain, and more than 300,000 new companies are incorporated each year.

Companies operating in the UK have access to a tariff-free market of consumers through the
country’s membership in the EU, and free trade with Iceland, Liechtenstein, Norway and
Switzerland through other agreements. The UK has abolished all national barriers against imports set up in the past to protect troubled industries.

As of January 2007, there were 29 million people in the employed workforce (excluding the self employed). A wide range of skills is available in both manufacturing and service industries, but there can often be shortages of skilled labour in particular industries. Strong local loyalties tend to reduce labour mobility.

Grants and incentives available to businesses setting up in the UK are administered by a wide
range of bodies, from the European Union through to local authorities and regional development
agencies.
The policy objectives of all the incentives available are:
• To encourage investment into economically depressed areas
• To encourage investment in a specific type of product, service or industry
• To assist the establishment and prospects of specific types of businesses.

Business regulation

Responsibility for the basic legal framework for the regulation of industry and commerce rests with the newly formed Department of Business, Enterprise and Regulatory Reform (formerly the Department of Trade and Industry). The Department administers the Companies Act 2006 (see above) and various other statutes and regulations governing business affairs and marketplace regulation.

Trademark registration
Patents, trademarks, service marks, copyrights and design rights are legally recognised in the
UK. Intellectual property rights may be enforced through a civil suit (brought by the patent or
trademark holder or by a licenser or licensee against an alleged infringer). Damages for patent
and trademark infringement may be awarded based on the loss suffered by the owner of the
intellectual property or in the form of a royalty payment. Copyright damages are assessed on
essentially the same basis. Damages may be claimed for any infringement during a six-year
period before the suit is filed.

The Trade Marks Act 1994 ensures that trademarks are afforded the same rights as in the EU.
Under the Madrid Protocol, trademarks registered in a participating country offers the same
protection in all participating countries. This avoids multiple applications and fees. The World
Intellectual Property Organisation (WIPO) administers the application system, although
applications may be made in the UK.

The Community Trademark offers uniform trademark protection in all EU countries through a
single application. The Community application is an alternative to, and complementary with,
national procedures and the Madrid Protocol. Community Trademarks are valid for 10 years and renewable indefinitely. An applicant may file for a Community Trademark at the British Patent Office or the EU trademark office, officially known as the Office for Harmonisation in the Internal Market (Trade Marks and Designs), in Alicante, Spain.
Regulations have also been passed to implement the EU Directive on Copyright and Related
Rights in the Information Society. The directive adjusts and complements the existing legal
framework on copyright to take into account the electronic environment, covering such areas as electronic copies and online transmission.

Investments by Foreigners
The UK is the largest single base for non-EU companies setting up operations in Europe, and it is the largest repository in Europe for investment from the US and Japan.
The government has some power to block foreign acquisitions and compel divestments.
Nonetheless, it generally does not exercise any discriminatory controls over foreign takeovers.
The main regulatory hazards for direct investors, especially those planning acquisitions, stem
from the EU. For the most part, these reflect the European Commission’s responsibility for
cross-border mergers that could lead to monopolies. The Commission also has other concerns,
such as practices that interfere with intra-EU trade.
The procedure for establishing a company in the UK is identical for UK and foreign investors. No approval mechanisms exist for foreign investment; foreigners may freely establish or purchase enterprises in the UK, with few exceptions, and acquire land or buildings.
Foreign ownership is limited in only a few strategic privatised companies in the aircraft and
defence sectors in which no individual foreign shareholder may own more than 15%. In theory, the government can block the acquisition of manufacturing assets from abroad by invoking the Industry Act 1975, but it has never done so.

Economic Environment

The United Kingdom is one of the strongest EU economies in terms of inflation, interest rates and unemployment, all of which remain relatively low. The United Kingdom, according to the International Monetary Fund, in 2007 had the ninth highest level of GDP per capita in the European Union in terms of purchasing power parity, after Luxembourg, Ireland, the Netherlands, Austria, Denmark, Sweden, Belgium and Finland. However, in common with the economies of other English-speaking countries, it has higher levels of income inequality than many European countries. During August 2008 the IMF has warned that the UK economic outlook has worsened due to a twin shock: financial turmoil as well as rising commodity prices.

Both developments harm the UK more than most developed countries, as the UK obtains revenue from exporting financial services while recording deficits in finished goods and commodities, including food.
In October 2007, the IMF forecast British GDP to grow by 3.1% in 2007 and 2.3% in 2008. However, GDP growth slowed to zero in quarter 2 of 2008. As of September 2008, the OECD forecasts that the UK economy faces contraction for at least two quarters, possibly severe, placing its predicted performance last in the G7 of leading economies.

Services, particularly banking, insurance, and business services, account by far for the largest proportion of GDP while industry continues to decline in importance. Since emerging from recession in 1992, Britain’s economy has enjoyed the longest period of expansion on record; growth has remained in the 2-3% range since 2004, outpacing most of Europe

The United Kingdom had £21bn of financial exports in 2005, contributing significantly towards the Balance of Payments. The UK has had an expanding export business in financial service, which has been influenced by a mixture of unique institutions, light regulation, and a highly skilled workforce.

Offshore Environment

As a relative high tax country, located in Europe, the UK doesn’t qualify as an offshore jurisdiction or offers offshore facilities. However, the United Kingdom is often involved in offshore structures because of the large financial centre in London, and the attractive English Limited, which is used worldwide by thousands of companies.

Taxation

General

Tax is levied primarily by central government. The only tax of any significance levied locally is the council tax, a tax on the occupiers of residential property.

Both the direct taxes (income tax, corporation tax, capital gains tax, petroleum revenue tax,
inheritance tax, tonnage tax, stamp duty, stamp duty land tax and stamp duty reserve tax) and the indirect taxes (air passenger duty, customs duty, excise duty, insurance premium tax, landfill tax, climate change levy, aggregates levy and value added tax) are administered by HM Revenue & Customs ‘HMRC’. National Insurance contributions, formerly the responsibility of the Contributions Agency, an executive arm of the Department of Social Security, are now also administered by a separate department of HMRC, the National Insurance Contributions Office.

Resdence

A company is resident in the UK if:

• It is incorporated under the laws of the UK or
• Its central management and control is in the UK.

There are complex exceptions to the above two rules relating to the effect of certain of the UK’s double taxation treaties, and other matters.
A non-resident company is subject to corporation tax if it carries out a trade in the UK through a permanent establishment (branch or agency). In such a case it is liable to corporation tax on:

• Any income arising directly or indirectly from the permanent establishment
• Capital gains on the disposal of UK-situated assets connected with the permanent
establishment.

Foreign companies not trading in the UK through a permanent establishment are liable to income tax on income arising in the UK.

A non-UK resident company is subject to corporation tax only in respect of the profits of its PE in the UK and chargeable gains on assets used or held for the purpose of the trade or PE. If a non-UK resident company carries on an investment activity in respect of UK sources of income, it will be subject to income tax.

A company is UK tax resident if it is incorporated in the UK or, if not incorporated in the UK, if its place of central management and control is in the UK. In practice, this often means
determining whether the directors exercise central management and control and, if so, where
they exercise that control. Where a company would be resident in the UK because its
management and control is in the UK but also would be resident under another country’s tax
law because the company is incorporated there, its residence status may be resolved by an
applicable tax treaty (if any) between the two countries. In determining residence, HMRC
considers whether the directors exercise central management and control and, if so, where such central management and control is actually exercised.

As mentioned above, non-UK resident companies operating in the UK are charged UK
corporation tax if they trade in the UK through a PE. Taxable profits include trading income
arising through or from the PE, income from property or rights used or held by the PE and
chargeable gains arising on the disposal of assets used or held by the PE. The profits
attributable to a PE are determined according to these rules unless there is a business profits
article in an applicable tax treaty. The lower 21% rate of corporation tax applicable to small
companies (those with profits of up to GBP 300,000; pro-rated for the number of associated
companies worldwide) does not apply to UK branches of foreign companies, unless the branch benefits from a non-discrimination clause in an applicable treaty.

The profits of a foreign branch of a UK-resident company are subject to corporation tax whether or not they are repatriated to the UK. If the foreign profits cannot be remitted to the UK because of foreign tax law or government action, a deferral of corporation tax may be claimed.

In general, dividends received by a UK company from another UK company are not subject to
tax unless, for example, the shareholder is a share dealer. Under anti-avoidance legislation
introduced by Finance (No. 2) Act 2005, certain shares may be treated as loans (e.g. shares
whose value increases at a rate that represents a return on as investment at interest) and the
dividends would then be treated as interest. These provisions should not affect routine
arrangements relating to preferential shares or other structures designed to avoid taxes.
Foreign tax incurred through withholding on the payment of foreign dividends, interest,
royalties and/or fees to the UK is added to the net amount of income received to arrive at
taxable income. Credit for such tax is given against UK tax payable. The amount of credit is
limited to the UK tax on that income or profit and it is necessary to take account of expenses
that are incurred in earning those profits.
When a foreign dividend is paid to a UK company, often credit will also be available against the UK liability for tax paid by the foreign company in earning those profits where the shareholding is at least 10%. Un-utilised taxes on foreign dividends and foreign branches can often be carried back for up to three years or carried forward, subject to limitations.

Tax structure

Companies are assessed to corporation tax on their total profits (income and capital gains) arising in an accounting period. Income is computed according to the same structure as applies to income tax, but for historic reasons, the different categories of income arising to a company are classified in ‘Schedules’ and ‘Cases’. These are as follows:

• Schedule A (income from land in the UK)
• Schedule D Case I (income from a trade)
• Schedule D Case III (income from loan relationships, e.g. interest; annuities and discounts)
• Schedule D Case IV (income from foreign securities)
• Schedule D Case V (income from foreign possessions, including land)
• Schedule D Case VI (other income)

As with income tax, different rules exist for computing income under each source, but the income so computed is then aggregated to arrive at profits chargeable to corporation tax. Capital gains are computed largely according to the rules of capital gains tax, but also then included in profits chargeable to corporation tax.

Tax year and filing/reporting requirements

Accounting principles
It is essential for every business to maintain accounts and timely records of its transactions. In
addition, all companies with limited liability are legally required by the Companies Act 2006 to maintain accounting records.
The form in which books and records are maintained is not codified and will vary between
enterprises, depending on their requirements. The records should be capable of meeting the
requirements of the tax authorities so that VAT returns, PAYE and National Insurance can be
accounted for.

In a company, it is the directors who are responsible for ensuring that the accounts (financial
statements) comply with accounting and financial reporting standards. These standards are
published by the Accounting Standards Board, and cover a wide range of accounting issues.
Financial statements must be drawn up according to UK generally accepted accounting principles (UK GAAP), and in a format as was prescribed by the Companies Act 1985 subject to any changes from the Companies Act 2006 consolidation. Small and medium-sized enterprises (SMEs) may file less detailed accounts. A small enterprise may supply abbreviated accounts to members; a medium-sized enterprise may not.

Tax Year
The tax year begins on 1 April. For company accounting periods that straddle the start of the
tax year, the taxable income is time-apportioned and taxed in accordance with the rates
prevailing in the two tax years that the accounting year overlaps.
Companies are obliged to self-assess their corporation tax liability.

Corporation tax is assessed for the financial year to 31 March. The profits of a company with a year-end other than 31 March are apportioned between the two financial years for the purpose of determining the applicable rates of tax. There are various rates of corporation tax.

Taxable Income and rates

Taxable Income

U.K. resident companies are subject to tax on worldwide profits and gains, with credit given for overseas taxes. A non-U.K. resident company is only subject to tax in respect of U.K.-source profits, which includes the income of a U.K. PE, income from U.K. real estate, certain U.K.-source interest income and gains on assets used for the purpose of the PE’s trade.

Corporation tax is imposed on a company’s profits, which consist of trading income and capital gains. Normal business expenses may be deducted in computing taxable income.

Corporate taxation

The rates for the financial year 2008(1 April 2008 to 31 March 2009) are as follows:

£ Effective rate of tax
First 300,000 21% Marginal Rate
300,00 to 1.500.000 29.75%
Remainder, i.e. over 1,500,000 28%

Dividends

Dividends received by an U.K. resident company from another U.K. company are generally exempt from corporation tax. Currently, dividends received from a foreign company are subject to corporation tax, buta credit for underlying corporate tax and withholding tax is generally available for foreign tax paid. A participation exemption for the majority of foreign dividends received by large and medium sized businesses is expected to be introduced from 1 april 2009 to replace the credit system for these entities.

Capital gains

Capital gains generally form part of a company’s taxable income. However, there is an exemption from tax for compaies on the disposal of substantial shareholdings in both U.K. and foreign companies, the main conditions being that the selling company musthave owned 10% of the shares of the company being sold for at least 12 months before disposal and the selling company/group is trading in nature, as well as the company being sold, both before and after the disposal. U.K. domestic law does not subject a non-resident to u.K. capital gains tax unless the asset being disposed of is held through a U.K. permanent establishment.

Losses

Generally, 1 year carry back, and unlimited carry forward for trading losses are allowed.
Participation Exemption

WHT & Tax Treaties

Dividends

There is generally no withholding tax under domestic law, although a 20% withholding tax applies to dividends paid to nonresidents by REITS (subject to treaty relief).

Interests

Interest paid to nonresidents is subject to a 20% withholding tax, unless the rate is reduced under a tax treaty or exempt under the EC interest and royalties directive.

Royalties

Royalties paid to nonresidents are subject to a 20% withholding tax, unless the rate is reduced under a tax treaty or exempt under the EC interest and royalties directive.

Tax Treaties
The UK is a party to more than 100 double tax treaties(these can be downloaded for our Country information pages). Some cover only a few items, but those with the UK’s major trading partners encompass a wide range of taxes. The treaties often exempt interest, royalties and licensing payments from UK and foreign withholding taxes.

Where foreign withholding taxes might apply to dividends paid to UK companies, the rates are normally reduced, often to zero, either under the treaty or as a result of the EC Parent-
Subsidiary Directive. Each treaty must be carefully reviewed in every instance.

Anti-avoidance rules

Transfer Pricing

The UK’s transfer-pricing rules refer explicitly to the OECD Transfer Pricing Guidelines and are considerable in extent. They apply wherever a ‘provision’ is made or imposed as between two persons at a time when:

• Either, one of the persons was directly or indirectly participating in the management,
control or capital of the other, or
• Some other person or persons was directly or indirectly participating in the management, control or capital of both persons and,
• That provision differs from the provision that would have been made at arm’s length
between independent parties; and
• Confers a “potential advantage” in relation to UK tax on either or both parties.

Related-party debt is specifically made subject to transfer pricing. HMRC has stated that the rules also cover situations where a thinly capitalised company pays ‘excessive’ interest to a third party (such as a bank) as a result of a loan guaranteed by an affiliated person.
In such circumstances, profits must be computed as if the arm’s length provision had been made instead of the actual provision. What is more, it will be the responsibility, under self-assessment, of the affected person to make the adjustment without the intervention of HMRC (see above). The UK has begun to operate an advance pricing agreement (APA) programme.
In respect of accounting periods beginning after 31 March 2004, however, the transfer-pricing rules do not generally apply to small or medium-sized enterprises (SMEs), with two exceptions. The first exception is where the affiliated party is located in a jurisdiction with which the UK does not have a tax treaty containing a suitable non-discrimination article. The second exception is the reserved right that HMRC retains to direct that the transfer pricing rules be applied to specified mediumsized enterprises.
From 1 April 2004, subject to the above, the transfer-pricing rules apply to transactions wholly within the UK as much as to cross-border transactions.

Under the self-assessment system, it is a company’s responsibility to ensure that for tax
purposes, transactions with related parties reflect arm’s length prices. The UK embraces
internationally accepted standards (i.e. OECD) for establishing prices. UK companies are
expected to have and retain adequate documentation to show that prices paid or charged meet
the criteria.

CFC-legislation
Generally speaking, a CFC is a company that is not resident in the UK but is controlled by UK residents and is subject to a lower level of taxation (generally less than 75% of what it would have paid had it been UK resident). If these conditions are satified and no exemption applies, the UK company will pay corporation tax on its share of the CFC’s income (ignoring capital gains). A major overhaul of the UK CFC rules is proposed from 1 April 2009.

Thin Cap
Anti-avoidance measures to address excessive debt of UK-resident companies (and UK PEs of foreign companies) are included as part of the transfer pricing rules. When considering whether the interest on a loan from, for example, a foreign parent is deductible, the arm’s length principle must be followed. Generally the ability of a borrower to support the loan is looked at on a stand-alone basis (ignoring the status of the group of which it is a part and any guarantees made to support the borrower’s loan), except that assets that it owns (including subsidiaries) can be taken into account. There are no safe harbour provisions.

VAT

VAT is the largest single source of indirect tax revenue in the UK. VAT applies to most sales of goods and services; in effect, it is levied on the value added at each stage of the production and distribution chain, as well as on imports. Companies act as VAT collectors, paying to HMRC the tax recoverable from their customers and receiving a credit for the tax they pay to suppliers. Thus VAT is offset at each stage until the goods or services reach the final consumer or an exempt business.

Rates
There is a standard VAT rate of 17.5% and a reduced rate of 5%.

Registration
An registered business must register if it has made £67.000 of taxable supplies in the last 12 months, up to any month end, or if it expects to make £64.000 of taxable supplies in the next 30 days. A registered business can deregister if it can satisfy HMRC that taxable supplies in the next year will not exceed £67.000. Small businesses with taxable turnover of up to £150.000 can opt to use the “flat-rate scheme”. A single rate, which varies with the type of business, is applied to all receipts, and no VAT is claimed on costs. The single rate is lower than 7/47 to compensate for lost input tax. Small businesses with taxable turnover of up to £1.35m can use the cash accounting scheme ( only paying VAT to HMRC when customers have paid ). The annual accounting scheme ( filing a single VAT return each ear instead of one every three months) is also available with turnover up to £1.35m.

Corporate legislation

General

United Kingdom company law is governed by the Companies Act 2006. The Insolvency Act 1986, the Company Directors Disqualification Act 1986, and the old Companies Act 1985 are also important statutes. It applies across the United Kingdom, and is highly influential within Europe around the world.

Provided entities

Business organisations in the UK usually take one of four forms: partnership, branch, private
limited company or public limited company. Private limited companies may not invite the public to subscribe for shares or bonds; public limited companies may. Public companies may choose to be quoted on the stock exchange or to be unlisted. A listing on an exchange in the EU entitles a company to be listed on any other EU exchange. Other organisational forms exist (such as limited partnerships) but are not widely used.

Most foreign-owned companies organise their affiliates as private limited companies; otherwise, they establish branches. Particular tax considerations can influence the choice. For example, operating as a subsidiary in the UK may mean that the profits of the subsidiary are subject only to UK corporation tax; operating as a branch of a non-UK company may mean that these profits (or losses) may also be taxable (or deductible) where the company resides. The tax treatment for a non-UK company varies from country to country.

Establishing a branch

If a foreign limited liability company establishes a branch in Great Britain (England, Scotland or Wales) and the company is required under the law of the country in which it is incorporated to prepare, have audited and disclose financial statements, the company must file for public
inspection in Great Britain all accounting documents that are disclosed under that foreign law. If the foreign company is not a limited liability company or is not required to prepare such
accounts, accounts must be prepared as though it were a UK company (with various
modifications) and filed for public inspection. Similar rules apply in Northern Ireland.
Within a month of establishing a branch, a foreign limited liability company must file various
particulars and documents that can be viewed by the public, such as the names and addresses
in the UK of persons authorised to accept legal notices served by the authorities; the name of
the company, its legal form, its country of registration, company number, details of its directors and secretary; and the address of the branch, when it was opened and its business. Additional disclosures are required for non-EU companies. Slightly less disclosure is required from unlimited liability companies. In all cases, it must also file copies of its constitution (translated into English). At every place of business, and on every letter and invoice, the branch must provide details of the company of which it is a branch, such as its registered name, the country of incorporation and whether its members have limited liability.

Setting up a company

Every company must be registered with the Registrar of Companies. The registration application should set out the scope of the intended corporate activities and must be submitted with a memorandum. If the company’s activities diverge from the goals stated in the memorandum, the transaction can be judged to be outside of the company’s authority. The company must also submit the articles of association, which detail the rights of the shareholders, borrowing powers and the duties of directors. The procedure usually takes several weeks. Public companies must include the words “public limited company” or the abbreviation “plc” as an integral part of the company name, to be used on all official documents, general stationery and nameplates. Private limited companies use the word “Limited” or the abbreviation “Ltd”.
The Company Law 2006 substantially changes company law, making it easier to understand and more flexible, especially for small businesses. It is possible to set up a European Company (Societas Europea—SE) in the UK. An SE is subject to the laws of the country where it is registered.

Relevant legislation

Companies Act 1948
Companies Act 1985
Companies Act 2006
Company Directors Disqualification Act 1986
Enterprise Act 2002
European Company Statute
Insolvency Act 1986
Limited Liability Act 1855
Limited Liability Partnerships Act 2000
Trustee Act 2000

Banking

The Bank of England is the central bank of the UK and is responsible for supervising the banking system, which it does largely through the Banks Act 1987.
Banks in the UK fall into four main categories: commercial banks of British origin (including
banks often known as “high street banks”), commercial banks of foreign origin, investment
banks and retail banks (represented by former mutual building societies that have turned into
commercial enterprises).
European Economic Area (EEA) banks can operate in the UK on the basis of the EU’s “single
passport” system; registration in their home country automatically entitles them to operate in
the UK, although they must notify the UK’s Financial Services Authority (FSA) of their presence. They remain subject to home country control. Financial institutions located in the offshore centres of the Channel Islands and the Isle of Man are not considered part of the UK banking sector.

These are the four major UK-wide Clearing House banks, together with the Scottish banks, which have a limited branch network in the rest of the UK. They are so called because they settle mutual indebtedness daily through the London Bankers’ Clearing House. These banks offer a wide variety of services to corporate and personal customers, and a company or individual operating in the UK is likely to need to open an account with a clearing bank, from which cheques can be drawn and into which deposits can be paid.

Originally private mercantile banks, Merchant Banks in the United Kingdom offer a variety of services, including the issue and placing of loans and securities, portfolio and unit trust management, the provision of risk capital and advice on corporate takeovers and mergers. Factoring and invoice-discounting services are offered by merchant banks and most clearing banks.

The largest banks in The United Kingdom are:

HSBC Bank London
Royal Bank of Scotland Edinburgh
Barclays Bank London
Standard Chartered London
Lloyds TSB London
HBOS Edinburgh
Halifax
Co-operative Bank