The UK has always been an attractive place for enterprises from around the world to do business. The opportunity to enter new markets, to expand and to access world quality talent naturally has great appeal, which is why companies based abroad want to do business in the UK.
There are several ways in which overseas enterprises can set up operations in the UK, with establishing a foreign subsidiary being an attractive way of expanding into this popular market.
A foreign subsidiary is essentially a subsidiary company that is operated by a larger enterprise based in a country other than the UK, which will generally be referred to as the holding company or the parent company.
In order to be classified as a foreign subsidiary, the parent company is required to own at least 50% of the subsidiary’s share capital. At the same time, a foreign subsidiary operating in the UK needs to be compliant with all relevant UK laws, including assuming liability for its UK taxes, and is also required to own its assets.
When does a company need to establish a foreign subsidiary?
Setting up a foreign subsidiary is generally considered to be one of the most effective ways for foreign companies to expand and enter the UK market.
In most cases, this sort of expansion is undertaken in order to provide companies with an opportunity to grow and gain access to a market that might otherwise be denied them. It enables a company’s products and services to be more easily available in the large and lucrative UK market, and so enhances international profile and reputation.
Increasingly, as the global workforce is more mobile and flexible, it is also the case that operating as a foreign subsidiary in the UK enables access to a far greater international talent pool, as cities like London and Manchester have long proven to be magnets for talented and skilled people from across the world in a wide variety of sectors.
In finance, law, and the tech industry, for instance, there is already a well-established, international workforce based in the UK, and so operating here as a foreign subsidiary enables expanding companies to tap into this, and so engage the services of leading people in their respective fields.
It can also increase inward investment opportunities through enhanced local knowledge and better working relationships with other UK companies.
At the same time, however, it is important to ensure that you open a foreign subsidiary in compliance with UK laws.
What are the requirements for setting up such a legal entity in the UK?
For any foreign enterprise looking to establish a legal entity in the UK, there are four main types of business structure that can be implemented: sole trader, partnership, limited liability partnership, and limited company.
The simplest of these is sole trader,where an individual registers with HMRC and operates as a business, effectively meaning that individual is self-employed. A sole trader is responsible for all of the business’ assets and liabilities and is liable for tax and national insurance (by completing a Self-Assessment Tax Return).
A partnership is defined as two or more people sharing the profits and losses of a business. Under this arrangement, the partners are essentially self-employed (and therefore responsible for any debts the business accrues), and so a partnership is considered an unincorporated entity. Each person in a partnership pays tax on their share of any profits, but at the same time is also liable for misconduct or negligence on the part of the other partners.
There are similarities between this arrangement and a limited liability partnership (LLP), except that each partner’s liability is defined and limited by the size of their investment in the business. In addition, annual accounts have to be filed, and a LLP needs to be registered with HMRC and Companies House. The members of an LLP can be individuals or companies and are liable for tax and national insurance on their share of the profits.
A limited company is owned by shareholders and run by directors, and as it is a separate legal entity, it has specific legal rights and obligations, and its finances are separate to those of its owners. A limited company is liable for Corporation Tax, with profits paid to shareholders in the form of dividends and has annual reporting and filing obligations with HMRC and Companies House.
Limited companies can either be limited by shares, where a shareholder’s responsibility for the company’s liability is defined by how much they agree to pay for the shares, or can be limited by guarantee, which means that it has members who act as guarantors rather than shareholders.
What are the alternatives to foreign subsidiaries?
While there are several benefits to establishing a foreign subsidiary in the UK, there are alternative arrangements that can also be fruitful. Most notably, working with a UK professional employer organisation (PEO) is a cost effective, efficient way for overseas companies to expand into the UK.
A PEO, also known as an Employer of Record (EOR), is a way for overseas companies to expand into the UK market and hire local employees without having to establish a foreign subsidiary. There are several advantages to this arrangement, particularly if you are only exploring the possibilities of expanding or are only likely to need a small number of UK employees in the initial stages, but still want to be able hire talented, skilled workers.
A key advantage to working with a PEO is that it effectively outsources the hiring process and management of payroll, and ensures compliance with UK labour laws and tax laws but without the need to set up a registered legal entity.
There are several other advantages of the PEO model for foreign enterprises looking to establish operations in the UK.
It means that you can benefit from having full-time employees on your team without having to navigate UK laws in terms of tax, working directives and other local laws. Therefore, you have much the same flexibility that you would if hiring local contractors, while at the same time also enjoying more stability.
It’s not always easy to establish constructive, ongoing working relationships with temporary contractors, but by engaging a UK PEO you have a full-time team working for you but without the complexities inherent in managing compliance from abroad.
A UK PEO will also manage employees’ benefits and payroll on your behalf, so that important time is not taken up in trying to manage diverse workforces in different locations, all of whom are likely to be engaged under different employment laws. Instead, the PEO assumes full responsibility for this on your behalf.
Using the services of a UK PEO is also more cost effective and less time consuming than setting up a foreign subsidiary. UK workers can be hired without having to engage your own HR staff, especially important for startups or when you are simply investigating the potential of the UK market for your business.
Likewise, you don’t need to register with Companies House or HMRC, set up local payroll and banking, establish partnerships with healthcare providers, pension funds, etc., or engage consultants to ensure you are in compliance with UK laws.
At the same time, working with a PEO also means you avoid some of the drawbacks associated with hiring independent contractors, either on an ongoing basis or just for the duration of a project.
For instance, while the hiring and managing workers is performed by the PEO, you nevertheless enjoy the benefits of a full-time employee who is committed to you, rather than a contractor who may be juggling a number of different projects for different companies at the same time.
You can also ensure that you avoid the problems that can arise when a contractor’s status is misclassified, which can happen if you are not especially familiar with UK labour laws.
Is a foreign subsidiary in the UK the right choice for your business?
Overall, there are several important benefits to be gained when an overseas company sets up a foreign subsidiary in the UK.
You can access one of the world’s biggest markets and some of the brightest international talent when you operate in the UK. Having a local presence can open up investment opportunities that might not be available if you are reliant solely on remote hiring, and it also means you are well placed to establish mutually beneficial business relationships across all parts of the UK.
Also, the parent company is still able to formulate and implement its global strategy, while also benefiting from the local knowledge and expertise of the subsidiary team and staff.
However, a foreign subsidiary may not always be the best option. Particularly if you are a startup or an SME or are not yet sure whether the UK market is going to be one in which you can thrive, setting up a foreign subsidiary may not (at least in the short term) be cost effective. It can also be time consuming, and therefore divert valuable time and resources away from operations.
In this scenario, exploring the opportunities provided by engaging the services of a UK PEO may make sense, at least in the initial stages of any planned expansion.
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