Setting up in the UK

2 December 2021

What common structure options are available or required when setting up in the UK?

Two main options available:

• limited company (subsidiary) or a branch. A subsidiary is an incorporated body (i.e. a company) and has a separate legal entity from the overseas parent.
• a branch (UK establishment), which is an extension of the parent company, requires you to register the overseas entity as having a UK establishment with Companies House.

What is the difference between a branch and a subsidiary?

• A subsidiary (most typically a limited company) is a separate legal entity with separate legal liability albeit typically owned and run by the parent company. This can be formed quickly – see formation questionnaire.
• A branch is an extension of the parent company operating under the laws of another jurisdiction. It is not a separate legal entity. This requires a form filling exercise and submitted to Companies House

Ongoing compliance requirements

UK subsidiary (Limited company): must file annual financial statements and an annual confirmation statement with Companies House. You must also file a Corporation tax return with UK HMRC.

UK branch: once registered, you are required to notify Companies House of any changes to the information contained in the OS IN01 form. Typically, as an overseas company, you will also be required to file your year-end financial statements with Companies House together with an OS AA01 form.

Profits arising in the UK, whether generated by a UK company or the profits of a trade carried on by a non-UK entity through an establishment in the UK, are liable to UK corporation tax. Because of UK tax law and double taxation treaties it is normally not possible to charge artificial prices, management charges or excessive interest rates between a UK branch and its overseas parent in order to reduce UK corporation tax.

Both a subsidiary and a branch will need to register for VAT based on the same criteria i.e. either when certain revenue levels are breached (£84,000) or dependant on the type and geographical nature of sales. We often see start-ups setting up in the UK being in a VAT reclaim position, particularly if they are importing goods into the UK. From a practical point of view, it is much easier to reclaim the VAT owed via a UK bank account.

A UK bank account is not required, unless you a registering for VAT, but is usually deemed necessary from a practical point of view when an entity reaches a certain size. Setting up a UK bank account is typically easier as a UK limited company but even then, the process can be lengthy because of the UK banks’ “know your client” requirements.

Pros & Cons

PRO’s	Limited	Branch – UK establishment
	The most common method for an overseas company to set up a business in the UK	A branch can be converted to a subsidiary at a later date if required – however it would involve registering a Limited and undertaking accounting transaction transfers.
	A separate legal entity with its own legal personality (even though it is wholly owned by the overseas parent company), so the parent company therefore is not liable for the subsidiary’s operation, debts and liabilities.	A UK branch is subject to UK corporation tax (currently 19%) on the profits of the overseas parent company which are attributable to the UK branch.  Any start-up losses of the UK branch are usually therefore, available to the overseas parent company to set against home profits.  Loss relief for start-up costs can therefore be obtained much sooner than for a UK subsidiary (which can only carry the loss against future profits).
	Many European customers and suppliers prefer dealing with a UK company rather than a branch as its feels more permanent.
	May be easier to recruit key staff into a subsidiary company as this feels more permanent.
	The UK subsidiary company prepares and files (at Companies House) only the statutory financial statements of the UK subsidiary.   If it satisfies certain criteria it can be by way of abbreviated accounts
	Quick formation – usually within 3 days
CON’s	Limited	Branch – UK establishment
	A UK subsidiary is subject to UK corporation tax (currently 19%) on the UK subsidiary’s world-wide profits and, start-up trading losses can only be carried forwards against future trading profits in the UK rather than being set against any parent company current year profits.	A UK branch is the same legal entity as the overseas parent company, so the overseas parent company has full responsibility for the operation, debts and liabilities of the UK branch.
		A UK branch does not prepare its own financial statements, instead it must file (and make public) the overseas parent company’s consolidated financial statements (at Companies House). These financial statements must be filed in a specific UK format and in the English language which may have resource and cost implications.
		There may be restriction on use of branch losses in later years or on incorporation to prevent tax relief being claimed twice over in-home country and UK.
		Setting up is all paper-based and can take up to 6 weeks

 

Which one is best?

There is no right or wrong answer to this question and the route chosen will depend on practical factors (separate legal entity, visas, bank accounts etc.) and commercial factors (general ease of interaction with other UK limited companies, UK companies generally feel more confident dealing with a UK limited company). From a tax and filing requirement perspective, there are certain nuances between the two structures but often these do not outweigh the other considerations. The advantage of a branch is that any setup costs can be deducted by the overseas company, which is useful if establishing a factory or similar. However, if a simple sales organization is being proposed it is more usual to establish a limited company as this ring-fences all liabilities within the UK entity without any recourse to the parent.

There are other types of setups available in the UK and contact us for further details.

No responsibility for loss occasioned to any person acting or refraining from acting as a result of any material in this publication can be accepted by Entreprenor Limited.