This article was first published in the May 2017 international edition of Accounting and Business magazine.

The UK and US invest more in each other’s businesses than they do in those of any other country. In 2015, the UK had the biggest share (16.1%) of the US$484bn of foreign direct investment (FDI) in the US, while the US accounted for 46.8% of the US$39.5bn of FDI into the UK.

This phenomenon is expected to continue as the fundamental reasons for it include strong historical and cultural ties, a common language, the top 10 ranking of both countries for ease of doing business, a good supply of talented people and an attractive tax regime – all of which are characteristics that are likely to remain in play. 

There are several motives behind US companies’ investment in the UK – and also a number of challenges.

Strategic acquisition

Acquiring a UK-based business is a quick way to secure a UK market presence. However, it can be riskier than other options because of the acquisition costs and the integration challenges. The acquirer needs to consider who will run the entity once it has been acquired, and what extra investment might be needed – for example, in intellectual property (IP), people, products and customers.

There are many useful tax reliefs and exemptions that can be used when dealing with acquisitions. Management can often add value by seeking advice on transactions to fully utilise these.

From scratch 

When setting up an entity from scratch, management has to think about what its legal and operational structure should be, and how the group wishes to run it. 

If the entity will be serving existing US customers in the UK market, then the business is usually run by someone from the US group. However, if the customers will be new, the operation is usually run by a UK entrepreneur. 

Both approaches present potential difficulties – from ensuring that someone is settling well into a new country, to considering how a UK entrepreneur can fit culturally into a US group, as they often have different styles of doing business. 

From a tax perspective, long-term incentives such as stock options can be complicated and require careful consideration. But there are tax planning opportunities in setting up the UK structure and bringing someone over from the US, which can make a significant difference in reducing the tax cost. 

When planning how to fund investment in the UK, management needs to consider potential movements in foreign exchange, particularly given the recent volatility in exchange rates. Ideally, businesses try to match revenues and costs, investment and funding, in the local currency, although this is not always possible.

Range of reliefs

The UK offers a series of very attractive tax reliefs, including:

  • R&D tax credits for SMEs, allowing an enhanced deduction of up to 230% of qualifying expenditure when calculating tax profits
  • plant and equipment tax relief, particularly if they are energy-efficient 
  • patent box regime, giving a 10% rate of corporation tax on certain patent-related income where the IP has been created in the UK
  • film tax relief
  • TV and animation tax relief
  • video games tax relief.

Many businesses have chosen the UK as a location for creative activities off the back of these generous reliefs. The film relief was likely to have been a factor when Disney decided to film the current series of Star Wars films in the UK.

There is no doubt that the UK is a business and tax-friendly environment. In 2016 it ranked seventh in the world for ease of doing business – one place ahead of the US. 

The UK offers exemptions for dividends and capital gains received by limited companies, with generous participation exemptions for dividends received and gains realised on shareholdings of 10% or more in trading companies. These rules are being enhanced for disposals on or after 1 April 2017.

Both sets of exemptions have detailed conditions that need to be met, but if this can be achieved, then the UK becomes an attractive jurisdiction to have a holding company for, say, operating subsidiaries in Europe.

The UK offers an attractive rate of corporation tax to which limited companies are liable. At the time of writing this was 20%, but it dropped to 19% last month and will fall again (to 17%) in April 2020. The rate of corporation tax is the same throughout the UK, although a 12.5% rate is proposed for Northern Ireland from April 2018 to match the corporation tax rate currently levied in the Republic of Ireland. 

Indirect taxes in the UK are significantly different from those in the US. The main UK indirect taxes are:

  • value added tax (VAT) – this applies to supplies of goods and services in the UK; there are no other sales or use taxes in the UK
  • stamp duty – the most common occasion for paying this tax is on the acquisition of shares, when it is charged at 0.5% of the consideration paid by the purchaser
  • stamp duty land tax – chargeable on the acquisition of freehold property and leases at different rates depending whether the property is residential or commercial.

People business

US businesses, particularly those in certain cities or states, struggle to find people with certain technical skills. Setting up in the UK may provide access to talent that wouldn’t otherwise be available. But investors beware: there are a number of significant differences in the area of employment and HR, not least around the emphasis placed on work-life balance and family policies, which are generous in the UK. 

It isn’t always just financial benefits that attract talent; flexible working is rapidly becoming one of the most sought-after perks that employees look for. Paid personal days could be a great offering to set a business apart, as they are still fairly uncommon in the UK. 

While the emphasis in US packages is often placed on salary and medical insurance, the latter is less essential for UK employees because of the UK’s National Health Service, and benefits such as maternity insurance have little attraction in the UK. Employees are more likely to be tempted by pension schemes with generous employer contributions. 

Another key area to consider is annual, parental and sick leave in the UK. Employees are legally entitled to 20 days of statutory holiday in addition to eight public holidays a year. Parents are entitled to up to 52 weeks’ statutory maternity, adoption, surrogacy or shared parental leave, much of which is paid; and statutory sick pay and redundancy pay also have minimum rates.

It is not uncommon for US groups to use the UK as a launchpad for expanding into Europe, the Middle East and Africa (EMEA), which spans many countries and languages. There is a host of practical issues to consider here and obtaining local advice to navigate these is essential.

Brexit factors

The UK and US will continue to invest in each other’s businesses because of the economic opportunities they offer, which are broadly unaffected by the forthcoming departure of the UK from the EU. Although Brexit may result in some industry-specific legislation affecting specific sectors, it’s worth remembering that the recent devaluation of the pound makes the UK an even more cost-effective place to set up business. 

Seeking local advice may result in greater costs upfront for a US business interested in investing in the UK, but it should ensure that it will let them set up on the basis of best practice, and avoid significant liabilities later. 

Mike Hayes, tax partner, Darren Jordan, business advisory partner, and Richard Cummings, HR consultancy director, at Kingston Smith