Setting up a UK subsidiary

Professional Company Secretarial Solutions

A guide to forming a UK subsidiary trading company

Setting up a UK trading subsidiary can present many benefits to an international organisation. For example, it can

  • operate as a sales platform providing comfort to your customers in the UK and throughout Europe that they are dealing with a UK company;
  • allow you to incentivise your UK based staff by granting them shares (or options) in the UK company but not the rest of the business;
  • allow greater access to sources of capital through the UK public markets;
  • provide tax and regulatory benefits; and
  • ‘ring fence’ the UK business, thereby helping to protect the established overseas business from a failing or significant liability.

Our experts have advised on many different types of arrangements and can help guide you through the process of incorporating a new company in the UK and managing your compliance going forward. As well as subsidiaries, we also have experience in helping businesses set up UK holding PLCs, through which to list on the public market.

Set out below are some of the more common considerations faced by people incorporating a UK subsidiary though we encourage you to contact us directly to discuss your specific needs.

UK Advisory Network

Elemental CoSec is a proud member of the government’s UK Advisory Network and recognised as a specialist in assisting businesses setting up in the UK.

For details of the UK Advisory Network, please see here.

How we can help

Our specialists offer a comprehensive service, from formation advice through to legal and accountancy.

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UK Company Formation

The most common corporate form for a UK subsidiary is a private limited company. This guide assumes that such a company will be used.

The most important document for the incorporation is the articles of association. This is the governing document of the company and sets out the relationship between the shareholders and the company. There are three main approaches that you can take with this document:

  1. Adopt the ‘Model Articles’: These are prescribed by the government and provide certain basic provisions. The content is standard and well known and they are therefore often the easiest to apply;
  2. Adopt a set of standard articles: The Model Articles take a simplistic approach in many areas and some people choose to adopt a more full form document. These often include more sophisticated provisions and cover more detail. Elemental CoSec uses a set of standard in-house articles of association which we provide free of charge when you incorporate a company with us; and
  3. Adopt a fully tailored set of articles: This is most common when a company has multiple shareholders who wish to clearly set out their rights and obligations. In these instances it is common for the shareholders to also enter into a shareholders’ agreement.
    Amongst other things, the articles of association set out the powers of the shareholders in relation to the directors. For a wholly owned subsidiary, this can be key as it sets out the ability of the parent company to make changes to the company if they are not satisfied with the performance of the directors.
For more information on the different types of provisions that can be found in articles of association, please see our Guide to the Articles of Association and our Guide to the Key Provisions of the Model Articles.

Consideration should also be given to the share structure of the company and the directors of the company (see the section on Corporation Tax for some of the tax implications of the residency of the directors).

For further information please refer to our UK company incorporation service.

Statutory Compliance

The statutory compliance regime for UK corporates is relatively pragmatic when compared to other European regimes. However, as with any country, it is important that the basic statutory requirements are met.

Doing so helps protect the company and the directors from fines, civil and even criminal proceedings. Companies House has the power to strike a company off the register for failing to meet its obligations and the owners of the company are determined by the company’s statutory registers, so these are vitally important.

Amongst other requirements (including those listed in this guide), all UK companies are required to comply with three areas:

  1. maintenance of the statutory registers of the company;
  2. compliance with the Companies Act 2006; and
  3. relevant filings for Companies House.

For further information on these and other duties falling on the company secretary, please see our Guide to the Role of a Company Secretary.

Elemental CoSec’s company secretarial support, including our annual compliance package can assist with these functions.

Conflicts of Interest

All directors of UK companies are subject to the rules relating to conflicts of interest. These include:

  • the duty to avoid a situation in which a director has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company (section 175 Companies Act 2006); and
  • the duty to declare an interest in a proposed transaction or arrangement with the company (section 177 Companies Act 2006).
These duties are particularly important for directors of a UK subsidiary of an international group, as such directors will often have interests in the rest of the international group. As directors, they are required to act in the best interests of the UK company and not just the group as a whole. They are therefore required to manage these conflicts of interest or they could be in breach of their legal obligations.
Conflicts of interest can be handled in various ways, including approval by independent directors and by the shareholders though this depends on the provisions in the articles of association.
For further advice on this, please see our guide on directors’ duties or contact our experts directly.

Legal Requirements

Setting up a business operation in a new country brings about a host of regulatory and legal requirements, some of which are generic to all business in the jurisdiction and some of which are industry specific.

In the UK, this can include such matters as compliance with data protection legislation and anti-bribery rules to commercial contracting and e-commerce legislation. These rules are varied and should be considered carefully by the directors of the company.

Elemental CoSec’s commercial legal services can assist with this by helping to draft policies and contracts as and when needed and by providing guidance and advice.

Accounting

Every UK company (whether or not it is trading) is required to keep accounting records that are sufficient:

  • to show and explain the company’s transactions;
  • to disclose with reasonable accuracy, at any time, the financial position of the company at that time; and
  • to enable the directors to ensure that any accounts required to be prepared comply with the requirements of the Companies Act 2006 and, where applicable, IFRS.

In particular, the accounting records must contain:

  • entries from day to day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place; and
  • a record of the assets and liabilities of the company.

If the company’s business involves dealing in goods, the accounting records must contain:

  • statements of stock held by the company at the end of each financial year of the company;
  • all statements of stock takings from which you have taken or prepared any statements of stock; and
  • statement of all goods sold and purchased, other than by ordinary retail trade. This should list the goods, the buyers and sellers.

(Section 386 Companies Act 2006)

It is a criminal offence for every officer of the company if these requirements are not met. In any event, it is generally good business practice to maintain these records. Sometimes these records are maintained by a central function overseas in which case accounts and returns relating to the UK business must be sent to the UK not less than every six months.

UK trading companies are required to file accounts each year with Companies House and HM Revenue & Customs, as well as a self-assessment tax return. The specific requirements for these documents, and whether they need to be audited, depends on the size and revenue of the company.

Elemental CoSec’s accountancy and tax support can assist with these services, either providing them in their entirety or in conjunction with the business’ central accounts function.

Corporation Tax

The tax residency of a UK subsidiary will need to be determined before its tax position can be evaluated. If the directors are resident in the UK and make their decisions in the UK, then it is likely that the company will be tax resident in the UK. However, if decisions are, in reality, taken by the overseas parent company, or if the directors run the company from abroad, then the company may be tax resident overseas. This is a complex area and professional advice should be sought if you are in any doubt. Elemental CoSec offers UK resident directors and tax domiciliation services for UK SPV and holding companies.

Assuming the company is UK tax resident, then it will be taxed in the UK on its worldwide profits. UK corporation tax is charged on tax adjusted accounting profits.

Transfer pricing rules apply to UK resident companies, whereby transactions with related parties (such as the parent company) must be recognised for tax purposes at an arms’ length value (being the amount that a third party would have paid for the goods or services). Though there are certain exemptions for small and medium sized groups.

If a UK company is paying interest or royalties to a recipient overseas, it may be required to withhold income tax and pay it over to HM Revenue & Customs. This is generally subject to any double tax treaty that may in place between the UK and the place of residence of the recipient.

Elemental CoSec’s accountancy and tax support can assist with these issues. Please get in touch for more information.

Value Added Tax (VAT)

The European Union operates a form of sales tax called VAT. The rate of VAT varies between different EU countries, but in the UK the standard rate is currently 20% (since 4 January 2011) though there are various exceptions and reduced rates.

If the company is trading in the UK and meets the relevant threshold, the company is required to register for VAT. You can also register voluntarily for VAT, which companies generally choose to do because it can allow them to reclaim VAT on their expenses and because it projects a professional image to their customers or clients.

Currently, the general threshold for VAT registration is sales in the UK of £81,000 in the previous 12 months or an expectation that this will be exceeded in the next 30 days.

Elemental CoSec’s accountancy and tax support can assist with these issues. Please get in touch for more information.

Employees

A company should have an employment contract with each of its employees which sets out the main terms of the employment and, in any event, a company must provide employees with a written statement of employment particulars which sets out certain prescribed information.

When a company starts employing individuals, it is required to register as an employer with HM Revenue & Customs and operate a payroll system. This payroll system will manage the salaries of the employees and withhold amounts for National Insurance and Income Tax which should be accounted for to HM Revenue & Customs either on a monthly or quarterly basis.

The UK is introducing pension auto-enrolment which requires UK employers to automatically contribute to a pension scheme on behalf of their employees and to automatically enrol the employees in the scheme (subject to opt out rights).

Elemental CoSec’s Human Resources support can assist with these issues. Please get in touch for more information.

Though every effort has been taken to ensure the accuracy of this guide, it is only intended as general information and is not a substitute for professional advice. Professional advice should always be obtained and Elemental CoSec accepts no liability for loss or damage suffered as a result of actions taken (or omitted to be taken) in consequence of this guide. If you would like professional advice, please contact Elemental CoSec. This guide was last updated on 25 September 2014.