Guide to UK company incorporation
17 April 2020 | Insights
What makes the United Kingdom (UK) such an ideal location to incorporate your business? We guide clients in the formation and administration of companies, trusts, foundations and partnerships, providing a wide range of administration, director and secretarial services for your operational and transactional needs.
Why incorporate your company in the UK
Despite Brexit, the UK remains one of the most important European consumer markets and of one of the top countries attracting foreign direct investments (FDI). London remains the financial capital of Europe, home to the European headquarters of almost 60% of companies in the Fortune 500 ranking. According to the World Bank's 'Doing Business 2020' ranking, the UK ranked 8th out of 190 economies, gaining a position compared to the previous year.
Advantages of incorporating a company in the UK
In the Institute of Management Development (IMD)'s 2020 World Competitiveness Ranking, the UK climbed from 23rd to 19th in 2020. The UK was ranked 20th on the business efficiency measure, compared to 31st in 2019. One of the main strengths of the UK economy in attracting FDI is that its economy is one of the most liberal in Europe, while its business environment is extremely favourable.
The UK is a large and dynamic marketplace
The UK is a large and dynamic marketplace in its own right, but also benefits from being an excellent gateway to other parts of the world. Foreign investors coming to the UK can experience its many advantages, which include:
- Having one of the highest 'ease of doing business' scores globally, according to the World Bank a company can be incorporated in just one day; there is no minimum capital requirement (other than at least one share must be issued on incorporation) the initial share capital is commonly less than £100; there must be at least one director appointed and Company Secretary is an optional position for private limited companies (you can appoint one if you feel it will assist in administering your company).
- English law – The UK legal system is globally recognised, and many overseas-based territories replicate the its legal process.
- The UK has a solid, credible and long-established structure for companies to build a business.
- Another primary reason for moving operations into the UK is the vast pool of skilled employees – the UK is both a magnet for global talent and a deep pool of high-skilled homegrown talent.
- The UK has established itself as a global centre of academic excellence, with strong links between academic institutes and businesses.
- Excellent transport links with the rest of the world.
- A central time zone position, ideally placed between the markets of the East and West.
- Accessibility of language.
- One of the world’s global financial centres
- A top-class environment for research and development work
UK corporate tax rate
The UK's corporate tax regime also has a number of attractive features:
- UK Corporation tax rate has been 19% since 1 April 2017, but will increase to 25% with effect from 10 April 2023.
- The 19% rate will still continue to apply to (small) companies with profits of no more than £50,000, with marginal relief for profits up to £250,000.
- The UK has the largest network of double tax treaties in the world.
- The UK offers tax incentives for technology and fintech companies.
Excellent jurisdiction for international holding companies
The UK is considered to be an excellent jurisdiction for international holding companies for many reasons, including the following:
- Most foreign dividends are exempt from UK tax. Dividends received by a UK company are exempt from UK tax subject to certain conditions. These conditions vary depending on whether the recipient is a small, medium or large company.
- No UK withholding tax on dividend payments to shareholders. The UK does not impose withholding taxes on the distribution of dividends to shareholders or parent companies. This is regardless of where in the world the shareholder or parent company is resident.
- No capital gains tax on the disposal of shareholdings in subsidiaries, subject to meeting certain conditions.
- No capital gains tax on profits from the disposal of UK holding company shares by non-resident shareholders. Non-UK resident shareholders are not subject to UK capital gains tax on disposals of shares they hold in a UK company.
- Extensive double tax treaty network, thereby minimising withholding taxes on dividends received.
- No capital duties on paid-up or issued share capital. Stamp duty of 0.5%, calculated on the transfer value of the shares, is payable on subsequent transfers.
Contact our expert team to help you set up a holding company in the UK today.
UK capital gains tax exemption
There is no capital gains tax on the disposal of a 'substantial shareholding' in a trading company or a holding company of a trading group or a sub-group.
A substantial shareholding is a holding of at least 10% of the ordinary shares in another company that have been held for a continuous period of at least 12 months in the six years preceding the sale.
A trading group is a group where one or more of the members carry on trading activities, and the activities of those members taken together do not include a substantial component of nontrading activities, which means that such non-trading activities should not form more than 20% of the total turnover within the group.
For disposals on or after 1 April 2017, the requirement that the company being disposed of remains a trading company (or holding company of a trading subgroup) immediately following the disposal will no longer apply unless the disposal is to a related party.
Further, there is a relief for disposals of shares in companies which are materially owned by qualifying institutional investors (‘QIIs’).
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UK tax incentives for research and development
Research and development (R&D) reliefs support companies that work on innovative projects in science and technology. They can be claimed by a range of companies that seek to research or develop an advance in their field. They can even be claimed on unsuccessful projects.
Types of R&D relief
There are different types of R&D relief, depending on the size of your company and whether or not the project has been subcontracted to you.
Small and medium-sized enterprises (SME) R&D relief
You can claim SME R&D relief if you are an SME with:
- less than 500 staff; and
- a turnover of under 100 million euros, or a balance sheet total of under 86 million euros.
SME R&D relief allows companies to:
- deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction; and
- claim a tax credit if the company is loss-making, worth up to 14.5% of the surrenderable loss.
Research and development expenditure credit (RDEC)
Large companies can claim a research and development expenditure credit (RDEC) for working on R&D projects.
It can also be claimed by SMEs and large companies that have been subcontracted to do R&D work by a large company.
A tax credit is available, equivalent to 13% of the qualifying expenditure. This can be recognised as a taxable item above operating profit in a company’s financial statements, with the net amount of 10.5% payable to the company.
The principal ways for a foreign investor or company to carry on business in the UK are as follows:
1. Branch company
The overseas company retains ownership and control of the branch. The branch will not have a separate legal personality, so the overseas parent company is liable for the debts and obligations of the overseas establishment.
A branch is often a favoured option for overseas businesses in the early stages of international expansion. Once a solid business presence has been established, branch activities are usually transferred to limited companies.
Need help setting up a branch company? Contact our expert team.
2. Limited company
A limited company is a separate legal entity with its own limited liabilities. This is much more substantial than a branch and offers greater assurance for customers and others who come into contact with the business.
Overseas companies establishing a limited company in the UK may do so by setting up a subsidiary. The overseas company, as the parent company, will have complete ownership and therefore control of the English subsidiary. The most popular corporate vehicle is a private company limited by shares.
Advantages of private limited companies are:
- Separate legal personality. The subsidiary can sign contracts on its own behalf, own assets and is liable for its own debts.
- It can be formed with a single member, but has no statutory limit on the number of shareholders.
- The liability of its shareholders to contribute to the assets of the company is limited to the amount, if any, unpaid on the shares held by them.
- Incorporation can be undertaken quickly in one day and at a low cost.
- Only one director is required and company secretaries are optional.
- It is possible to re-register as a public company, subject to satisfaction of certain requirements.
- There is no minimum issued share capital.
Limited liability partnerships (LLPs) are separate legal entities and must have at least two members, which can be natural persons or body corporates, and at least two designated members.
Need help with your limited company set up? Contact our expert team.
What are the advantages:
- The liability of members can be limited to the amount of their capital investment in the LLP. Limited liability protects the members’ personal assets from the liabilities of the business. LLPs are a separate legal entity from the members.
- No statutory upper limit on the number of members (although there must be a minimum of two members).
- Flexibility – the operation of the partnership and distribution of profits is determined by a written agreement between the members, which allows greater flexibility in the management of the business.
- The LLP is deemed to be a legal person. It can buy, rent, lease and own property; employ staff; and enter into contracts.
- Corporate ownership – LLPs can appoint two companies as members of the LLP. In an LTD company, at least one director must be a real person.
- Designate and non-designate members. You can operate the LLP with different levels of membership.
- No capital maintenance requirements.
The activities of the LLP are treated as carried out by the individual partners, so the individual partners are separately subject to income tax on their share of the profits or losses of the LLP.
Profit cannot be retained in the same way as a company limited by shares. This means all earned profit is effectively distributed with no flexibility to hold over profit to a future tax year.
Should you set up a business in the UK?
The UK is a flexible and business-minded location, historically recognised as a well-established and reputable jurisdiction to conduct business.
The UK’s position, both geographically and in respect of business culture, put it at the centre of a diverse collection of markets and sectors. Its open market and diversified economy present opportunities for new investors to access a domestic market and to use the location as a gateway to the rest of the world. The UK remains one of the most attractive places in the world to invest in and trade with.
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Interested in finding out about our full range of company incorporation services? View our services here.
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