UK corporate tax landscape continues to attract North American businesses

Given the Coronavirus pandemic, Brexit uncertainties and recent news regarding tensions between the UK, the US and the EU on whether the introduction of digital services tax will unfairly prejudice US businesses, you might expect US inward investment in the UK to be volatile. Regardless of these tensions, our experience is that the UK is still high on the list of overseas businesses seeking to expand internationally.

In the Department for International Trade’s 2019/20 statistics, the US remained number one for foreign direct investment in the UK, creating 462 new projects and 20,131 new jobs. India, in second spot, also continues to favour the UK its business infrastructure, skilled workforce and digital sector innovation. It is also noteworthy that Unilever has recently chosen to break its hybrid UK/Dutch structure in favour of the UK.

The UK is well-known for the ease by which profits can be repatriated because there is no UK withholding tax on dividend payments. Together with a wide tax treaty network and dividend and participation exemptions, the UK contributes a favourable tax environment to the decision-making process. Here are some specific tax matters that should be considered:

• Transfer pricing – Broadly speaking, the UK provides an exemption from transfer pricing for SMEs for transactions with countries where the UK has a full double tax treaty and the tax rate is at least 80% of the UK tax rate. For such groups ((those with fewer than 250 employees and with turnover or balance sheet total not exceeding EUR 50mn and EUR 43mn respectively on a consolidated worldwide basis), this can provide flexibility and a reduced administration and compliance burden as the business grows. A UK subsidiary of a US parent should qualify for the exemption thereby facilitating the creation of a UK group company with a reduced compliance burden and a degree of flexibility regarding the level of intercompany recharges.
• R&D tax relief – The UK has a generous and internationally competitive R&D tax relief system with different regimes tailored to large companies and SMEs. In a group context, in order to support a claim, there needs to be clarity over the status of the intra-group commercial and contractual terms. In addition, it needs to be clear whether the UK company is undertaking a trade of contract R&D and providing subcontracted services to the group on that basis or is undertaking R&D in its own right to exploit in its own trade. Staffing costs and subcontracted labour form the majority of most R&D claims with UK tax rules also allowing for costs that have been capitalised as intangible assets to qualify for relief.
• Patent box regime – UK companies owning qualifying patented technology can reduce their tax rate by electing for profits associated with the patent rights to effectively be subject to a 10% rate of tax. The relief is only fully available where the company has undertaken the R&D activity giving rise to the patented technology. Therefore forward planning is essential to ensure that UK R&D activities and the ensuing ownership of the associated intellectual property are correctly structured and aligned.
• Employee equity incentives – The UK provides a tax-advantaged equity share scheme where UK employees of a UK subsidiary can be granted options over shares in an overseas parent company without incurring any tax or national insurance liability on the grant or exercise of the option. This does require certain conditions to be met regarding group size, structure and qualifying activity. On a subsequent disposal of the shares, they may then potentially benefit from a 10% rate of capital gains tax. Such option arrangements are an effective way to retain and reward key employees.

Alongside being a favourable tax landscape, the UK also continues to offer a vibrant open economy with access to a wealth of talent and an easy place to do business. Despite the current challenges and uncertainty, this has not changed and the UK will stay high on the destination list for companies looking to expand internationally.

Our North America Group has supported many businesses looking to set up in the UK and we are continuing to provide advice on all aspects of tax planning and corporate structuring. If you would like to discuss how we could support you setting up in the UK or with your existing UK presence, please contact srudling@mks.co.uk

View Moore Kingston Smith’s North America Group brochure here.