Popularity of the UK

The UK attracts a large proportion of inward-investment destined for the European Union, particularly from the English-speaking world and the Commonwealth. The UK has relatively low corporate taxes, low employment costs and generally less burdensome regulations than many of its Continental partners. UK companies are quick, cheap and easy to set-up and run. The UK has a very wide network of double taxation treaties and recent developments such as the substantial shareholdings exemption (or "participation" exemption), make the UK an attractive location for establishing a regional holding company. As a result, the UK is regarded as an excellent jurisdiction both for inward investment, as well as a stepping-stone for further investment into Europe.

Case Study: Foreign software services company establishing a UK office

Having established a UK entity such as a company, branch or LLP, the next step might involve transferring human resources to set-up and work in the UK office. Before foreign personnel can work in the UK, work permits or other employment authorisation must be obtained. The work permit and taxation issues can best be illustrated by using a case study.

Work permits

For work permit purposes, details and evidence would be required of the work experience and qualifications of the assignees, copies of their CVs and details of the positions including copies of deputation or assignment letters. Also, the assignees would have to be employed by a group company overseas for at least 6 months, before the Intra-Company Transfer route can be utilised. As IT is no longer a shortage occupation in the UK, the alternative would be to advertise the positions in the UK and pass the local Resident Workers Test – a far more difficult hurdle. Once the permits are obtained, these must be dispatched overseas, so that the assignees can obtain their entry clearance from their local British Consulates within stipulated deadlines.

In practice, there will be tremendous pressure to get the workers to their UK assignments as quickly as possible. Therefore, there will be instances when foreign workers come over on visitor visas or other documents and "in-country" work permit applications and "Leave to Remain" applications subsequently have to be made. It should be noted that foreigners on visitor visas are normally not allowed to work in the UK, unless their passports contain appropriate endorsements allowing work. For example, visiting Indian nationals cannot work or be paid in the UK under the employment category, unless they have valid work permits. One of the work permit conditions is that the worker must join the UK payroll of the sponsoring employer and have UK income tax and national insurance operated on their emoluments.

Payroll taxes

As mentioned above, all emoluments must be subject to UK income tax and national insurance contributions. However, there are tax concessions available for expatriates seconded to the UK on a temporary basis, such that income tax and NI deductions can be mitigated for certain stipulated periods provided the compensation package is structured in a particular manner. These concessions are not available for workers recruited within the UK.

Corporate taxes

One of the most common misunderstandings that occur are regarding the corporate taxation status of UK branch offices of overseas companies, particularly companies from India. Due to the peculiarities of foreign exchange controls in India, UK branches of Indian companies are often designated "non-trading" status for RBI purposes, particularly as software exports benefit from long tax holidays in India. This does not necessarily mean that the economic activities carried on by the Indian company's UK branch will be tax-exempt in the UK. Nevertheless, many companies file "nil" corporate tax returns in respect of their UK branches or worse do not file any tax returns at all. UK branches are permanent establishments under the UK-India double tax treaty and by definition are taxable. Sadly such companies can expose themselves to huge corporate tax liabilities in the event of an Inland Revenue enquiry.

Lack of familiarity with UK Value Added Tax (VAT) is also a great cause for concern. The place that is most directly connected to the supply of services to the client, determines VATability of the supply. If that place is the UK office, where the consultants are based and are on the UK payroll, then VAT should be charged in respect of on-site activities of the consultants, even though the client's contractual arrangements are with the overseas head office. We would strongly advise that even in respect of offshore software development activities, written rulings from HM Customs and Excise should be obtained before exempting billing from VAT.

Final thoughts

The discussion above highlights only some primary areas of concern and is not designed to be a comprehensive account of all the immigration and tax planning issues. Although the case study focuses on Indian companies, the issues are broadly similar and concern companies from any other part of the world. It should be noted that immigration and tax issues affecting expatriates are complex and inter-related. Proper professional advice should be sought before setting-up a UK entity or embarking on HR assignments. A great deal of forethought and planning are required to avoid expensive mistakes.