This article deals with some of the issues that would arise if traders were to form and trade through a UK subsidiary for their UK business. There would be obligations to prepare and maintain accounts and undertake UK companies’ office returns. It would change VAT treatment and be subject to UK corporation tax on UK profits.
The issue of having a brass plate company or natural physical presence are distinct. A brass plate company may be sufficient for some purposes, but not for others. For example, it is unlikely to qualify for a sponsorship licence. A company with some element of real presence may have a branding advantage.
The question of whether the formation of a UK company is necessary or desirable is particular to each sector and businesses. The matter needs to be kept under review and regard needs to be had to the range of intersecting factors and effects, advantages and disadvantages of having a UK company, in advance of commencing trade through it.
Whether traders choose to trade more or exclusively with UK clients through a new UK company is ultimately a business decision. It involves both branding and market considerations as well as tax, legal and regulatory considerations. Most of these issues will apply irrespective of Brexit. For the most part, traders should look at them on an ongoing basis as circumstances unfold.
There is some possibility of divergence and barriers arising after the UK is outside the EU. However, for the most part, the UK has not put barriers against international providers of fintech services from outside the EU so that on balance it seems less than likely that it will put up new barriers, in the immediate aftermath of Brexit. There is a possibility that there might be a new trade agreement which will provide some assurance against such barriers, although this cannot be guaranteed.
Forming a UK Company
Forming a UK company and having it available as a contingency is a possibility and would not necessarily mean traders had to or should trade through it immediately. Generally, UK companies can be formed quite quickly, so that it will be possible to so if and when the risk arises. Traders have an absolute right to form a company at present, and there is no requirement for a UK shareholder. There is no requirement at present for UK companies to have UK or EU resident directors which is unlike the position in Ireland.
There is some chance that this may change after Brexit, but an Irish director might be permitted even in this case. In theory, if a change was made, it might be allowed that existing companies could continue as they were. It is very hard to judge, and this would be a very speculative reason to carry the ongoing costs of a company.
Northern Ireland company
Although Northern Ireland will be outside the UK customs area for many purposes, it will be within the UK for most purposes. It is almost certain to have the same immigration, financial services rules and freedoms as a company in GB. A Northern Ireland company would be within the UK for most other tax purposes other than VAT and customs.
If traders are minded to form a UK company, other than for customs purposes, they might look at the possibility of forming a Northern Ireland company. It would be critical to deciding if a NI company would suffice for the particular need. There are issues of geographic proximity in terms of dealing with accountants in Northern Ireland. The costs of services employees and facilities in Northern Ireland are generally less than in Great Britain. There may be some scope to leverage advantage by using a Northern Ireland base and company as opposed to a UK base.
Obligations in having a Company
Having a company involves ongoing administration and costs obligations. A UK company would have UK corporation tax obligations and liabilities as well as Companies House obligations. They are much the same obligations as those owed to the Irish companies’ registration office and the Irish Revenue. They would be owed by the UK company to the UK Companies House (Cardiff) and HMRC (UK Revenue).
Traders would have an obligation to prepare and audit accounts unless they qualified for an audit exemption. Under current EU law, companies may be obliged to prepare group accounts as well as consolidating their Irish company and UK company accounts. At present, to some extent, it is possible to use group companies accounts for a subsidiary. However, post-Brexit, two sets of accounts may be required as the UK is likely to fall outside the EU group accounting rules.
There are ongoing HMRC compliance obligations while traders have a UK company, even if they are not trading in the UK through it, on account of Brexit uncertainty or otherwise. Therefore, if traders formed the company now, they would in due course have to prepare accounts even if the company did not trade. Equally, they may have obligations to make nominal tax returns depending on the precise circumstances. Generally, having a company as a contingency would carry costs that exceed its benefits in almost most cases. Even if there is a change in UK law making it necessary, it is likely to be given some prior publicity.
Incorporating and trading through a UK company will require that it charges UK VAT (unless it is below the VAT registration threshold). This might have a cash flow implication for some traders’ UK customers/clients relative to the present B2B treatment. Of course, merely having a UK company would not mean that traders have to trade through it completely or at all.
A business could, for example, trade with some or all of its UK clients through its Irish company as at present while using its UK company to provide certain ancillary services to the RoI company or vice versa. The implications of taxation of a branch and taxation of employees would need to be considered very carefully in this context.
Branch v Subsidiary
A UK incorporated company will always be taxed in the UK regardless of the degree of activity in its trade within the UK. Even if it does not form a UK company RoI companies/traders should be aware that if they form a branch or a “permanent establishment” of their Republic of Ireland company in the UK, then it would be subject to many of the same obligations as a UK company.
A permanent establishment depends on the degree of presence in the United Kingdom. A permanent establishment would mean having a place of business from which traders could provide their services.
Doing Business Issues and Limited Liability
A consideration which is often important is the fact that having a UK company insulates the Irish company from insolvency risk due to losses and unexpected uninsured liabilities that arise to the UK company. This can be a critical advantage. There is always a risk with any enterprise that some unexpected event might arise which could “bankrupt” the particular company. Having a separate company in the UK insulates the Irish company from this risk.
The general “doing business” rules are likely to remain the same, at least in the short term. Some such rules are coordinated on an EU wide basis, and after Brexit, the UK would be freer to change them in a way that does not now apply. This presupposes, however, a will or desire to do so.
The articles on immigration should be considered in the context of forming a company. It would appear that a UK company would be required if a business needs to employ EU 26 citizens in the UK under the current immigration rules. This is because the company would require a sponsorship licence which requires a certain degree of presence in the UK.
There are some possibilities under the UK immigration rules at present for intercorporate transfers. Having a UK company would enable these options.
The present third-country rules would kick in in a hard Brexit. It is possible in a soft Brexit that some more liberal rules might apply which might not require a sponsor who has a base. However, the UK immigration proposals published in February 2020 contemplate maintenance of the sponsorship licence regime for EU26 employees. The existing third-country rules should be the baseline even if a lighter touch regime comes into force. Traders should follow the position closely.
Having a UK company at an earlier date, trading through it and having a record might make it easier for traders to have the credibility to obtain a sponsorship licence if this regime kicked in. However, it seems unlikely that doing this simply to have a track record in the circumstances would be worth the disadvantages in terms of tax VAT treatment and possible changes to employees’ personal income tax circumstances as well the costs and other logistical considerations involved.
Of course, traders might decide for purely business, strategic and planning reasons to form a company, and those reasons may outweigh any other consideration and justify the other risk and costs.
A significant aspect of the European Union is the freedom to incorporate companies in other EU states and to exercise trades and provide services from one state into another. After Brexit, it is not clear to what extent these rights will remain. It seems likely that the EU will not give the UK access to the single market on the same strong terms as at present, which includes the strong rights to provide services and exercise economic activities into and throughout the European Union.
If the EU was to exclude UK citizens from exercising such rights, there is a real possibility that the UK would similarly restrict EU nationals from doing the same within its own jurisdiction. The common travel area arrangements may assist Irish citizens in some cases.
At present, the EU rules are very significant as they go a long way to guarantee the removal of open and hidden barriers to providing services and exercising trades. States may bring in subtle and not so subtle rules that, for example, require particular local qualifications, local residence etc. requirements which are simply much easier for those in the home state to comply with.
At present, an EU citizen can walk into any court including a UK court and/ or complain the EU Commission to use powerful EU wide rules to invalidate such local restrictive rules unless the rules have a very good objective basis. This is rarely the case.
Equally, the services directive makes it easier for companies and nationals of other EU states to assert the right to exercise business and provide a service in another EU state. There are administrative procedures which are cheaper than court action by which the EU Commission can challenge unjustifiable new rules which generally need to be pre-approved by the commission in any event.
Doing Business Post Brexit
It is very difficult to predict the future, particularly if Brexit takes the route of a trade war or if there is no trade agreement. After Brexit, the UK would be free to put in place all kinds of rules and restrictions which it is precluded from doing at present by reason of EU membership.
Many other countries put in place subtle barriers to trade, such as requirements of having a certain degree of presence and local employment. The UK has not traditionally done this and has been very open to international trade and has put up minimum barriers. To some extent, this is because it has had Conservative governments and Labour governments that followed quite similar policies.
It is very hard to predict how a post-Brexit landscape might unfold. There might be a policy which seeks to limit the ability of foreign companies to do business. This is the kind of thing that is known to happen when particular sectors place pressures on the government to protect themselves.
While all of this seems contrary to the way the UK has approached the world for many years, it is impossible to predict how things will unfold. The important point is that the UK has greater freedom to have restrictive rules outside the EU even if its traditions in international trade are against putting any such restrictions in place.
A company as Protection Against Exclusionary Rules
After Brexit, the UK will no longer be subject to the EU law constraints against putting barriers and hidden barriers to non-UK persons and companies providing services and undertaking business.
In theory and for much the same reasons as above, the UK might make it more difficult for non-nationals to form UK companies in the future. At present, there is no requirement that there be a UK resident director.
Equally restrictions on shareholdings by nonnationals would be prohibited under EU law but could, in theory, be put in place outside of it. This would not be something the current UK government or any recent government would be likely to do. Another government might put in place these types of controls which were once common long before the European Union.
Once again, having an existing company is certainly no guarantee against new restrictive legislation but might enjoy some exemptions because it is already in place.