The differences between forming an establishment or subsidiary in the UK Having decided to trade in some form in the UK, it is necessary to decide whether to set up an establishment or form a limited company/subsidiary company. Both entities would be liable to pay Corporation Tax on profits generated in the UK, be registered for VAT where gross revenues exceed the VAT registration threshold, and operate a payroll scheme for any UK-based employees. The following points cover the main attributes of each organisation:
Establishment formation • An establishment is effectively an extension of the Overseas Company operating in the UK, and as such, the UK office is subject to UK Law. • An establishment is not a separate legal entity from the Overseas Company and any such contractual arrangements or liabilities entered into are binding to the Overseas Company. • A n establishment must have a trading address in the UK and present evidence of this for formation purposes. In addition, there must be a responsible officer in the UK who is empowered by the Company to make business decisions and enter into contractual arrangements on behalf of the Company. • T o set up an establishment can take a number of days/weeks depending on the speed at which the information required for filing on formation can be collated. • T he filing requirements are greater than those of a limited company and are therefore more costly than forming a subsidiary. The information needed on formation of an establishment is as follows:
- the corporate name of the Overseas Company - its legal form, i.e. whether it is a private or publicly-quoted Company, and its manner of limitation, i.e. by shares - the law under which the Company is incorporated - the identity (name and address) of the authority in the home state responsible for keeping the records of the Company - its registration number in the country of incorporation (if applicable) - the objects of the Company - the share capital of the Company - a list of its Directors (and if applicable, Company Secretary) and the home addresses, dates of birth and business occupation of such persons - the extent to which Directors can represent the Company, i.e. whether they can act alone or must act jointly - whether the Company is a credit or financial institution - the address of the establishment in the UK, the date on which it was opened and the business carried on by the establishment - a list of the names and addresses of persons in the UK authorised to accept service on behalf of the Company in respect of business at the establishment - a list of those persons resident in the UK and entitled to represent the Company and whether any powers of representation are limited in any way - the address of its principal place of business in its country of incorporation.
• A n establishment can cease operating easily and speedily, and as a result, third parties often prefer to deal with subsidiaries, which are regarded as more permanent, independent organisations. • A lthough the accounts of the UK establishment would not be required to be filed on public record at Companies House, the accounts of the Overseas Company would need to be filed each year in English.
In summary, an establishment is easy to close down if the Overseas Company wishes to do so but the information required on formation is quite extensive. The Company would have to create a physical presence in the UK and pay UK taxes on the trading activities. However, the UK establishment would not be subject to UK audit and there are no filing requirements for the establishment. The main disadvantage is that the overseas accounts would need to be filed on public record annually and therefore have total visibility in the UK to competitors, suppliers and other users of the accounts.
Company formation/subsidiary company formation Establishing a private limited Company or subsidiary Company is a very simple and inexpensive process. A company would normally require at least one Shareholder with at least one ordinary share of £1 in issued share capital, one Director of any nationality who does not need to reside within the UK, and a Company Secretary. The Company Secretary role is a “servant” of the Company and not an officer. In the new Companies Act 2006 the need to register a Secretary at Companies House was removed, however the responsibilities of a Company Secretary still remain. The formation of a UK Company can be achieved electronically and normally within less than 24 hours, but before you can register a Company name you must ensure that the name is not already registered. Registering a Company name that is too similar to one already in existence can lead to a challenge being made by the existing Company. Depending on whether the Company is registered in Northern Ireland, Scotland or England and Wales, the registered office of the Company will in turn have to be situated in the relevant jurisdiction area. However, the trading address of the Company does not need to be the same as the Registered office with many companies choosing to keep these separate. Therefore, for example, a Company registered in Scotland with a registered office in Scotland, may trade from an address in England. The accounts of the UK Company/Subsidiary will need their own audit in the UK depending on the gross revenues/ gross assets of the bigger global Group. The current annual audit exemption threshold for the Group would be £6.5m revenues and more than £3.6m gross assets. If the Company was a subsidiary then these thresholds would apply to the global Group and not just the UK Company. Therefore, a small UK entity could be subject to audit in the UK if the Parent Company overseas is large enough to mean that the Group’s thresholds are exceeded. Accounts in UK GAAP format will need to be filed annually at Companies House (£15 filing fee), together will an annual return stating the Directors and Shareholders of the Company. Although the Ultimate Parent company information will be contained within the notes to the UK GAAP accounts, it is the trading results of the UK entity only that would need to be filed at Companies House, thereby keeping the results of the Parent Company invisible from public record in the UK. On closure of a UK limited company, the Company will need to be formally wound up in accordance with insolvency rules which can be a lengthy process depending on what is involved. However any contractual arrangements entered into by the UK Subsidiary would remain in the UK on dissolution and hence protect the Overseas Parent Company from any remaining liabilities. In summary, we find that most overseas companies setting up in the UK take the option of forming a subsidiary, simply because it is quicker and cheaper than forming an establishment and it is likely to be more popular with customers as registering a Company creates a more permanent establishment. Although the closure of a UK Company can be a lengthy process, the benefits of “Limitation of Liability” for the Overseas Parent far outweighs the disadvantages on closure, and besides we should think positive and hope that companies find doing business in the UK a success! For questions regarding company or establishment formation, please contact our Company Services team on: +44 (0)20 7616 8852 email firstname.lastname@example.org or visit www.artaius.com/companyformation.htm
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