The UK holds significant opportunities for South African businesses aiming to expand their operations abroad and, as one of the world’s largest economies, the UK serves as a business gateway to Europe and Asia. However, businesses are advised to be aware of the legal implications of doing business in the UK.

This is according to UK-based international accountancy and audit firm Kingston Smith partner Chris Hughes, who highlighted the many advantages of doing business in the UK at law firm Edward Nathan Sonnenbergs Africa business seminar, in Johannesburg, last month.

With political stability, a relatively stable economy and ease of doing business, the UK was an attractive destination for South African businesses, he noted.

He further highlighted the implications of registering a branch, as opposed to a subsidiary, as branches offered double tax relief and did not require separate audits, while subsidiaries could create double-tax relief problems and might need to be audited, resulting in additional costs.

Branches and subsidiaries were taxed at 23%, which was expected to reduce to 20% in the 2014/15 financial year.

However, compared with registering branches, subsidiaries were easier to incorporate and were perceived to have a stronger UK presence.

The practical steps of establishing a company in the UK include the registration of the company, a pay-as-you-earn scheme, value-added tax (VAT), shareholders’ and employment agreements and pensions, as well as establishing a bank account.

The UK’s taxes on employment income are currently at 0%, 20%, 40% and 45% for income tax. An employee’s social security is rated at 0%, 12% and 2%, while the employer’s social security is rated at 0% and 13.8%.

“For individuals on secondment from South Africa to the UK, there is no liability to social security for the first 52 weeks. Further, if an employee spends some time working outside the UK, the salary corresponding to the proportion of work days spent outside the UK can be excluded for UK tax, provided that it is not remitted to the UK,” Hughes stated.

In terms of a claim for living expenses, if an employee is seconded temporarily to the UK and the secondment is expected to last less than 24 months, certain living expenses are tax deductible.

The tax-deductible living expenses include accommodation costs, subsistence that includes three meals for seven days a week, council tax, utility bills and home-to-office costs.

The nontax deductible expenses include school fees, family costs, landlines, broadband and cable television.

A current business trend is companies moving to the UK to access research and development (R&D) relief, which is an extra tax-deductible expense under corporation tax.

Small and medium-sized companies and branches can claim a 225% deduction for qualifying R&D expenditure, with the possibility of a cash refund of 25% of R&D expenditure. Large company schemes can claim a 130% deduction, but no tax refund.

Further, extra tax-deductible expenses are stock-option scheme deductions and capital allowances.

The nondeductible tax expenses in corporation tax include client entertainment, capital acquisition and depreciation.

Hughes noted that the practical issues to acknowledge were immigration and VAT.

The important types of visas available for immigration were investor and entrepreneur visas, as well as a prospective entrepreneur visa, valid for six months.

Investor visas required £1-million in a regulated financial institution available to the UK and £2-million worth of personal assets.

An entrepreneur visa required proficiency in English, access to £200 000 and applicants cannot be employed in the UK, other than by their own business.

VAT was charged at 20% on certain services or goods made in the UK.

“This means that most UK businesses charge VAT on their sales invoices and incur VAT on their costs. The net of VAT charged and incurred is payable or recoverable from Her Majesty’s Revenue and Customs.

“It is important to understand your liability for VAT in the UK as failure to charge VAT when due can result in large penalties and liabilities. Failure to register for VAT when the investor is eligible to register can result in the nonrecovery of VAT,” Hughes warned.