For overseas entrepreneurs or businesses looking to expand into the UK, understanding the legal framework is crucial to making the right decisions for your operations. Whether you’re deciding between setting up a subsidiary or a standalone company, navigating the UK’s legal, tax, and regulatory landscape can seem complex. In this article, we’ll break down the pros and cons of each business structure, as well as explain how the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) can benefit your business.
1. Subsidiary vs. Standalone Company: Which Structure is Right for Your Business?
When expanding into the UK, one of the most important decisions you’ll need to make is whether to establish a subsidiary of your existing overseas business or set up a completely standalone company in the UK. Both structures have their advantages and disadvantages depending on your goals, tax position, and the level of control you wish to retain.
Subsidiary of an Overseas Parent Company
A subsidiary is a UK-based entity that is owned and controlled by your overseas business. The parent company holds a majority (or full) shareholding in the UK subsidiary, and the two companies operate as separate legal entities.
Pros:
Limited Liability: A subsidiary structure provides limited liability protection for the parent company. This means that the parent company’s liabilities are separate from the subsidiary’s, offering protection for shareholders.
Familiarity: Setting up a subsidiary allows you to maintain control over operations while benefiting from the UK’s business-friendly environment. The structure may also allow you to leverage the parent company’s established brand and reputation.
Tax Benefits: UK subsidiaries can benefit from certain tax reliefs, such as group relief for intra-group trading and the ability to offset losses against the parent company’s profits (subject to specific conditions).
Easier Funding: If the parent company is well-established, it may be easier to secure funding for the UK subsidiary, as investors often prefer the stability of an established business structure.
Cons:
Complex Reporting Requirements: As the subsidiary is a separate legal entity, it must adhere to UK regulations, including regular filing with Companies House and compliance with UK tax laws. You will need to prepare and file separate accounts and tax returns for both the subsidiary and the parent company.
Double Taxation: While the UK has a network of double taxation treaties with various countries, there could be instances where the parent company is taxed on the profits of the UK subsidiary. International tax planning is necessary to ensure that the business is not subject to double taxation.
Standalone UK Company
A standalone company is an independent entity formed in the UK that operates entirely separate from any parent company. This structure can be beneficial if you want to establish a wholly UK-based operation.
Pros:
Autonomy: A standalone company has full autonomy and is not dependent on the parent company’s operations or financial health. This can offer greater flexibility in decision-making and long-term strategy.
Access to UK Funding: As an independent entity, a UK company may have better access to local funding options, including venture capital, grants, and government-backed funding schemes such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS).
Tax Incentives: UK companies may qualify for various tax reliefs, including the Research and Development (R&D) tax credits and the Patent Box regime for businesses with patented products.
Cons:
Limited Brand Recognition: A standalone company does not have the benefit of the parent company’s brand recognition, which may slow down initial market penetration.
Initial Setup Costs: Setting up a standalone company can be costly, especially if you need to establish a UK-based management team and office space. Additionally, the company must be fully compliant with UK business laws and tax regulations.
2. Understanding EIS and SEIS: Tax Reliefs for Investors
Both the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are designed to encourage investment in UK-based startups and small businesses by offering significant tax incentives to investors. These schemes are beneficial for both standalone companies and subsidiaries, depending on your business model.
Enterprise Investment Scheme (EIS)
The EIS provides tax relief to individual investors who purchase shares in qualifying small and medium-sized businesses in the UK. The scheme is designed to attract investors who are willing to take a higher risk in exchange for substantial tax breaks.
Key Benefits:
Income Tax Relief: Investors can claim 30% income tax relief on investments of up to £1 million per tax year.
Capital Gains Tax (CGT) Relief: Any gains made on EIS shares are free from CGT if the shares are held for at least three years.
Loss Relief: If the investment results in a loss, investors can offset the loss against their income tax liability.
Eligibility Requirements for EIS:
The company must be a UK-based, unquoted business with fewer than 250 employees.
The company’s gross assets must not exceed £15 million.
The company must be carrying out a qualifying trade and have been trading for less than 7 years.
Seed Enterprise Investment Scheme (SEIS)
The SEIS is a similar scheme to EIS, but it focuses on even earlier-stage companies. It’s aimed at companies that are just starting up and looking for seed capital to get their operations off the ground.
Key Benefits:
Income Tax Relief: Investors can claim 50% income tax relief on investments of up to £100,000 per tax year.
Capital Gains Tax (CGT) Exemption: If shares are held for at least three years, any gains made are exempt from CGT.
Loss Relief: Investors can offset losses against their income tax liabilities, similar to EIS.
Eligibility Requirements for SEIS:
The company must be a UK-based, unquoted business with fewer than 25 employees.
The company’s gross assets must not exceed £200,000.
The company must be in its early stages (less than 2 years old) and not have raised more than £150,000 in funding.
Choosing the right business structure—whether a subsidiary or a standalone company—depends on your goals, your appetite for control, and your approach to managing tax obligations and funding. The UK’s legal framework offers flexibility and a variety of incentives to encourage international businesses, with the EIS and SEIS providing valuable opportunities to raise capital through tax-advantaged investment schemes.
To make the best decision for your business and ensure a smooth entry into the UK market, it’s essential to work with experienced advisors. UK Advisory Services can provide expert guidance on the legal, financial, and tax considerations of setting up a business in the UK. From choosing the right structure to understanding funding opportunities and managing compliance, we’ll help you navigate every step of the process with confidence.
Contact UK Advisory Services today to get started on your UK business journey. Let us help you set up and optimise your operations in the UK.
