In this article, Rittika Chowdhary who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses what structuring advice will you give to an Indian entrepreneur who wants to expand to UK?
India, the land of opportunities! But is it really!
- India is a huge market with entrepreneurs carrying out their business in various forms and manners; a country with 29 states and 7 union territories, which proudly boasts of population of approximately 1’25 billion, being second highest in the globe, with the commendable network of 4.69 Mio Kms of road networks, 70,000 Kms of railway networks and approx. 346 airports across the country, India stands as one among the top nations in the matter of connectivity.
- No doubt it is touted as the next big superpower in the world economy; gone are the days when India was part of the “Third World”. With GDP of US $2.2T, it has made a remarkable growth rate of 7.3% in the GDP in FY 2016; with FDI inflow of USD 25 Billion in FY 2014, and not to mention that the Inflation factor is improving over the years in the country.
- Yet one has to admit that it is a notoriously difficult place to do business, and having local help on board is the key to unlocking the country’s vast economic potential. With this vast economic potential, traversing the diverse and complicated corporate landscape can be a daunting task without the right help on board.
- Not only is India one of the fastest-growing countries in the world, it is also going through a period of unprecedented economic liberation, with opening its vast consumer base to international firms and granting overseas investors more access to its vast and varied market than ever.
- A large, young population and a strong export sector awaits for expansions of businesses, with a potential consumer base that far outstrips most other nations in the developed and developing world.
The hassles of doing business in India
Irrespective of all these potential opportunities there are some critical factors which are stopping and making one rethink while establishing/establishing their business in India. Let’s have a glance of these critical factors.
Establishment of business
- The cost of starting a business in India is extremely huge, and the procedures corresponding in establishing the business is more laborious. There are stringent laws which are to be adhered with, various licenses and permissions which are to be availed by the businessman.
- A series of compliances await an entrepreneur on the central government level, and state specific laws as well. There are 12 procedures to complete in the initial set up of a business costing 49.8% of income per capita. It takes almost a month (27 days) to complete the tasks on average, which is well above the OECD average of 12 days. Furthermore, there is no single window concept for complying with all procedures.
- Registering a property requires quite a bit of legal work and can also incur substantial charges. Stamp duty of 5% of the property and another 1% charge on the market value of the property incurred at the Sub-Registrar of Assurances are the 2 fees to look out for, although the lawyer charges and fees at the Land & Survey Office also add to the bill.
- India performs the best of all South Asian economies for ease of getting credit, ranking 23rd in the world according to the World Bank and International Finance Corporation. The 2013 report this to when a “unified collateral registry, which is centralized geographically, became operational in India strengthening access to credit and the secured transaction regime”.
Protecting investors and enforcing contracts
- Concept of protection of investors has gain prominence of late; there are new bodies viz SEBI which has been set up late 90’s. Enforcing contracts will also be an area that must be looked at; India ranks as one of the worst countries in the world for the ability to enforce a contract, taking an average of 1,420 days.
- India is witnessing extremely complicated tax structure across the globe. Business units are bound to bare the huge burden of taxes and to undergo the stringent procedures for the compliances. There are several tax laws some are unified by Central government and some are specified by the individual state government. India has miserably failed to unify its tax structure across the country.
Trading Across Borders
- Despite India opening its borders to international trade, there are still several hurdles to overcome when importing and exporting goods. Several layers of bureaucracy make it very challenging to move goods efficiently, and companies must file a long list of documents before moving goods across borders.
- Culture: India is a cultural hotbed, and business is more about building relations than presenting figures and sums.
Exploring other opportunities
Across the globe, in order to attract the attention of entrepreneurs, governments are on a spree and are ready to shell out money and stops so as to figure out the best way to keep business in their country. New startups bring about innovativeness and exciting business opportunities, which are seen as a great way to stimulate the economy; they help in creation of new jobs and are in a unique position to generate real value just from an idea.
According to the World Bank, the UK is the seventh easiest place to do business in the world.
An article published by Forbes had listed a couple of reasons as to why UK is one of the most attractive business hub, given the fact that the UK government had been regularly (and annually) announced changes in their budget so as to help nurture the growing ecosystem.
- The barriers to starting a company have been falling: whether it is for a freelancer or for a exploring other commercial ventures, the regulatory and legal requirements have been made lot more simpler; be it getting registered as self-employed and doing your tax return through UK’s color-coded online system, or incorporating a company within an hour or so for £14, the barriers to getting started have been steadily getting lower.
- The British tax man is dealing with startups more intelligently: the fact that a business does not necessarily start yielding profits from day 1 has been adequately addressed in almost all countries’ tax structure now, and UK has not been far behind; for example, allowances on research & development expenses, a benefit which can later enable a switch to tax credits after the business is at break-even point is an attractive tax rule from the business point of view.
- A variety of helpful financial schemes: Various financial schemes are offered by the British government, which provides significant tax benefits to smart investors, founders and even employees of companies, regardless of who can afford expensive tax advice.
- The benefits are not just limited to British citizens: Anyone resident in the European Economic Area can relocate to Britain, but from last year, a new category of visa was created to allow anyone from anywhere in the world to enter the UK and establish a company, so long as they have £50,000 of UK-based investment.
Doing business in the United Kingdom
Now that we can see that UK is such an attractive business hub, the following are the considerations that one must keep in mind while thinking of doing business in the UK.
We are looking at this from the perspective of expanding a business. The website of the Government of the United Kingdom is an extremely structured one which lists out the actions for an entrepreneur wanting to set up a business in the UK.
As is applicable for each type of business, there are separate registration procedures for,
- Sole proprietor (https://www.gov.uk/set-up-sole-trader)
- Partnership Business (https://www.gov.uk/set-up-business-partnership)
- Private Limited Company (https://www.gov.uk/limited-company-formation)
- Social enterprise (https://www.gov.uk/set-up-a-social-enterprise)
- Overseas Company (https://www.gov.uk/register-as-an-overseas-company)
- Unincorporated associations (https://www.gov.uk/unincorporated-associations)
Since we are expanding our business to the UK, it is pertinent to take a registration as an overseas company; in addition to the normal procedure for setting up a business, Form OS IN01 needs to be filled out and sent it to Companies House within 1 month of opening for business along with £20 registration fee with the form (cheque or postal order).
Register (incorporate) a company in the UK
By incorporating a company, there will be a formation separate legal entity in the UK, which is known as a private limited company. The process to register (incorporate) a private limited company in the UK is straightforward and shall typically take less than 24 hours.
Before commencing the process of registration, an entrepreneur shall keep following information ready,
- A name for the company
- An address, which can be any UK address, to act as the registered address of the company
- At least one director (does not need to be UK resident)
- At least one shareholder (can be corporate or an individual)
Memorandum of Association is a compulsory document for the incorporation of an UK company. These documents must be in place at the time of incorporation. One can select standard documents at the date of incorporation, or professional advisers can prepare and file tailored documents on behalf of company.
While it is not a legal requirement to have a UK resident director or shareholder to set up a UK company, many banks will prefer this before they will open a UK business bank account for business establishment.
Register a UK branch of a foreign company
By registering a branch in the UK, a foreign company does not create a separate legal entity but is registering a foreign entity to do business in the UK. A branch does not offer the limited liability benefits that come with a UK company.
This is known as the registration of a UK establishment of an overseas company.
It will take longer to register a UK branch because the foreign registering company must submit additional documents and information to Companies House. The review process for this can take up to 4 weeks.
Compliance and Procedures regarding Accounting and Business Tax
Any company which is a registered entity in the United Kingdom, and carrying out its operations, has to comply with the established provisions for accounting and business tax:
- In the United Kingdom, the financial year runs from 1 April to 31 March for the purposes of corporation tax and government financial For the self-employed and others who pay personal tax the fiscal year starts on 6 April and ends on 5 April of the next calendar year.
Accounting period of a corporation can’t be longer than 12 months, however shorter period is allowed in the event of newly formed company or during closure of its operations.
- Accounting year will affect the deadlines for payment of Corporate Tax. After the end of financial year, every company is required to file its accounts and tax returns with Companies House and HM Revenue and Customs (HMRC). Following table summarizes the deadlines for filing the accounts and tax returns with HMRC:
|To File first accounts with Companies House||21 months after Company registered with Companies House|
|To File annual accounts with Companies House||9 months from the end of financial year|
|For the payment of Corporation tax or intimating HMRC about zero tax liability||9 months and 1 day after your ‘accounting period’ for Corporation Tax ends|
|To File a Company Tax Return||12 months after your accounting period for Corporation Tax ends|
- Capital Gain Tax on Business is also applicable when a business entity sells business asset viz. Lands and Buildings, Furniture and Fixtures, Plant and Machinery etc.
- Corporate Tax rate in United Kingdom stands at 20%.
- United Kingdom follows Value Added Tax as an Indirect Tax for the purpose of taxing the trading transaction. VAT is charged on transactions like:
- business sales – for example when transaction involves buying and selling of goods and services
- hiring or loaning goods to someone
- selling business assets
- commission transactions
- items sold to staff – for example canteen meals
- when business goods are used for personal purpose which are potential VAT transactions.
- ‘non-sales’ like bartering, part-exchangeand gifts
It’s a duty of every business house to charge VAT on all their goods and services irrespective of the fact that they receive cash in return or it involves any barter transactions.
Every business house must register with HMRC if the turnover exceeds £83,000 unless every product sold by the business house is exempt from payment of VAT. Upon the registration for the VAT business house will receive VAT Number and the registration certificate.
Every registered business house shall submit the VAT return along with payment for VAT before the deadline date details are provided in website https://www.gov.uk/vat-returns
- HMRC is the monitoring authority of both direct and indirect taxes in United Kingdom. However, any assessee is having a right to appeal with the tribunal established by the law of country. Appealable topics and the procedures of an appeal are provided in the website. https://www.gov.uk/tax-tribunal/appeal-to-tribunal
When a business house involves in wider volume of transactions transaction across the country becomes more important. In United Kingdom, following procedures shall be followed by the business entities while indulging in Imports.
Procedures and Compliances are depending on from where the imports takes place,
- Within the European Union
- Outside the European Union
Procedures while importing from the European Union
When moving goods from European Union (EU) countries, one need to get a commodity code and pay VAT, but not import duty. Import licenses are not mandatory for this.
Imports within the EU are called ‘acquisitions’. However following procedures shall be strictly adhered with.
Business House needs a commodity code if the goods are moving out from other EU countries. The code classifies the materials involved for tax and regulations.
Import licenses are need not be obtained for while moving goods from the EU countries except if the goods involved in the transaction is fire arm.
Paying VAT for EU acquisitions
- If we move goods from another EU country we must add these acquisitions and any tax due in the VAT Return. One can reclaim the VAT paid if the goods are for you to make taxable supplies or use in your business.
- Instant declaration shall be submitted to the authorities if the value of the goods involved in the transaction is more than £1,500,000.
- VAT shall be paid at the rate specified in the United Kingdom for the goods imported within the European Union.
Paying duty on acquisitions from EU countries
One need not pay any duty on goods that have been produced in the EU. These goods are ‘in free circulation’ in all EU countries.
This also covers goods from outside the EU if duty has already been paid on them.
Procedures while importing from Non-European Union Countries
When an organization involves in the importing of goods from non-European countries briefly the following procedures shall be followed with.
- Finding out the appropriate commodity code to classify the goods for tax and regulatory purposes.
- Registration for EORI Numbers.
- Declaring the value of imports with customs.
- Payment of duty
Import license may be necessary for restricted items.
Payment of duty on imports from Non- European Union Countries
- If the goods are routed through the EU countries then the business house is need not pay the duty. However if the goods are imported directly from Non EU countries duty shall be paid on it.
- The amount of duty you pay depends on how the goods are classified under the UK Trade Tariff and how they’ll be used.
- Business houses have an option to apply for reduced or zero rate duty for goods from certain countries as long as you can prove their origin. This is known as ‘preference’.
- Goods will not be released by customs until you’ve paid all duty and UK VAT.
- It’s possible to import goods from non-EU countries without paying duty or VAT as long as they stay in a customs warehouse. These warehouses are places where duty is suspended.
- For example, business house can import goods from the USA, store them in a customs warehouse in the UK and move them into a customs warehouse in Spain without paying duty.
- Import Duty and VAT will only be paid when the goods are put into free circulation within the EU.
- Sectors identified for doing business in the UK: With pro-business legislation and an appetite for innovation, UK business sectors are renowned for being world-leading. From revolutionary developments in automotive components through to filming the latest and greatest blockbusters, the UK is the next logical step for your business.
- Advanced Manufacturing
- Energy creation
- Financial services
- Food and Drink manufacturing
- Health and life sciences
- Asset management
- Automotive research and development
- Automotive supply chain
- Creative content and production
- Data analytics in the UK
- Freeform foods
- Medical technology in UK
- Nuclear Energy
- Offshore wind
- Oil and gas in the UK
- Pharmaceutical manufacturing in the UK
- Licenses and licence applications is a separate and detailed topic, with sector specific licencing requirement, which has been explained in detail in the website
- Across the globe there are multiple UK Trade and Investment desks are established to help investors who are keen to explore the business in UK.
- Any business regardless of how it is conducted works best when it gets the adequate environment for flourishing. In this context, as has been pointed out earlier, governments are in a continuous upgradation process, so as to attract more and more investors, and bring about more entrepreneurs who are bubbling with energy, who can contribute to the economy in smarter ways which were unthought of in the past.
- Bringing in tax holidays for such entrepreneurs, opening up software and technology parks which are exclusively dedicated to the promotion and development of technology are some measures which have been taken by governments across the globe. The place where European countries take the lead from their Asian counterparts is availability of right resources to the right person in the right format, that is to say that doing business is not seen as a means of “only” earning profits in these countries, they are also looked up as a means to make lives simpler.
- Business is not an option; it is a matter of choice. The choice is made more attractive by means of easier policies, lesser regulations, stricter compliances and stringent penalties. The cost of non-compliance is far more than the benefit drawn out of the floating of law. Our Indian lawmakers can take a strong cue from such measures which have upheld the idea of innovation and conducting business across the globe.
- Several Initiatives has been put forward by the government of India viz. Make in India, Export Promotion schemes, exemptions etc. Inspite of all this we have a long way to go in ensuring proper inflow of the investment and retaining the domestic investment. More emphasis shall be given on providing the ease of doing business, with the single window procedure to comply with the provisions of law and regulations. Corruption free Procedures, better infrastructures will improve the business scenario in India.