HOW TO START A BUSINESS IN THE UK

 

The United Kingdom encourages and promotes entrepreneurship. According to the Best Countries for Entrepreneurs report done by the US News & World Report, the UK is the fourth-best country in the world for entrepreneurs.

Starting a business in the United Kingdom can be difficult, especially if you are not a European Union citizen.

Business Types in the UK

In the United Kingdom, there is a range of different business types, and you’ll need to pick the one that best fits your company’s structure.

1 - Sole Trader

2 - Partnership

3 - Limited Company

4 - Limited Liability Partnership

 

  

 

1 - Sole Trader

As a sole trader, you’re going to be a self-employed person and operate your firm.

After you’ve paid your taxes, you can keep all of your business profits. You are individually liable for any losses your company incurs. When it comes to running and naming your company, you’ll be required to follow certain guidelines.

Your duties and responsibilities as a sole trader include the following:

• Keep track of the revenue and expenses
• File a self-assessment tax return every year
• Pay income tax 
• Pay Class 2 and Class 4 national insurance

VAT

If your annual turnover exceeds £85,000, you must register for VAT. You can also register voluntarily if it benefits you, such as if you sell to other VAT-registered enterprises and want to reclaim the VAT.

Choosing a Business Name

You can either trade under your name or adopt a different name for your company. If you wish to prevent others from trading under your business name, you’ll need to register your name as a trademark.

 

2 - Partnership

A partnership is the most straightforward approach for two or more people to run a company jointly. 

Partnership business structure has similar duties to sole trader structure with the exception that you have one or more business partners. When you establish a partnership business, you must have a formal agreement describing the agreed-upon split of earnings, losses, liabilities, and ownership between you.

When setting up a business partnership, you’ll need to:

• Choose a name
• Choose a nominated partner
• Register with HM Revenue and Customs (HMRC)

The ‘nominated partner’ is in charge of administering the partnership’s tax returns and keeping track of its finances.

 

3 - Limited Companies

A limited business is a private company that requires an appointed director to administer the company in addition to any shareholders. The finances of a limited company are independent of your finances as the founder.

If you are the sole person employed by the company, you can still register as a limited company by appointing yourself as the director.

Director’s responsibilities include the following:

• Abide by the company’s standards, as outlined in its articles of incorporation
• Keep track of the company’s activities and report any changes
• File the accounts and company tax returns
• Pay Corporation Tax
• You can hire employees but a director is still legally responsible for the company’s records, accounts, and performance.
• The company has its bank account and is subject to corporate tax because it is a separate legal entity. Corporation tax can be registered at the same time as your business is registered with Companies House, but unlike income tax, all of a business’s profits are taxed, therefore there is no tax-free exemption. The government, on the other hand, allows for expenses and deductions that might reduce the amount of corporate tax owed.

 

4- Limited Liability Partnership (LLP)

To conduct a business with two or more members, you can form a limited liability partnership (LLP). An individual or a company, termed as a ‘corporate member,’ can be a member.

As in a ‘regular’ business partnership, each member pays tax on their share of the profits but is not personally liable for any obligations the business cannot pay.

The first steps to forming an LLP include the following:

• Choosing a company name
• Having a registered address
• Having at least two members
• Having an agreement that states how the LLP will be run

• Registering the LLP with Companies House

Members’ Duties and Responsibilities

At all times, you must have at least two “designated members” who will have more obligations than other members.

Responsibilities of Designated Members

• Registering the business with HMRC
• Registering the partnership for VAT if the annual sales are expected to be more than £85,000
• Appointing an auditor (if necessary)

• Keeping accounting records
• Sending yearly accounts to Companies House
• Send confirmation statement to Companies House

If designated members fail to meet their legal requirements, they may be prosecuted. It is also possible to remove the LLP from the register.

Responsibilities of All Members

• Carrying out the duties stated in the LLP agreement
• Registering with HMRC
• In some cases, your company may be registered as one of the above-mentioned structures yet operate under a different sub-category, such as:
• Franchise: A franchise is a corporation that already exists and has a solid reputation. You own the rights to use the established company’s business plan and operate under their brand if you own a franchise.
• Freelancer: A freelancer is someone who uses their skills and experience to deliver a service (such as writing or photography). This type of self-employment works by accumulating clients for whom you will execute work.
• Social Enterprise: A social enterprise is a company that works to assist society or the environment in some way. To ensure that they continue to work toward societal or environmental goals, these enterprises must be transparent in sharing the earnings that they reinvest.
• Charity: A charity’s aim is similar to that of a social enterprise in that it must function for the greater good of society. It is, however, unique in that its profits are derived from donations.
• Every business has its own set of rules and criteria. Before proceeding, you may want to get professional assistance.

 

  

 

Steps To Start a Business in the UK

 

1. Check your legal status

EU citizens who lived in the United Kingdom before January 1, 2021, may be eligible for the EU Settlement Scheme, however, most foreign people will need to apply for a work visa before they’re able to start a business in the country.

2. Apply for a visa

You should apply for a visa ahead of time if you require one. The start-up visa and the innovator visa are two types of visas available to entrepreneurs.

3. Write your business plan

A business plan is required for UK entrepreneurs. This will assist you in determining whether or not your business ideas are likely to thrive and be long-term viable.

4. Choose your business structure 

Before you start a business in the UK, you must select the business structure that best represents your company.

5. Decide on a company name and address

If you’re a sole trader, you’re free to use your name. When it comes to registering your UK business for tax purposes and entering the company register, you’ll need an address.

Only a few companies are required to register their names, but others can do so as a trademark to prevent others from trading under the same name.

You must appoint directors and a company secretary, calculate your shares and shareholders, write your memorandum and articles of organization, open a separate bank account, and register for corporation tax if you’re forming a limited business.

6. Register with HM Revenue and Customs

For tax purposes, you must register your UK business with HMRC. Companies House requires limited companies to register.

7. Review any additional rules that apply to your line of business

There may be extra requirements depending on the type of your UK business, such as permits or licenses. Check if there are additional rules to observe to avoid any problems in the future.

 

Business Visas in the UK

As long as you have the right to work and live in the United Kingdom, you can work as a freelancer, be self-employed, or start a business. Below UK visa types can be of help on your route to starting your own business in the UK.

Innovator Visa

This visa is for people who desire to start a new business in the United Kingdom. If you want to apply for this visa type, you have to make sure your business idea is unique and it’s endorsed by an approved body.

To be eligible, you must have at least £50,000 in investment funds and be able to demonstrate where this money came from.

You should also have sufficient personal funds to meet your needs. Before applying for, extending, or switching to this visa, you’ll need to show that you’ve had at least £1,270 in your bank account for 28 days.

Another requirement is that you’re also able to communicate in English at level B2 of the Common European Framework of Reference for Languages (CEFR).

The visa costs £1,021 and is valid for three years. If you meet the requirements, you can renew your visa for another three years.

Startup Visa

If you have an endorsement from a UK higher education institution or an organization that has a history of assisting UK entrepreneurs, you can apply for a start-up visa.

You’ll have to show that your business idea is fresh, unique, and has expansion potential. The application fees start from £363.

A start-up visa allows you to stay in the UK for two years. A start-up visa cannot be extended but you can switch to another visa while you’re in the UK.

Global Talent Visa

If you’re a leader either in academia or research, arts and culture, or digital technology, you can apply for a Global Talent Visa in the UK. The application cost is £608. 

Under this category, you can work in the UK for up to five years.

Establishing a Branch in the UK as a Foreign Company

Companies House requires foreign companies that want to do business in the UK or form a branch to register as an overseas company.

If you own a company in another country and want to operate a branch in the United Kingdom, you must fill out form OS IN01 and send it to Companies House. The cost of registering is £20.

Managing Your Company in the United Kingdom

For tax and auditing purposes, all UK businesses must keep a record of their accounts. Although self-employed freelancers are not required to keep official accounts, they must keep track of their earnings and tax-deductible costs.

Business Bank Account

A separate UK business bank account is required for many businesses in the UK, except for sole traders and partnerships. But for the sake of keeping accounting operations simple, it’s a good idea to open a separate bank account.

Taxation

For tax purposes, all UK enterprises and entrepreneurs must register with HMRC and are responsible for filing their tax returns.

Profits earned by self-employed sole traders and partnerships are taxed. Corporation Tax registration is required for limited companies and overseas companies with UK branches. Corporation Tax is levied at a rate of 20% on profits, minus any deductions or exemptions.

If the following conditions apply, you must also register for VAT:

• Your expected VAT taxable turnover is more than £85,000 in the next 30-day period
• You had a VAT taxable turnover of more than £85,000 in the previous 12 months

Depending on the types of goods or services you sell and where you offer them, you may need to register too.

Business Insurance

Business insurance is required to stay within the law and protect your business. The following are the most common types of UK business insurances:

Employers’ Liability Insurance

All companies with employees are required to have this insurance, which covers any claims made by employees who become ill or injured as a result of their job for you.

Public Liability Insurance

If you cause injury (including death) to a third party or damage to their property, public liability insurance protects your business from compensation claims and legal fees. Public liability insurance protects you both on-site and off-site. It can pay for legal fees associated with defending claims as well as compensation if your company is determined to be at fault.

Professional Indemnity Insurance

Professional indemnity insurance, commonly known as PI insurance, is a sort of company insurance that protects you against financial and reputational harm if you make a mistake in a piece of work for a customer.

Employing Staff in the UK

If you’re launching a business in the UK that will employ people, you’ll need to register as an employer with HMRC and get employers liability insurance.

You can hire foreign workers in your UK company if they have legal permission to work in the country. When hiring employees, you must follow minimum wage laws and pay social security and pension contributions per the law.

 

FAQ

Can I open my own business in the UK as a sole trader?

Yes, if you meet the criteria, you can start up a business in the UK as a sole trader. This type of business structure is the most simple.

Do I have to pay income tax if I open a limited company in the UK?

If your company’s business structure falls under a limited company, you’ll need to pay corporation tax, instead of income tax.

Can I send my overseas employees to the UK?

Yes, if you and your business qualify, you can be eligible for Global Mobility routes. 

 

  

 

ADVANTAGES AND DISADVANTAGES

The United Kingdom is a global, trading powerhouse, possessing an economy that ranks fifth-largest in the world and second-largest in Europe.

Given its vast GDP (an estimated $2.8 trillion in 2018), the U.K. remains a vitally important market for the export of American goods and services. Notably, the importance of the U.K. market hasn't diminished in the face of ongoing Brexit uncertainty. The U.K. still remains a core market for U.S. foreign direct investment (FDI) and is the largest European market for all U.S. goods and services.

Overall, American firms have invested $600 billion in the U.K. (representing 12 percent of total global U.S. FDI). This makes the U.S. the U.K.'s largest single investor.

These numbers present a powerful case for the U.K. as a highly attractive new market for any business eyeing global expansion or looking to start a business.

Advantages of doing business in the U.K.

An entrepreneur-friendly climate

The U.K. has gained a well-deserved reputation for being accommodating to new businesses, cultures and entrepreneurs. This attitude is reflected in a new policy enacted by the U.K. government that offers U.S. business owners access to special entrepreneur visas and lower tax rates.

Under this program, the capital gains tax rate is pegged at 10 percent for the first £10 million in sale value, exactly half as high as the standard 20 percent corporate tax rate.

As a result of these incentives—and London's status as a global business hub—the U.K. has seen robust growth in a variety of sectors, including fintech, healthcare, energy and manufacturing.

Consistent regulatory oversight

While excessive regulation can hamper growth and innovation, a lack of regulation can lead to uncertainty and instability. The U.K. aims to thread this needle by providing consistent regulation across a number of key sectors (financial services, consumer law, etc.). All businesses operating inside the U.K. are subject to some form of regulatory oversight.

Because failing to comply may result in significant fines and penalties, it's imperative to perform due diligence and seek advice when aiming for compliance with local laws and regulations. Some of the more important compliance areas on which to focus include consumer laws, competition and export controls.

Intellectual property standards

Much as in the U.S., intellectual property protections are vigorous in the U.K. Enforcement mechanisms and legal standards are highly similar in both countries. It should be noted, however, that Brexit may affect IP laws in Britain.

Should the U.K. depart the EU, IP laws will change, impacting copyrights, patents, trademarks, designs and so on. Businesses that are involved in the secondary trading of IP-protected goods between the European Economic Area and the U.K. should monitor these potential changes closely. This applies equally to firms that use cross-border services that involved copyrighted content.

As noted above, full clarity on this issue will not be at hand until the final terms of Brexit negotiations are known.

Tax rates

The U.K.'s corporate tax rate (19 percent) is among the most competitive in Europe and tied for lowest among G20 nations. While already attractive, this rate is scheduled to drop to 17 percent in 2020. (There is one exclusion—ring fence profits, which are profits generated through the extraction of oil within the U.K.)

The U.K.'s Value Added Tax (VAT) is currently set at 20 percent and is assessed on most goods and services within the country (including imported goods in some cases).

Tax incentives are also in place to encourage overseas investment and expansion. One example is research and development (R&D) incentives, which are primarily targeted at small to mid-sized firms. These firms can, in some cases, qualify for a 230 percent enhanced deduction for R&D expenditures.

While the U.K.'s tax policies are market-friendly, it should be noted that the nation's tax system is challenging to navigate. On average, a medium-sized business will spend 110 hours preparing, filing and paying taxes each year, which can be a significant burden.

Risks and considerations

Brexit

Concern has grown over the possibility of the U.K leaving the EU without an agreement due to the potential consequences of such an exit. The absence of a deal means that no agreements will be in place governing customs, citizen rights, trade and travel.

The absence of a bilateral trade deal between the U.K. and EU means that all trade between the two entities would be governed by World Trade Organization laws. Exports from the U.K. to the EU would then be subject to the same customs checks and tariffs that apply to other global trade partners lacking a formal agreement.

KYC banking requirements

The U.K., and Europe as a whole, have relatively strong "Know Your Client" (KYC) rules governing the creation of new financial accounts. As a result, it often takes an extended period of time to set up bank accounts after a setting up a new business entity in the U.K.

This is mitigated somewhat, by the U.K.'s flexible approach to registration. Bank accounts are not required before a new business entity can be registered in the U.K., a common requirement in many other jurisdictions.

Data protection standards

The EU's General Data Protection Regulation (GDPR), which came into force in May 2018, gives the U.K. and other member states the world's most robust privacy protections. GDPR was designed to protect consumers by modernizing data protection laws and establishing a stronger standard that companies must meet.

Non-compliance penalties established by GDPR are significant—up to $20 million euros, or four percent of the company's prior year turnover, whichever is greater.

Should the U.K. drop from the EU following Brexit negotiations, many GDPR rules would still apply, as the U.K. passed its own, nearly identical version of the law in order to maintain continuity. If Brexit occurs, citizens are still protected by the same data protection rules, to which businesses must still adhere.

One note: There may be changes for businesses that transmit data between the European Economic Area and the U.K., though these will not be made clear until Brexit negotiations conclude.

Registering a company in the U.K.

New entities in the U.K. must register with Companies House, which is the U.K.'s official registrar of companies, an executive agency and a trading fund of the British government. Once all documents are submitted, registration with Companies House can be concluded in as little as two days.

New firms must also register with HM Revenue and Customs (HMRC), the U.K.'s tax, payments and customs authority. Registration for corporation tax must be completed within three months of the start of business operations. Though the paperwork is reasonably limited, specific statutory documents must be filled out and submitted in order to complete this process in a timely fashion.

Property registration rules and timeframes

It takes, on average, six procedures and 29 days to register a property within the U.K., according to the World Bank. This makes the registration process one of the more arduous processes associated with setting up a business in the U.K.

Businesses must also register any unregistered land or property at the time of ownership, or when choosing to mortgage that land or property. (Note: Only 10 to 15 percent of U.K. land remains unregistered as of 2019.)

While registering property isn't always required, voluntary registration does confer a variety of benefits. It establishes ownership, protects owners from fraud and eliminates a significant hurdle when attempting to sell, give away or otherwise change the status of the property.

Employer obligations

Companies that wish to task a non-European person with establishing a new, overseas U.K. operation should secure a sole representative visa for that individual. These licenses are generally granted for a term of three years.

Businesses must also shoulder the responsibility of paying employee taxes. In the U.K., this typically means implementing Pay As You Earn (PAYE) into normal payroll operations. Run by HMRC, PAYE is a national system for the collection of income tax and national insurance.

As of 2018, U.K. businesses without an existing pension plan must implement auto-enrollment pensions with minimum employee and employer contribution rates. This program is not part of PAYE, but rather runs in parallel.

Cultural considerations

U.S. organizations will find much in common with the U.K. market—the same language, a similar legal system and a lot of shared cultural history. However, there are also some significant departures that you need to consider before starting a business in the U.K.

British corporate and organizational structure is still more hierarchical than what's typically seen in the U.S., and British professionals may seem reserved or understated while in work settings.

Additionally, the pace of negotiations in Britain can be somewhat slow, depending on the organization. U.S. companies should give this due consideration when pursuing transactions.