Investors' Guide to the United Kingdom 2012/13

clients.

Part One

1.1 THE UK ECONOMY AND INVESTMENT ENVIRONMENT

Jonathan Reuvid

Legend Business

The robust deficit reduction policy that the Chancellor introduced shortly after the coalition took office in May 2010 remains in place, and the UK retains its triple A credit rating. August 2012 output numbers suggest that 3rd quarter GDP may signal relief from the second quarter double-dip recession while unemployment has stabilisd. However, while the US and other European economies remain depressed and the requirements of weaker Eurozone members for substantial financial support from the ECB increase, a return to more buoyant conditions in the UK’s prime export markets is delayed.

THE 2012-2013 INVESTMENT CLIMATE

There is consensus among economists, the government and Parliament that strong investment programmes by the public and private sectors are essential to recovery in the medium-term. The Government has pledged to stimulate infrastructure investment as an essential tool in generating growth and employment. As the Prime Minister stated in his speech at The Institution of Civil Engineers on 19th March 2012, "We’re encouraging the appetite of investors, both at home and abroad, for investment in British infrastructure; taking advantage of our stability and our open markets".

The impact of necessary austerity on public services and disposable incomes is painful. However, there is nothing in the Coalition Government’s programmes to deter foreign investors. Indeed, as the UNCTAD international investment statistics for 2011 (reported below) show foreign investors already active in the UK are extending their commitments, and new incoming investors continue to develop a business base in this leading global economy.

More generally the lowering of the corporation tax rate by 1 per cent progressively each year up to 2014 is a major incentive to inward investors. The UK is very much open to inward investment.

BASICS OF THE UK ECONOMY

Population

The population of the UK stands at an estimated 62.3 million (Source:ONS, 2012), with 29.28 million in work, comprising 21.23 million in full-time work and 7.97 million in part-time work. The employment level (the proportion of working age people in work) in the UK is high at 70.6% compared with the European Union (EU) average of 64.3% Applying the international standardised measurement, the UK’s rate of unemployment is 8.2% which also compares favourably with the EU average of 10.3% (source: Eurostat, 2012). 83.6% of the population are English, 5.6% Scottish, 4.9% Welsh and 2.9 % Northern Irish.

Macro-Economic Indicators

Forecasts for 2012/2013

Table 1.1.1 highlights 2012 and 2013 forecasts for the basics of the UK economy. Independent averages, and the range of forecasts, are based on forecasts made in the last three months (August: 23 institutions; July: 10 institutions; June: 3 institutions). Averages of new forecasts are calculated from forecasts for the comparison received in August.

Table 1.1.1 Macro-economic indicators August 2012

The 22 most recent forecasters include 11 banks and investment firms, 10 research institutions and the Confederation of British Industry (CBI).

UK INWARD INVESTMENT

In the World Investment Report 2012 by the UN Conference on Trade and Development (UNCTAD), the UK stock of inward foreign investment is quantified at US$1,198 billion, an increase of 3% over the previous year. UNCTAD also reports a 7% growth in the UK’s FDI inflows in 2011 to US$53.9 billion, with the UK ranked as second in the world behind the US and as the largest recipient of FDI stock in Europe. In world rankings the UK remains ahead of Hong Kong and France. In the Ernst & Young European Attractiveness Survey 2012 the UK was rated as the most attractive location for most foreign direct investment (FDI) projects (19%) in Europe, then rated the most attractive regional location for investors globally after China. More recently, the Financial Times fDi Intelligence Report 2012, confirms the UK as the primary FDI location in Europe.

The sources of investment over the past four years are detailed in Table 1.1.2.

Table 1.1.2 Country sources of investment 2008/09 and 2011/12

The total number of inward investment projects in the year to March 2012 at 1,406 was marginally less than the 2010/2011 total of 1,434 projects. However, the number of new jobs generated by overseas investors was nearly 52,471, an increase of 26% on 2010/2011, and FDI activity also safeguarded a further 59,918 jobs, 14% more than in the previous year when a substantial increase over 2009/10 qas recorded. Together, the total of new and safeguarded jobs at 112,659 was 19% above the 2009/10 total and, as shown in Table 1.1.2, more than three times the total recorded for 2008/09. In the current recessionary climate, this is a satisfactory outcome.

As in the three previous years, among the 58 countries that invested in the UK in 2011/12 (54 in 2010/11), the US remains by far the biggest source of investment projects, accounting for 24% and one-third of created or safeguarded jobs (36% in 2010/11). Project numbers were down for Germany and France to their lowest in four years, but up from 53 to 98 in the case of Italy and with an increase for the rest of the EU from 144 to 244. However, while the rest of the EU generated 20,263 jobs in 2011/12, approaching 3 times the previous year total of 7,489 and new and safeguarded jobs from German and French FDI were together up from just over 10,000 to 17,000 in 20111/12, the greater number of Italian projects generated fewer jobs (1,763 in 2011/12 against 2,940 in 2010/11).

China ranked third in 2011/2012 after the USA and Italy and ahead of Japan and India as the source of 92 new investment projects, a significant increase of more than 55%, and generated 2,116 new and safeguarded jobs against 1,411 in 2010/2011. Although there were only 88 new investment projects from Japanese sources in the wake of the tsunami, compared to 105 in 2010/2011, the number of jobs generated increased from 5,508 to 7,818 as new models were introduced to its UK vehicle manufacturing plants, placing Japan third in the table. India was also the source of fewer new investment projects, 81 in 2011/2012 against 97 in 2010/2011 but the new and safeguarded jobs total was only marginally less at 5,454.

Within the employment figures, 52,741 new jobs were created by overseas investors, a more than satisfactory increase of 26% in the challenging economic circumstances. Likewise, 59,918 jobs were safeguarded in 2011/2012 as a result of FDI representing an increase of 14%.

Composition of investment projects

Inward investment by category

The 2011/2012 proportions of completely new investments, expansions of previous investments and mergers and acquisition (M&As) including joint ventures (JVs) are compared with the 2009/2010 and 2010/2011 proportions in Table 1.1.3.

Table 1.1.3 UK inward investment by category

Source: UK Inward Investment Reports 2009/20010,2010/2011 and 2011/2012, UKTI

Although the total of investment projects was reduced marginally by 2% in 2011/2012, new investments in fact rose by 4% to 752 with the fall attributable to a decline of 7% in expansions and 11% in M&A and JVs.

Inward investment by sector

Although levels of investment activity were lower in 2011/2012 than the previous year for the first four sectors, all sectors continued to attract significant investment.

Table 1.1.4 UK inward investment projects by sector

*Other includes the food & drink, power and chemicals sectors

Source: UK Inward Investment reports 2009/2010, 2010/2011 and 2011/2012, UKTI

As in the past two years, the software sector attracted the largest number of projects (more than 16 per cent of the total). Ranking second, the advanced engineering sector accounted for most jobs, an encouraging increase of 25% over 2010/2011 to 17,379. In spite of the continuing problems in the banking industry, financial services projects increased by 24% while there was a similar increase of 26% in creative and media section investments. In life sciences, ICT and environmental technology investment projects remained at the same level as in 2010/2011 but investment in general business services fell away to 74, less than half the projects achieved in 2009/2010.

Inward investment by type of operation

Table 1.1.5 completes the analysis of 2011/2012 FDI projects by type of operation. Within the period, 286 headquarters operations relocated to the UK compared to 274 in 2010/2011, which represented 20% of total projects entering the territory. The UK’s status as the home to more headquarters than any other European economy remains unchallenged.

Table 1.1.5 UK Inward Investment by operation type

Source: UK Inward Investment Reports 2009/2010, 2010/2011and 2011/2012, UKTI

The number of investment projects in services, manufacturing and e-commerce advanced with the growth in manufacturing projects to 256 particularly strong bringing the annual total 22% above the total for 2009/2010. Substantial investments were registered by Nestlé and by Tata, Nissan, Toyota, Honda and Sahaviriya Steel Industries, emphasizing that the UK’s commitment to advanced manufacturing clusters and the ongoing development of its engineering skills base continues to bear fruit. Conversely, contact centre projects were reduced by almost 50% to 35, while investment in distribution fell away by 42% and in R&D projects by one quarter. However, the UK continues to be rated as having one of the strongest research bases globally and Chapter 6.3, provides an overview of science parks and business incubators in the UK where much of the private sector R&D is located.

KEY AREAS OF INVESTMENT OPPORTUNITY

Looking forward to 2013 and beyond among the many areas of business opportunity for inward investors there are four individual areas where prospects are particularly exciting and which merit specific attention:

Infrastructure

The UK’s major infrastructure projects will play a leading role in propelling the economy through to recovery and will provide a highly attractive range of opportunities for institutional investors and, in particular, sovereign wealth funds. Key elements of the programme include:

•implementation of a ground-breaking commercial-scale carbon capture and storage project;

•improvements to selected road and local transport schemes across the UK;

•Crossrail and the new high-speed rail network;

•launch of the Green Investment Bank to stimulate growth in the green economy;

•support for major regeneration projects around the UK, including Elephant and Castle, Nine Elms and the Atlantic Gateway;

•increase in the UK’s nuclear power capability;

•construction of the Thames Tideway Tunnel;

•development of electricity generation capacity through offshore wind.

London Olympic Games Legacy

The London Legacy Corporation is building on the highly successful London 2012 Olympic and Paralympic Games by transforming the Olympic Park into a new metropolitan centre that will provide significant development opportunities for business enterprises and investors, such as:

•the International Quarter, a £1.3 billion project that will provide four million square feet of Grade A commercial office space: and

•Landprop, a 30 acre mixed development with 1.3 million square feet of housing and half a million square feet of office space.

Tech City

The Tech City Investment Organisation (TCIO) was established in 2010 to support the growth of the technology cluster in East London around Shoreditch and Old Street and extending into the Olympic Park at Stratford.

TCIO’s objective is to make Tech city the digital capital of Europe and a leading global centre for technology-based entrepreneurs and companies. Growth has been accelerated by the early involvement of global technology leaders including Intel, Cisco, BT, Vodafone, Qualcomm and Google which has launched an innovation hub to provide a centre for developers and start-ups. A further attraction of Tech City is its close proximity to four of the world’s leading universities; Cambridge, Oxford, Imperial College, London and University College, London.

Life Sciences

As one of the largest purchasers worldwide of life sciences products the UK’s National Health Service (NHS) is the catalyst for the Government’s commitment of substantial investment into the UK’s life sciences R&D infrastructure including:

•£180 million into a biomedical catalyst fund and £130 million into stratified medicine to support research, development and commercialization;

•£25 million over five years into regenerative medicine through the Research Councils;

•£75 million into the European Bioinformatics Institute in Cambridge, and;

•Up to £10 million annually into a Cell Therapy and Innovation Centre.

Investment in life sciences is supported by the world-class UK academic base and Government initiatives such as R&D tax credits and Patent Box.

Leading industry sectors

Overall other UK industry sectors which continue to attract high levels of inward investor interest are:

•Advanced engineering

•Creative and media

•Electronics and communications

•Energy

•Financial and business services

•Food and drink

•IT and software

THE ROLE OF UK TRADE AND INVESTMENT (UKTI)

UKTI works with new and existing investors to ensure that clients are fully integrated into UK networks and UK market opportunities with access to information and people to ensure that their inward investment decisions are made on a sound economic basis. The realisation of almost 1,200 of the 2010/2011 investment projects has involved input from UKTI and its partners. For 2012/2013 UKTI is rolling out a comprehensive after sales programmes to help every new investor to connect with local partners, relevant UK business communities and to make use of UKTI’s Trade Services.

New initiatives in the UKTI international campaign are focused on repositioning the UK as a significant location for global manufacturing with product-driven initiatives such as Tech City and in key sectors such as advanced manufacturing, life sciences and business process outsourcing. Already, the UK investment offer and options are being upgraded to address the different drivers and modes of investment from the major emerging markets such as China and Brazil.

Notes: Much of the content for this chapter is derived from the Great Britain and Northern Ireland Inward Investment 2011/2012 published July 2012 by UK Trade & Investment.

Refer to UKTI website www.ukti.gov.uk for the July 2012 report - ‘Entry to the UK For Business and Employment’– providing details of for foreign nationals wishing to enter the UK for business purposes.

1.2 OVERVIEW FOR INWARD INVESTORS

Christina Howard

Watson, Farley & Williams LLP

INTRODUCTION

The UK is one of Europe’s most favoured jurisdictions for inward investment1, that is, the investment of money from an external source into a region. Despite continuing global economic uncertainty, inflows of foreign direct investment (FDI) into the UK in 2011 exceeded US$45 billion2. Once established in the UK, foreign-owned companies are treated no differently from UK firms. London is seen to be a particularly attractive place to invest and has been voted the number one destination in Europe for FDI3, attracting more than one-third more FDI projects over the past five years than any other European City4.

There are many reasons for investors and businesses to choose to invest or establish a presence in the UK, including:

•its sophisticated infrastructure and telecommunications;

•its position as a leading financial centre;

•its recognized and respected legal system;

•its financial incentives and tax environment;

•its stable political environment; and

•its skilled workforce.

Once a business has chosen to establish a presence in the UK, there are a number of factors, in addition to other, broader commercial issues, that need to be considered, including the following:

1. What type of entity should I choose?

2. What will the tax treatment be on my investment?

3. How do I go about employing people in the UK?

4. Which type of premises do I need for my investment?

5. Is the UK a good place to raise finance?

6. What if my business becomes involved in a dispute?

TYPE OF ENTITY TO BE CHOSEN

There are a number of entities or arrangements that may be chosen when establishing a business presence in the UK, including trading partnerships, limited liability partnerships, agency arrangements and European Economic Interest Groupings. However, the most common arrangements chosen by those investing or establishing a presence in the UK are the incorporation of a UK company (which may be a subsidiary of the overseas parent company) or the opening of a UK establishment (a branch or place of business in the UK).

UK companies and establishments are all regulated by UK companies’ legislation. Companies House, operated by the Registrar of Companies, is the key government organisation that coordinates the registration and administration of businesses in the UK.

Where a business establishes a presence in the UK through a company or UK establishment, a number of consequences will follow, which will to some extent vary with the form or presence chosen, but will include obligations to file certain documents at Companies House and to submit tax returns to HM Revenue & Customs.

Establishing a UK company

The most common method of establishing a business presence in the UK is through the incorporation of a limited liability company. The company may be incorporated as a wholly owned-subsidiary of a non-UK parent entity, or by one or more individuals. The company will have its own legal personality as an entity separate from its parent undertaking or individual shareholders, and will be able, therefore, to enter into contracts and operate in its own name.

In certain cases, the best way to develop a presence in the UK may be to partner experienced and established local representatives or undertakings through cooperation or joint venture arrangements, which will often be structured through a UK company as the joint venture vehicle. For further discussion on joint ventures, reference should be made to the chapter of this book entitled Mergers and Acquisitions and Joint Ventures.

In order to establish a UK company, certain documents must be filed with Companies House, including the company’s constitutional documents (namely, the Memorandum and Articles of Association). Depending on the nature of the company’s business going forward, standard documents may be adopted, or these can be tailored to specific requirements (for which a solicitor’s advice should be sought). Once the constitutional documents have been finalised, these and other incorporation documents are filed at Companies House, and a certificate of incorporation and company number are issued. It can take as little as a day to register a company at Companies House.

Opening a UK establishment

As an alternative to incorporating a UK company, a non-UK business may simply register a UK establishment in the UK. An overseas company will be required to register its UK establishment at Companies House and will also be subject to certain on-going accounting requirements and requirements to deliver returns. In simple terms, if an overseas company has a presence in the UK from which it regularly conducts business or premises in the UK where it may be contacted, this will constitute a UK establishment requiring registration. A single registration regime applies for all overseas companies that carry on business in the UK through a UK establishment, irrespective of whether it is a place of business or a branch.

THE TAX TREATMENT ON INVESTMENT

The format chosen for establishing a business presence in the UK will vary as a result of the taxation implications as well as the commercial considerations and objectives of the investors involved. The basic principles of UK corporation tax and the taxation consequences of each format are briefly set out below.

When deciding which entity would be most suitable for an inward investor, it should be noted that the tax implications of establishing a company, branch or a place of business/representative office in the UK may vary significantly from entity to entity depending on, for example, the size of the business or the nature of the trade that is being undertaken.

Since the taxation implications of any investment will vary from case to case and may be complex, it is advisable to seek more detailed tax advice from a solicitor specialising in UK tax before establishing any sort of UK presence.

Companies resident in the UK

A company incorporated in the UK will generally be regarded as resident in the UK for tax purposes and will consequently be liable to pay UK corporation tax on its worldwide profits (subject to double taxation relief for foreign taxes).

In the UK, local and foreign-owned UK resident companies are taxed alike. Inward investors may have access to certain regional grants and incentives that are designed to attract industry to particular areas of the UK, but no tax concessions are granted.

The main corporation tax rate is currently 24%, with a small profits rate (previously the small companies’ rate) of 20%. The coalition government has announced plans to reduce the headline rate of corporation tax by 1%. per year until it reaches 22% from 1 April 2014. These reduced rates of corporation tax are being introduced with a view to increasing the UK’s competitiveness from a tax perspective.

The UK has a fairly simple system of personal income tax, with a basic rate of 20% for income up to £34,370 (excluding personal allowances), a higher rate of 40% for income between £34,371 and £150,000 and an additional rate of 50%. for income over £150,000. There is also a National Insurance system into which taxpayers and their employers make mandatory payments.

Companies that are not resident in the UK

Companies that are not resident in the UK are subject to corporation tax only if the company trades through a branch or permanent establishment in the UK. Profits that are attributable to the activities of a UK branch/permanent establishment are subject to UK corporation tax as if the branch/permanent establishment were a separate entity.

A non-UK resident company that does not have a branch or permanent establishment in the UK, although not liable to corporation tax, may be liable to income tax on its UK source profits (e.g. rents from a UK property) at the basic rate of 20%, subject to certain limitations.

Where a company is resident or has a permanent establishment in a country with which the UK has a double taxation treaty, the impact of that treaty must be considered.

EMPLOYING PEOPLE IN THE UK

Businesses wishing to establish a presence in the UK have various options in relation to their staff. These, along with connected immigration issues, are discussed in more detail in the chapters of this book entitled UK Immigration and UK Employment Law.

Due to the challenging economic conditions, there has been some downturn in the UK’s employment data; however, between February and April 2012, the number of people in work in the UK was still 29.28 million and the unemployment rate was at 8.2% (up 0.5% compared to the same period last year).5

Much of the employment legislation currently affecting the UK workforce originates from the European Commission in Brussels. EU regulations affect working patterns, wage structures and employee protection rights in the UK; for example, the European Working Time Directive creates an entitlement to minimum daily and weekly rest periods, an average working week limit of 48 hours, and restrictions on night work. As it has implemented the EU directives, the UK government has been proactive in trying to maintain its flexibility and competitiveness; for example, it has currently negotiated a special provision under the Working Time Directive that allows employees to opt out of the 48-hour working week limitations.

Whilst citizens of EEA Member States can usually enter the UK to live and work without restriction, migrants from other countries will usually require a visa. Individuals from certain countries can enter as business visitors for up to six months without applying for a visa in advance but their activities whilst in the UK are restricted. The UK immigration regime is dealt with in more detail in the chapter of this book entitled UK Immigration.

RAISING FINANCE

The City of London is widely regarded as one of the leading financial centres in the world. London offers a huge variety of financial services, including:

•commercial and investment banking;

•insurance;

•venture capital;

•stock and currency brokering;

•fund management;

•commodity dealing;

•accounting and legal services;

•electronic clearing and settlement systems; and

•bank payments systems.

Notwithstanding the continuing difficult global economic conditions, London remains attractive to inward investors because of its solid regulatory, legal and tax environment, a supportive market infrastructure and a dynamic and highly skilled workforce.

UK government policies are intended to facilitate the free flow of capital and to support the flow of resources in the product and services markets. The principles involved in legal, regulatory and accounting systems in the UK are transparent, and they are consistent with international standards. In all cases, regulations have been published and are applied on a non-discriminatory basis by a single regulatory body: the Financial Services Authority.

The London Stock Exchange (LSE) is one of the most active equity markets in the world, combining its robust and liquid nature with a high degree of integrity. An increasingly popular forum for inward investment into the UK, particularly for smaller companies, is the LSE’s AIM market, which is examined in the chapter of this book entitled The AIM Market of the London Stock Exchange.

REAL ESTATE

The UK has one of the most dynamic and transparent property markets in the world, with a wide range of property options and flexible short term lease arrangements. For inward investors in the UK, one of the first decisions to make regarding real estate is whether to rent premises (known as ‘leasehold’) or to buy premises (known as ‘freehold’). There are no restrictions on overseas companies either buying or renting property in the UK.

Renting or leasing

Companies can either rent premises that are already available or enter into what is known as a pre-let. This is an agreement with a developer to lease premises before construction is completed, enabling prospective tenants to specify the design, layout and fittings of the building. Commercial leases in the UK typically run for 5-10 years with the tenant paying a full-market rent, often quarterly, with rent review provisions and usually with no premium. It may be possible to negotiate break clauses at set times throughout the lease (enabling the occupier to serve notice to vacate the premises).

The majority of leases of commercial premises in the UK are let on full repairing and insuring terms, which places the responsibility and costs for all upkeep, decoration and repairs on the tenant. In addition, most leases over 5 years in length will have a provision to increase the rent in line with market conditions at pre-determined points throughout the lease. The standard clause allows for upwards-only rent reviews at 3-5 yearly intervals (this means that if the market rent rises, so too will the rent payable, but the rent payable will not come down if the market falls).

Businesses choosing to rent property must also pay stamp duty land tax, which is calculated using the lease premium (if any) and the net present value of the rent payable, which is based on the value of the total rent over the life of the lease.

Buying

Buying property in the UK is usually a relatively straightforward process and, importantly, there are no restrictions on overseas companies buying real estate. In addition to the price of the property, purchasers must pay stamp duty land tax, which is currently chargeable at a rate of up to 15% of the purchase price or lease premium of residential property (depending on the statutory value bands) and up to 4% for commercial property, as well as land registry fees payable on purchases and in some circumstances on a letting.

Companies purchasing or leasing property should appoint an agent to represent them and are expected to pay legal fees, which incorporate conveyancing fees, as well as the costs for local authority and other public searches and bank transfer fees. An experienced property solicitor is necessary to assist in the preparation of all the required legal documentation.

Location

London may be the obvious choice for most investors establishing their business in the UK, due to its position as an internationally accessible city, its international time zone, its proximity to the EU and its excellent telecommunications infrastructure.

However, running an office in London can be expensive, and some businesses may prefer to locate elsewhere in the UK. As the legal and tax regulations do not tend to vary between locations in the UK, the considerations when choosing a location are primarily practical and will include, for example, cost, physical geography, labour and transport.

DISPUTE RESOLUTION

Disputes in the UK are generally resolved through litigation in UK courts or by arbitration/mediation. Over 10,000 disputes a year take place in London, many with an international dimension, reflecting London’s strong position as an international centre for legal services6.

The London Court of International Arbitration and the International Chamber of Commerce’s International Court of Arbitration are leading international arbitration institutions. As a signatory to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), the UK permits local enforcement on arbitration judgements decided in other signatory countries. The UK is also a member of the International Centre for Settlement of Investment Disputes and as such accepts binding international arbitration between foreign investors and the state.

Bilateral investment treaties (BITs) have been used as a means of protecting international investment and ensuring a more predictable and fair treatment of investors. The UK is party to 94 BITs that are currently in force7. A key feature of most of these BITs is investor-state dispute settlement arrangements that provide rights to those investing in the UK to seek redress for damages arising out of alleged breaches by the UK government of investment-related obligations. Key elements include provisions for equal and non-discriminatory treatment of investors and their investments, compensation for expropriation, transfer of capital and returns and access to independent settlement of disputes.

CONCLUSION

For the reasons discussed throughout this chapter, notwithstanding the challenging global economic conditions, the UK continues to be attractive to overseas businesses and inward investors.

1 Restart - Ernst & Young’s 2011 - European Attractiveness Survey.

2 United Nations Conference on Trade and Development - World Investment Report 2011 - Country Fact Sheet - UK.

3 London and Partners’ Foreign Direct Investment Review 2010/11

4 European Cities and Regions of the Future 2010/11

5 Office for National Statistics - Labour Market Statistics (June 2012).

6 Doing Business in the United Kingdom, 2012 Country Commercial Guide for US Companies -US Commercial Service

7 Ibid.

1.3 GRANTS AND INCENTIVES WITHIN THE UK

Olaf Swanzy, PNO Consultants Ltd

INTRODUCTION

Thousands of different grant schemes, worth well in excess of £5 billion each year, are available for UK companies in an attempt to encourage, amongst