Investors’ Guide to the United Kingdom 2014/15

By Legend Press

This new, fully updated 7th edition of Investors’ Guide to
the United Kingdom provides an authoritative and essential
guide to the current investment climate in the United
Kingdom. This includes the principal sectors of opportunity
for foreign investors, the grants and incentives available, the
financial sector and the laws and business regulations that
affect foreign investors.
In its World Investment Report 2013, the United Nations
Conference on Trade and Development (UNCTAD) reconfirmed
the UK as the largest recipient of foreign direct investment
stock in Europe. The Ernst & Young European Attractiveness
Survey 2014 found that the UK is the most attractive location
for investors in Europe and ranks fifth globally after China, the
US, India and Brazil in foreign investors’ expectations over the
next three years. This reflects its enterprise culture, businessfriendly
employment laws, world-class support services and
relatively benign fiscal policies.
Aimed at foreign businesses of all sizes, from multinationals
to SMEs as well as Sovereign Wealth Funds, this unique
guide offers in-depth briefings on the technical aspects of
investment as well as business start-up.
This edition features investment opportunities in energy
and regeneration which are of interest to primary asset fund
managers as well as other key business sectors.
Investors’ Guide to the United Kingdom is published in
association with UK Trade & Investment. Includes a Foreword
from Michael Boyd, Managing Director Investment, UK
Trade & Investment.

• Language: English
• Publisher: Legend Press
• Release date: Oct 1, 2014
• ISBN: 9781785079993

Book preview

clients.

Part One

Investment in the United Kingdom: The Current Environment

1.1 THE UK ECONOMY AND INVESTMENT ENVIRONMENT

Jonathan Reuvid

Legend Business

The UK economy continues to maintain its recovery from recession. At the conclusion of its 2014 Article IV Consultation, the IMF Board reported on 28 July that:

The economy has rebounded strongly and prospects are promising. Headwinds that had previously held back the economy - including adverse credit conditions and diminished confidence - have eased. There are signs that demand is becoming more balanced, with growth in investment now ahead of private consumption.

In its 20 August 2014 report, the National Institute of Economic and Social Research confirmed that GDP had regained its pre-recession level with an implied annual growth rate of around 3%. However, the coalition government recognizes that a recovery in productivity growth and real wages is necessary to sustain strong growth and that there is no room for complacency over the substantial progress so far.

MACRO-ECONOMIC INDICATORS

Forecasts for 2014/2015

Table 1.1.1 highlights recent independent 2014 and 2015 composite forecasts for the basics of the UK economy published by HM Treasury on 16th July.

Source: Economic Assessment Team, HM Treasury No. 328, 20 August 2014

The independent averages are based on the forecasts made during the previous 3 months by 22 city banks and investment firms, and 17 non-City research institutions and forecasters including the OECD, IMF, EC, Economist Intelligence Unit (EIU) and Confederation of British Industry (CBI).

Prospects for the UK are compared with those for other major developed economies in Table 1.1.2 by reference to the recent IMF forecasts, implying a brighter short-term outlook for the UK than for its EU neighbours and for the Euro area as a whole.

Table 1.1.2 2015 forecasts GDP growth vs 2014.

Source: IMF forecasts June/July 2014

Second quarter 2014 statistics for the EU, the UK’s largest trade partner, emphasize that eurozone members, including Germany, have not yet escaped from recession and cast a shadow on the strength of forward growth prospects for the UK.

The UK GDP forecasts also compares favourably with those for Japan and in 2015, is at a level similar to that of the US - also in recovery mode.

The UK Population

For readers unfamiliar with the ethnic diversity of the UK, the population stands at an estimated 64.1 million (Source:ONS, 2014), with 30.24 million in work. The employment level (the proportion of working age people in work) in the UK is high at 69.9% compared with the EU average of 62.7%. Applying the international standardised measurement, the UK’s rate of unemployment was 7.1%, which also compares favourably with the EU average of 10.7% (source: Eurostat, 2014). 84.1% of the population are resident in England, 8.3% in Scotland, 4.8% in Wales and 2.8% in Northern Ireland. According to the 2011 census, 7.5 million (13%) were born abroad, of which almost half (3.4 million) held a UK passport. Some of those born abroad have since become British citizens. Of the 694,000 born in India, 379,000 have taken British citizenship. By contrast, of the 579,000 residents born in Poland, 558,000 remain Polish nationals, having acquired the right to live and work in the UK since Poland joined the EU in 2004. The other top 10 countries of birth of UK residents are: Pakistan, Republic of Ireland, Bangladesh, Nigeria, South Africa, US and Jamaica. Immigration rose sharply in the first decade of the millennium, but is now capped for non-EU entrants.

UK INWARD INVESTMENT

In the World Investment Report 2014 of UN Conference on Trade and Development (UNCTAD), the UK stock of inward foreign investment is quantified at US$1,605 billion (£975 billion), an increase of 8.3% over the previous year. As Michael Boyd, Managing Director, Investment, at UK Trade & Investment (UKTI) notes in the UKTI Inward Investment Report 2013/14, UNCTAD also reports UK FDI inflows in 2013 at US$37.1 billion against global FDI inflows of US$1,425 billion. The UK continues to rank second as the largest global recipient of FDI stock after the USA and first in the EU, where its relative share of the total accumulated FDI stock reached 19% at the end of 2013. Other major European economies have significantly lower shares (e.g. France 13%, Germany 10%). These statistics provide evidence-based confirmation for the EY and Financial Times assessments of the UK’s continuing status as the preferred European FDI location. The UK also attracted 52 R&D projects in 2013, 20% more than Germany, giving it a leading European market share of 18% of R&D FDI.

EY in their review of 2013 performance note that the UK continues to score over 20% internationally for the attractiveness of its top six attributes and point to quality of life, technology and telecommunications, infrastructure and stability of social climate as strong differentiators.

The total number of inward investment projects in the year to March 2014, at 1,773, was the highest for four years and an advance of 14% over the previous year. Likewise, the number of new jobs generated by overseas investors was 66,390, an increase of 12% on 2012/2013, as in the previous year over 2011/12 and the highest since 2001. In addition, FDI activity also safeguarded a further 45,000 jobs, a significant year-on-year reduction from a total of 110,943 recorded for 2012/13, but signaling a healthier balance between new and safeguarded jobs associated with FDI projects.

Sources of FDI

The investment performance over the past four years of the 9 geographical sources of FDI generating and safeguarding more than 2,500 jobs in 2013/14 is displayed in Table 1.1.3.

Source: UK Inward Investment Reports: 2010/11, 2011/12, 2012/13 and 2013/14, UKTI

As in the three previous years, the US remains by far the biggest source of FDI, accounting for 28% of new projects (27% up from 2012/13) and 28.5% of created or safeguarded jobs. This corresponds to the FDI stock figures, which also confirm that the USA is the largest source of inward FDI. The two largest European sources of FDI in 2013/14 were France and Germany, both contributing more than 100 projects. From the Asia Pacific region, Japan was again ranked second among key investment partners with 116 projects (2012/13 - 114 projects) and China also increased its commitment to the UK with 88 projects, an increase of 26%. Canada and Australia both held their own with 89 and 69 projects, up 14% and 11% respectively on 2012/13.

India and Italy each invested in fewer projects year-over-year in 2013/14; conversely, 98 projects were recorded from the Nordic region. Elsewhere, while inward FDI from Spain as well as Italy slowed significantly, these reductions were offset by the continued growth in FDI from Ireland which contributed 55 projects.

Encouragingly, investments from emerging markets showed continuing growth in 2013/14. Turkey (15 projects), Poland (14 projects), South Africa (11 projects), Brazil (10 projects) and Mexico (nine projects) each recorded a year-on-year increase in their investment into the UK.

COMPOSITION OF INVESTMENT PROJECTS

Inward investment by category

In Table 1.1.4, the 2013/14 proportions of completely new investments, expansions of previous investments and mergers and acquisition (M&As), including joint ventures (JVs), are compared with the proportions of the previous three years.

Source: UK Inward Investment reports 2013/2014, UKTI

The overall growth rate of 11% in investment projects in 2013/14 matched the previous year, which saw the beginning of the recovery. In 2013/14, growth was driven primarily by expansions, an increase of 100 in absolute numbers while M&A projects increased in numbers by 71, slightly ahead of 2012/13 performance. The healthy increase in investments by nearly 6% to 820 projects was close to double the previous year’s growth.

Inward investment by industry group and sector

The dispersion of FDI by primary business sector in 2013/2014 and jobs created or safeguarded is detailed in Table 1.1.5; project numbers are compared with 2012/13.

Table 1.1.5 UK inward investment projects by primary industry group

Source: UK Inward Investment reports 2012/2013 and 2013/2014, UKTI

As in the previous year, FDI in advanced manufacturing delivered the highest number of projects and jobs. Foreign investments continue to perform an important role in strengthening many of the key sectors and industries across the UK economy, including the advanced manufacturing group in which the automotive, aerospace and advanced engineering sectors are prominent.

In terms of job creation and safeguarding, the energy and infrastructure group delivering a 24% increase in the number of investment projects and 31,261 jobs was the second largest after advanced manufacturing. With a similar increase in the number of investment projects and delivering 21,661 jobs, the finance and professional services group ranked third.

Software and computer services again accounted for the largest number of projects (229) within a group (creative industries and ICT). Other individual sectors that performed strongly were financial services (159 projects) and consumer services. Sectors that were also significant recipients of FDI in 2013/14 were electronic and IT hardware (66 projects); renewable energy (61 projects); mechanical, electrical and process engineering (54 projects); and oil and gas (52 projects).

The nature of investment

FDI continues to make a significant contribution to R&D activities in the UK. In 2013/14, 312 projects were reported to have an R&D element (298 in 2012/13); likewise, 324 investments were reported to involve their UK sites in having responsibility for some headquarters function. (According to UKTI data, 545 projects were associated with services while 394 were involved to some degree in manufacturing).

KEY AREAS OF INVESTMENT OPPORTUNITY

Looking ahead to 2015, the exceptionally high level of inward investment projects that the UK is attracting is expected to continue. Together with the new jobs that these projects are creating, FDI will continue to contribute towards continuing economic recovery.

Initiatives spearheaded by UKTI in a number of emerging markets are feeding the pipeline of investment projects, while the Investment Organisations (described below) with a sharper focus on sector strategy and growth will consolidate the UK’s status as a global centre for business, trade and investment and add significant value to the economy.

Key areas of opportunity for inward investors are summarized in this chapter. Some of them are the subject of more detailed information in the fourth and fifth chapters of the book.

Infrastructure development and regeneration projects

The UK National Infrastructure Plan gives priority to enhancing the quality of the UK’s infrastructure and its urban environment, which is vital to the nation’s development in helping to raise living standards and create jobs. In 2013/14, working through UKTI, overseas contributors committed £23.8 billion investment into projects that will develop the UK’s infrastructure and regenerate its cities. Some of these projects (to the value of £1.45 billion) are already under way delivering tangible benefits.

The Government’s development programme includes radical new policies for the UK energy sector, such as Electricity Market Reform (see Chapter 4.2), and specific targets for the harvesting of private investment to contribute the major part of the capital that is required. In 2013/14, the range of investments which UKTI supported included:

Hinkley Point - the first new nuclear power station to be built in the UK in the last 20 years to generate approximately seven per cent of the UK’s electricity requirement. The selected partner EDF has obtained Development Consent and other license/permits for the station and has agreed to key commercial terms with the Government. EDF is expected to confirm its investment decision on the £16 billion project as soon as final agreement has been reached with shareholders and the Government and State Aid clearance has been given by the European Commission. The project will require up to 5,600 construction workers and create 900 permanent jobs.

Royal Albert Docks - the location for China’s Advanced Business Parks that have committed £1 billion to the regeneration of the 35-acre derelict industrial site into a business hub that will complement the City and Canary Wharf financial centres. The hub is expected is expected to employ 20,000 people and yield a £6 billion boost to the UK economy.

London Array - the world’s largest offshore windfarm that will provide clean energy to 500,000 people. La Caisse, one of China’s leading pension funds, has invested £644 million following that of other major overseas investments, including DONG Energy, E.ON and Masdar.

Nine Elms - Wanda, the Chinese conglomerate, has committed £790 million to the purchase and redevelopment of One Nine Elms into a mixed-use complex with a major hotel, offices and 1,000 homes. The greater Nine Elms site, where the new US Embassy is located, is projected to become the world’s biggest urban regeneration project, creating 25,000 new jobs.

Airport City, Manchester - a new office, manufacturing, logistics and leisure city around Manchester Airport is to be developed, creating 20,000 jobs. The co-investors, Beijing Construction Engineering Group (BCEG), Manchester Airports Group, Carillion and the Greater Manchester Pension Fund, have committed £800 million to the development.

Global Entrepreneur Programme

Global Entrepreneur Programme (GEP) is UKTI’s flagship as an accelerator mandated to attract overseas-based entrepreneurs with innovation-rich businesses planning to grow from a UK strategic hub.

Over the past four years, as a vehicle for FDI, GEP has achieved 280 successes with entrepreneurs and companies relocating to the UK from where they have expanded. They have raised over £1 billion of equity investment and generated more than 2,000 high-value jobs. In 2013/14, GEP exceeded its target, delivering 65 high-value investment successes, which included: software to support creative, digital and internet-based business; clean technology supporting a diverse range of applications; and engineering supporting aerospace, construction and chemical production.

The GEP team is composed of internationally successful entrepreneurs, known as dealmakers, working part-time for the GEP while continuing to build their own businesses. They apply their global networks and track records in international business to help entrepreneurs and their early-stage companies to expand from their UK hubs.

Technology entrepreneurs and their businesses in the UK are key drivers of innovation and job creation and provide significant contributions to productivity improvement and economic growth.

THE ROLE OF UK TRADE AND INVESTMENT

UK Trade and Investment (UKTI) works closely with its investment partners throughout the UK to ensure that all investment promotion activities contribute to wider economic policies and strategies, such as the Industrial Strategy and the promotion of centres of academic, R&D and manufacturing excellence across a whole range of industries, including automotive, life sciences and the information economy.

The Investment Organisations (IOs) are UKTI’s hybrid public/private sector teams, which are tasked to seek and secure the highest-value inward investment in those sectors that the Government has prioritised as vital elements of its Industrial Strategy. Each IO comprises a specialist team with private sector expertise brought together to contribute to the strategic direction of UKTI.

The first IO was the Tech City Investment Organisation formed in April 2011, which has successfully overseen the development of Tech City, a technology cluster located in East London Organisations, with a presence in Tech City today include Google, Intel, Cisco, University College London and Imperial College London.

Seven further IOs with senior industry figures as their CEOs are now established in life sciences, agritech, financial services, the automotive sector, regeneration and innovation. The activities of the first six of these new IOs are detailed in the following six chapters of this book, as follows:

- 4.1 Regeneration

- 4.3 Offshore Wind

- 5.1 Automotive

- 5.2 Life Sciences

- 5.3 Agritech

- 6.1 Financial Services

So successful have the IOs been, that since 1 April 2014, they are now also dealing with trade, supporting businesses that want to use the UK as a launch pad for expansion into international markets.

UKTI also works closely with the Local Enterprise Partnerships (LEPs) and Enterprise Zones to secure and support inward investors for specific high-value investment projects throughout the UK. Among the most prominent of these projects are:

Wolf Minerals and Heart of South West Local Enterprise Partnership - a metal exploration venture in the Plymouth area of Devon, in which Wolf Minerals, an Australian-headquartered company, is the prime investor.

Elecnor Deimos and Science Vale Oxfordshire Enterprise Zone - a project for Spain’s Elecnor Deimos Group, which provides engineering solutions and advanced systems in the fields of space and new technology, to establish a facility close to the European Space Agency in the Space Applications Catapault in Harwell.

Vattenfall investment in Wales - the largest onshore wind project in England and Wales at Pen y Cymmoed between Neath and Aberdare, where the Swedish power company, Vattenfall, working with the Welsh Government, will increase the renewable energy capacity of Wales by a third.

Clear2Pay and Scottish Development International (SDI) - an investment by the Belgian payments technology company working closely with UKTI and SDI to expand their workforce in Scotland and position its Dunfermline operation as a global hub for growth in their Open Test Solutions Division.

Convergys investment in Northern Ireland - a £5 million investment by US-based Convergys in a contact centre at Londonderry to service its client EE, supported by Invest Northern Ireland and UKTI.

In these and similar projects, UKTI performs its key role as facilitator in reinforcing and promoting local assets and capabilities in all parts of the UK to make them more competitive and attractive as favoured destinations for foreign investors.

Note: Much of the content for this chapter is derived from the Great Britain and Northern Ireland Inward Investment 2013/2014, published July 2014 by UK Trade & Investment.

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 reached nearly US$62.5 billion in 20122. 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 48% of the UK’s FDI4.

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 the 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 ongoing 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

Generally, a company incorporated in the UK will 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 21%, with a small profits rate (previously the small companies’ rate) of 20%. The coalition government continues to reduce the headline rate of corporation tax. The main rate will be reduced to 20% by April 2015, down from 28% in 2010, 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 £31,865 (excluding personal allowances), a higher rate of 40% for income between £31,866 and £150,000 and a rate of 45% 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 permanent establishment in the UK. Profits that are attributable to the activities of a UK permanent establishment are subject to UK corporation tax as if the permanent establishment were a separate entity.

A non-UK resident company that does not have a 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 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 over the last few years; however, between February and April 2014, the number of people in work in the UK was 30.54 million and the unemployment rate was at 6.6% (down 1.2% 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 continuing global economic uncertainty, 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.

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 final 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