Doing Business in the U.K. Q&A
Last week’s webinar Doing Business in the U.K.: It's Harder Than You Think encouraged a lot of discussion.There were several interesting questions from attendees for HSP's U.K. expert Katie Davies; here are some of the highlights, and answers:
My company is planning to run courses in U.K. with U.K. instructors but charge through the U.S. website in dollars. We will charge VAT and let attendees know. Is that an issue, should we register for a VAT number? (we do not have an establishment in the U.K., just a distributor)
You are correct that U.K. VAT is likely to be chargeable. You are not entitled to charge VAT unless you have a U.K. VAT number, therefore you will need to register the U.S. parent for U.K. VAT; the invoices/receipts will need to be provided in a VAT compliant way.
What are the typical rates under cost-plus contracts—what is the “plus”?
The rates will depend on the underlying services being provided. For example, a typical sales and marketing service provided by the U.K. company to the U.S. parent will typically fall in the range of cost plus 5 to 15 percent, dependent on a number of factors, such as size and value of the U.K. operation. Industry norms for this kind of underlying service would be around cost plus 8 percent.
I heard that the tax rate on stock award exercises could be as high as 65 percent—is this true?
Yes, potentially, if the employee hits the 50 percent marginal rate of income tax (where total taxable income exceeds GBP 150,000 annually, inclusive of share-based compensation) plus 2 percent employee NIC plus 13.8 percent employer NIC, where there is a joint election waiver in place. That creates a total of 65.8 percent.
If a company has fewer than five employees, what benefits are mandatory, and is there a specific probationary period that must be met prior to the benefits being offered?
At present, there are no U.K. employee benefits which are mandatory, apart from paying social security via payroll. However, in October 2012, the U.K. is introducing mandatory employer pension contributions subject to certain minimum limits; this is being phased in over a number of years, starting with the largest employer’s first. Most small companies will not be affected until at least 2014/2015; you will receive notification directly from HMRC when mandatory enrollment will be required (by reference to the PAYE references).
Best practice probationary periods are between three to six months, but there is no specific probationary period that has to be met before benefits are awarded. It is not unusual for U.K. companies to provide benefits from day one of employment irrespective of probation period. Whatever is decided needs to be clearly set out in the employment contract for the avoidance of doubt.
Does PTO include sick as well as vacation days?
No. Vacation is vacation, sick leave is sick leave. They are to be treated separately. There are separate rules regarding sickness leave and mandatory sick pay.
Can you explain the 8th and 13th Directives? We have items drop shipped from our U.K. vendor to end users (not our customers). We have been requested to provide VAT numbers for our end users (which we don't have). Who should/shouldn't be taxed for the VAT: our company, our customer or our end user?
In the situation that you have described, it is unlikely that the 8th and 13th Directive is appropriate. There are explicit rules and situations when such VAT reclaim is permitted under the 8th and 13th Directives. With respect to the importation VAT issues that you are experiencing, more specific details are required to provide specific advice on how to mitigate or be in a position to recover VAT—this may require local VAT registration of the U.S. company (although there may be special exemptions available in the case of drop shipments).
If the U.S. entity invoices a Luxembourg entity for services performed in U.K., should the U.S. entity charge VAT? Is U.S. entity subject to VAT if a U.K. entity charges U.S. for services performed in U.K.? (ex. cost for setting up a entity)
The answer to this will depend on the exact nature of the services performed in the U.K. and the structure of the commercial contracts. Proper VAT advice likely needs to be taken to investigate the full facts of the case and to be able to make the determination as to whether a local U.K. VAT registration of the U.S. company is required and whether VAT does need to be charged.
Can you provide examples of in-kind benefits under U.K .travel and expense policies?
This could include non-HMRC approved per diem payments; mileage reimbursements in excess of the HMRC approved mileage rates; temporary accommodation (in certain situations); staff entertainment in excess of annual thresholds; reimbursement of phone lines in the home which are not wholly for business purposes.
There are many examples of potential in-kind benefits that may arise through expense reimbursements; it is important to have an HMRC-approved U.K. travel and expense policy, to ensure that the HMRC approved amounts are only reimbursed, and that if a decision is made to pay above HMRC rates, the tax implications are understood by the employer and the employees. The company may decide to set up a company settlement on such so-called excessive payments and bear any taxes on the employees’ behalf on a grossed up basis.
What are the rules for banking PTO if not taken? Is company obligated to pay out when they leave?
Where the statutory minimum vacation is provided (20 days plus public holidays), then it is important that all vacation is taken in a 12-month period. No rollover is allowed, as companies need to ensure that their employees are taking their minimum required vacation. Where vacation in excess of the 20 days is provided, then it is allowed to rollover such additional days into the following year and it is a matter of company policy as to how long such rollover is allowed. For example, days may be rolled over until March 31st of the following year and if at that stage they are not taken, a company could impose a “use or lose” it policy.
PTO accrues over the period of employment, so if an employee leaves part way through the year and has a balance of PTO owed, this needs to either be given as days of vacation prior to termination or else a payment needs to be made.
In the U.K., our tax/accounting firm makes required payments on our behalf (i.e. pension contribution) right now. Any issue with that?
It would be normal for the U.K. accounting/payroll firm to administer payments into pension funds, etc. and book such payments into the local accounts of the local entity. However, if the accounting firm is acting in any other capacity, it’s likely the arrangement needs to be further reviewed to be able to confirm that this is acceptable practice.