Doing business overseas in the United Kingdom and beyond
Greg Brown of Silicon Valley-based Sensiba San Filippo and Richard Heap of London-based Chartered Accountants Kingston Smith discuss doing business in the United Kingdom and beyond.
As technology continues to make the world seem smaller, more US-based companies are looking overseas for untapped opportunities. International expansion has traditionally been undertaken primarily by large, multi-national companies. Today many small, private companies are joining this trend and increasingly venturing outside the US. For these companies, however, seeking overseas opportunities does come with a different rule book, including many hazards and pitfalls that business owners must be prepared to encounter and address as they are expanding internationally.
Greg Brown, tax partner at Sensiba San Filippo LLP (SSF) and Richard Heap, technology and media partner with UK-based Chartered Accountants Kingston Smith, sat down to discuss why more businesses are considering overseas expansion and what they need to know before investing in the UK and beyond. Brown has helped many leading Bay Area companies make strategic decisions about overseas expansion, from Europe to Asia and beyond, while Heap has helped numerous US-based companies set up European operations in the UK.
Why are more and more companies looking overseas for opportunity?
GREG BROWN: In recent years, we’ve seen locally-based companies looking into international expansion for two primary reasons: increased sales opportunities and access to new talent pools. Consumer markets are expanding across the globe, while Bay Area technology companies are increasingly looking to India, the UK and Asia for specialized talent. In both cases, in order to increase their probability of success, company decision makers need to educate themselves or partner with those that know about the geographies they are entering.
RICHARD HEAP: US-based companies commonly see the United Kingdom as an entry point to Europe and providing a relatively “easy” point of entry for serving their international clients. Our geographic and historical proximity to Europe and our shared language and history with the US makes the UK a natural bridge between the US and Europe. For businesses expanding overseas, having connections in the UK can help open doors throughout mainland Europe.
As for why we see companies coming to Europe, in general, the primary reason is to be closer to their customers. It can be quite difficult to connect with customers across language, cultural and even time zone differences. Establishing operations in the UK, allows businesses to more efficiently and effectively serve their international clients and to access the European mainland.
What’s the first thing a company should do prior to opening a foreign operation?
GREG BROWN: Most businesses considering foreign expansion already have a good idea where they want to go and why they are going there, but their certainty isn’t always the result of thorough planning. It is not unusual for a business to make a snap decision about entering into a contract with a foreign customer or to hire a talented foreign employee without doing their homework. While the business decision may make sense, they may not know the operational or cultural challenges and the tax implications of their decision.
Companies venturing out should use qualified advisors that have local connections and experience in the country where they are considering doing business. These advisors can navigate through the applicable laws and provide valuable advisory services to the state-side leaders. Many law and accounting firms have international resources and can often connect their clients with these advisors through global professional affiliations.
RICHARD HEAP: This is an area where many US companies commonly have a misstep. When a foreign company enters the US, often the first point of contact is an attorney. The attorney can help them select and setup optimal legal entities and navigate the maze of local and regional rules and regulations. In comparison, in the UK, businesses are best advised to start with securing a relationship with a chartered accountant. Accountants in the UK are the gatekeeper advisors that can help coordinate all required activities. Additionally, unlike in the US, chartered accountants in the UK can actually setup companies and legal entities. When lawyers, bankers or other advisors are needed, experienced accountants with local connections can point you in the right direction.
How can culture affect the outcome of an overseas venture?
GREG BROWN: Cultural differences are often overlooked during international expansion. Without prior experience in a specific location or the luxury of a local partner, it’s easy to miss cultural differences that could significantly impact the success of the venture. An understanding of proper manners and etiquette are important and should be valued. A local advisor or business partner can help you understand cultural differences ahead of time and potentially avoid the embarrassing faux pas.
Travel and local time differences are also important considerations. Using sales or development teams overseas will require interaction with your US-based personnel. This means calls at odd hours and potential travel to these areas.
RICHARD HEAP: Culture differences in the UK may seem minor, but they can still pose challenges even for savvy businesses. For instance, in the US no one would think twice about sending a business email at 11pm and expecting a response the next morning. If I sent an email at 11pm, my client might think I was overly keen with no personal life. Business is done at all hours in the US. British customs dictate more of a separation between working and personal hours. Networking is also a different experience and is less “in your face.”
It is also important to note that the UK is more than just London. Many American businesses look at London only, when other parts of the UK may be a better fit. London is a very expensive place to do businesses and specific industries have concentrations outside of London. For example, the east coast of England has a large bio-tech community. A US-based bio-tech company looking to tap local talent may be better served looking that way.
How important are the tax ramifications of international business?
GREG BROWN: The tax ramifications of operating in a foreign country are an important aspect of the overall business decision. Businesses should consider what level of activity would cause them to come under the laws of another country, and what they’ll need to do to ensure compliance. Even having a few employees in a foreign country may require the company to file tax returns and possibly pay tax. If a company establishes a related foreign company (subsidiary), this comes with additional requirements such as transfer pricing agreements.
Moving existing employees to another country or having them work overseas will more than likely require them to pay foreign tax in addition to their U.S. tax obligations. You should consider their personal tax ramifications as well. It is normal for companies to enter into agreements with these employees in order to equalize the financial tax burden and benefits that result from overseas employment.
RICHARD HEAP: The tax ramifications of sending your professionals to the UK should not be overlooked. Working in the UK will complicate their tax situation and may create tax liability in both countries. However, there is a double tax treaty between the UK and the US which helps mitigate double taxation. Companies should be sure that their professionals are taken care of and that their taxes are sorted out before sending them overseas.
The UK also has what is called Value Added Tax (VAT). Companies doing business in the UK will need to first register to collect and charge VAT and to do that, they’ll need to have established a UK banking relationship. Whether you are expanding to the UK, mainland Europe or elsewhere, working with a local accountant early on will ensure that you are compliant with local tax laws and regulations. Coordination between your US accountant and your UK accountant will help you avoid potential problems while planning for overall tax minimization.
Any other advice you want to share?
GREG BROWN: Have a clear vision of what you want to do, educate yourself and your team and use competent legal, tax and business advisors. Start by talking with your lawyer and accountant. Many professional advisory firms have experience in foreign operations and very useful contacts in other countries that can help ensure that your venture has the greatest possibility for success.
RICHARD HEAP: It’s essential that you setup your UK entities correctly from the beginning. Your level of activity, relationship with parent company, tax ramifications and more can help to determine your optimal corporate structure. You should be strategic about your corporate structure. Consult with experts both the US and in the UK.
Establish an accounting relationship first in the UK. The right chartered accountant will provide tremendous value and help ensure a seamless transition.
How do Sensiba San Filippo and Kingston Smith work together to help their clients?
GREG BROWN: Doing business globally is becoming more and more common for closely held businesses and middle market corporations. What was once a challenge tackled only by Fortune 500 corporations is now an opportunity that entices businesses of all sizes. Here in Silicon Valley, our technology sector is actively looking for more talent and expanded markets. In many cases, that means expanding internationally. At SSF, we have the ability to help our clients face challenges and capitalize on opportunities. When our clients look overseas, we need to have trusted, reliable partners in other countries that we can work with to bring the greatest value to our clients. To accomplish this, we actively participate in KS International (KSi), an international association of independent accounting firms. When our clients need help doing business overseas, we can pick up the phone and talk to a local advisor that we trust to help take care of our client’s needs. KSi is an invaluable resource to SSF and our clients. And when a KSi firm from outside the US has clients with needs in the US, we are here to help them as well.
RICHARD HEAP: Our clients do business globally, so they require a global network of advisors. Kingston Smith is the original member of KSi, an organization that now includes member firms in over 70 countries. Whether you are a client of Kingston Smith, Sensiba San Filippo or any other member firm, you have access to local experts all across the world. There really aren’t any major markets you would want to go where your local accountant couldn’t help you connect with a local advisor and local resources on demand.
5 MAJOR LANDMINES TO AVOID WHEN OPENING UK OPERATIONS
- Getting the wrong corporate structure for your needs
- Missing critical tax requirements and getting setup correctly
- Waiting too long to establish a UK banking relationship
- Missing key cultural differences
- Failing to account for immigration requirements and clearance when sending employees overseas