Expanding your Business Beyond U.S. Borders – Part 2

Expanding a U.S.-based business internationally is a significant step that requires a thoughtful approach and well-developed strategy. Before diving in, it is important to first learn as much as you can about the legal and business landscape of the market you intend to enter since foreign laws and business practices can vary considerably from those in the U.S. In this 3-part blog series, we will explore three popular expansion targets for U.S . companies – Canada, the UK and France – by reviewing some basic considerations associated with doing business in each one of these markets.

Part 2: Doing Business in the United Kingdom

With one of the largest economies in the world, the United Kingdom (UK) holds considerable appeal for U.S. entrepreneurs looking to expand internationally. The ability to continue conducting business in English – including the use of existing technical, sales and marketing materials – is just one of many reasons why the UK offers a “ready market.” Government incentives designed to promote competitiveness and economic growth (such as low corporate tax rates and favorable labor laws) are equally enticing for U.S companies. Likewise, the UK’s physical proximity to the European Union (EU) makes it a perfect springboard for those businesses anticipating future growth. The following overview is intended to help companies successfully navigate entry into the UK market.

Entering the UK Market
There are several ways to enter the UK market: (1) without a physical presence on UK soil, (2) without a physical presence through a local representative, and (3) with a local presence. These options make market entry accessible to even the earliest stage companies.

First, companies can enter the UK market simply by leveraging their English language websites, whether creating a parallel website or localizing an existing one. In either case, the key to a successful remote entry is taking steps to ensure that both the cultural norms and compliance requirements of the market are met. Additionally, a U.S. business might consider drafting UK-specific contract templates, as well as amending software licenses, distribution agreements and other key legal instruments, in an effort to make UK business prospects and clients more comfortable conducting business with a foreign entity.

Engaging a local representative to help with market entry is an additional step companies can take to reflect their commitment to doing business in the UK. A local representative (often an independent contractor) is usually responsible for meeting potential clients and promoting products or services within the UK. For example, a U.S. business might sign a contract with a “commission-only” business referral agent who offers experience in the local market and industry knowledge.

Finally, establishing a local presence is the entry option typically chosen by well-established U.S. companies intending to set up wholly-owned subsidiaries in the UK, or by smaller businesses which have already had the chance to test the UK market for their products or services and wish to further develop it.

Incorporating in the UK is a remarkably easy process. Of the three main legal structures (sole trader, limited company, and partnership), the limited company option offers many advantages to U.S. companies. For example, there are no residency requirements for shareholders or directors of a limited company. The only required physical connection to the UK is a local registered office, which can be done through an agent. Also, private limited companies only require one director, who must be a natural person; whereas public limited companies require at least two directors, one of whom must be a natural person. Besides an easy incorporation process, a limited company structure offers considerable flexibility around how management and operations are structured; and there are no minimum capital requirements.

 Complying with Tax Obligations
All companies incorporated in the UK are treated as residents for tax purposes and are responsible for paying corporation taxes on their net profits. This obligation extends to companies which may be incorporated outside of the UK, but have British-based management and control. Fortunately, the UK’s corporate tax rates are low. Additionally, a tax credit is available for U.S. companies paying tax on their income to the U.S. government pursuant to a so-called “double tax treaty” between the UK and the United States.

The UK also offers other tax incentives, including credits for companies investing in research and development in the UK and reduced tax rates for companies earning a profit by exploiting patent inventions (the so called “Patent Box” discount tax rate). Of course, these incentives come with strings attached, including additional obligations on the qualifying company. Therefore, it is always recommended to seek accounting and tax advice on these matters.

Finally, Value Added Tax (VAT) is a tax (20%) levied by the government on sales of goods and services. All businesses with an annual revenue of more than the current VAT threshold (£85,000) must register for VAT and complete a quarterly VAT return.

Applying for Work Visas
Once a U.S. company has established a physical presence in the UK, the next step is to have its employees apply for work visas in order to demonstrate evidence of the right to live and work in the country. The innovator visa and the start-up visa are particularly attractive options to U.S. companies. While both of these visas require a new, innovative and viable[1] business idea, as well as an endorsement by an official endorsing body, the innovator visa also requires the business to have at least £50,000 in investment funds. For this reason, the start-up visa is often a better fit for entrepreneurs with no prior business experience who are looking to enter the UK market.

Building a Local Workforce
The UK offers a robust workforce of more than 30 million people, a number which is only expected to grow over the next 15 years, fueled in part by a relatively low cost of living. The availability of a highly skilled, professional workforce, as well as the UK’s flexible employment laws and regulations (as compared to those in the EU), are additional reasons why U.S. companies find hiring locally so attractive. That said, the doctrine of “at will” employment does not exist in the UK, making workforce adjustments (dismissals) more complicated in the UK than they are in the United States. U.S. businesses should understand that employment contracts are routinely used in the UK, and seek the advice of UK employment counsel whenever they are looking to employ staff in the UK.

Registering your intellectual property
Protecting intellectual property rights (patents, copyrights, trademarks, mask works, and trade secrets) by registering in the UK is important, particularly if you intend to sell products or services within the country. One aspect of British IP law worth noting relates to the treatment of employee inventions. Generally speaking, any intellectual property rights associated with employee work product will belong to the employer. However, UK law does not recognize assignment provisions associated with future inventions, such as those included in an employment agreement. Employers should be mindful of this key difference from U.S. law. Conversely, any IP rights associated with inventions created by third party contractors will belong to such contractors.

Contracting under UK law
When entering the UK market, U.S. companies should consider using forms and templates governed by English law to ensure that all necessary contractual protections are included. Whether localizing U.S. templates or creating UK-specific contracts, this effort will not only help to protect your company, but also, aid in positioning it as a local player by increasing the confidence of clients and local prospects in your commitment to succeed in the UK market.

Like any other business opportunity, exploring the possibility of a foreign expansion should involve some basic diligence about the target market, particularly its laws and business practices. Seeking the advice of an attorney who is qualified to practice in both the U.S. and the country of interest can also help when formulating a strategy for growth beyond U.S. borders. If you are interested in learning more about the UK market or foreign expansion in general, please contact Stephan Grynwajc for more information or assistance. Stephan can be reached at [email protected] or 347-543-3035.

 

[1] The UK government defines “new” as a business that is not already trading, “innovative” as an original business idea which is different from anything else on the market, and “viable” as having potential for growth ; see: “Innovator visa”, gov.uk, online: < https://www.gov.uk/innovator-visa > (accessed 31.01.2022).

 

Stephan Grynwajc is admitted to the practice of law in the U.S., Canada, U.K. and in France/the European Union. He has served as a senior in-house attorney for several blue-chip technology corporations (e.g., Intel and Symantec) in France, the U.K. and the U.S., and today, focuses his practice on advising U.S.-based clients on navigating the EU, UK and Canadian legal and regulatory landscape.