Introduction

The United Kingdom consists of England, Wales, Scotland and Northern Ireland, and has three separate legal jurisdictions – England and Wales, Scotland, and Northern Ireland. Operating a business in the UK sees various legal structures, including sole trader, private company limited by shares, private company limited by guarantee, private unlimited company, public limited company, partnership, and limited liability partnership. This article focuses on the essential implications of operating a private company limited by shares within the jurisdiction of England and Wales under English law, with an aim to provide a fairly comprehensive guide on a number of practical considerations for companies who operate in the UK, especially those which are unfamiliar with the UK’s legal and commercial environment.

A private company limited by shares (also known as private limited liability company) has a separate legal personality from its directors and shareholders. The business of the company only ceases upon winding up of the company. Directors of the company operate its business but are not generally liable for the acts of the company unless they have given personal guarantee; other situations when directors of the company would be liable include having acted whilst disqualified as directors, conducted fraudulent or wrongful trading, or acted beyond their personal capacity.

Decisions on behalf of a sometimes need to be approved by the shareholders. Shareholders are owners of the company and have the right to sell shares to possible investors. The liability of shareholders is generally limited to the amount of investment in the company by subscribing the shares. In addition, the company (including a dormant company) must comply with the requirements in Part 21A of Companies Act 2016[1] and the Register of People with Significant Control Regulations 2016, which requires the company to take reasonable steps to identify People with Significant Control (PSCs) and keep a register[2].

Formation

A company is incorporated by filing the required documents and paying the fee at the Companies House of England and Wales; it exists upon the Company Registrar’s issuance of the certificate of incorporation. The company’s constitution include its articles of association[3] and necessary resolutions or agreements. Alternatively, prospective owners can buy a company which has already been incorporated but has not yet traded (i.e. a shelf company).

A company must have at least one shareholder; he/she does not need to reside in the UK. Shareholders may also enter into agreements to set out the business relationship among themselves. When there are only two shareholders (or, even number of shareholders who invested in the company at equal proportion of voting right) in a company, it is strongly advised that the company consider setting out provisions for 50:50 deadlock situation and practical resolution to the situation, so that when shareholders cannot reach an agreement on major decisions the company will continue to progress on its business.

There are also restrictions on choice of company’s names[4]. A company may change its name by passing a special resolution[5] and other means. Where the articles of the company permit, it may also change its name in accordance with the procedure as provided for by the articles.[6]

Banking

Once formed, the company will also need to set up a business bank account by applying to the bank and providing details of the company and all signatories to the account. If it is a new company, banks usually require original or certified copies of recent personal bank statements of the shareholders. If the company is a newly registered subsidiary of an existing company, original or certified copies of bank statements of the parent company will usually be required. Many banks in the UK provide tailored services to business customers.

Accounting and auditing

The company may have in-house accountant dealing with its accounting affairs, alternatively it may use professional accounting firms for the service. Subject to the size, annual turnover and assets, the UK has a general requirement for audit. There are a number of audit exemptions applicable to small companies. In addition, if the company is a subsidiary of an overseas parent company, depending on the law of the country of the parent company, auditing the company’s accounts may also be required.

Employment

The UK’s Employment law has been increasingly affected by statutes, many of which were driven by EU legislation.[7] Statutory provisions override contractual provisions – this applies to every individual worker working in the UK. Before the company makes payment to any of its employees, the company must register with HMRC as an employer. All employees ought to have an employment contract with their employer, setting out the terms of the contract including the employee’s working conditions, rights, responsibilities and duties.[8] Every employee in the UK is also issued with a code of his/her personal reliefs and allowances. Being the employer, the company has an obligation to pay to HMRC income tax under the Pay as You Earn (PAYE) system by deducting income tax and national insurance contributions (NIC, a type of social security) directly from each employee’s income.

The UK also operates National Living Wage and National Minimum Wage.[9] The rates from April 2016 are:

a)    Apprentice:      £3.30,[10]

b)    Under 18:        £3.87,

c)    18-20:               £5.30,

d)    21-24:               £6.70, and

e)    25 and over:    £7.20.

A company and its employees (including company directors and other officers) will be subject to UK residence status and tax. For tax purpose, a foreign national is regarded as UK resident in any tax year if he/she spent 183 days or more than in the UK during that tax year.[11]

Tax

A company in the UK is subject to corporate tax if its central control or management is carried out in the UK.[12] Where relevant, the residence status applies to income tax, capital gain tax, corporation tax and inheritance tax.

It is worth noting that registration for VAT is separate from incorporation of the company. VAT registration will become compulsory when the company’s VAT taxable turnover for the past twelve months is more than £83,000[13]. A company may also voluntarily register for VAT at any time. Once registered, a company is required to file with HMRC VAT returns each quarter and make payments to HMRC accordingly.[14] In addition, tax residence of the company does not transfer to outside the UK even if decisions of the company is made outside the country.

The UK has entered into bi-lateral tax treaties with over 130 countries[15], many of which provide protection against the risk of double taxation[16] by governments where the same income is taxable in the two states, prevents excessive foreign taxation and other forms of discrimination against UK business interests abroad, and as a result it provides certainty of treatment for cross-border transactions and investment. The treaty has a significant impact on income tax and capital gain tax of and on VAT and corporation tax.  

Pensions

Every employer in the UK must automatically enrol workers[17] into a workplace pension[18] scheme. The company in most cases will supplement money into the scheme for the employees; the employees will also get tax relief from the government.

The timing of taking the pension pot depends on the individual pension scheme, but usually it is after when the individual employee reaches 55 years of age. The employee may be able to take money out prior to this age, if he/she is either retiring early because of a health condition or has the right under the scheme (which he/she joined before 6 April 2006) to take pension before reaching 55. If the employee has life expectancy of less than a year, under 75 years of age and doesn’t have more than the lifetime allowance of £1 million in his/her pension savings, he/she may be able to take the whole pension pot as a tax-free lump sum.[19]

A person can get State Pension when he/she reaches State Pension age. The amount will depend on the person’s National Insurance record and when he/she will reach State Pension age. State Pension can be claimed if the person reaches State Pension age on or after 6 April 2016.

Insurance

A company must obtain Employer’s Liability (EL) insurance as soon as it becomes an employer. The policy must cover for at least £5 million and be underwritten by an authorised[20] insurer in order to help the company pay compensation if its employee is injured or becomes ill during his/her employment at the company. The employer must also display its EL certificate and make it available for inspection when is required. Failure to comply with this requirement will result in a daily fine of £2,500.

Other insurance protection cover: public and product liability, professional/services liability, internet liability, libel and slander, breach of copyright, assets, income, business travel and healthcare, legal expenses, for which the company should arrange depending on its need and the sector of the company.  

Intellectual property

It is important to differentiate registration of the company with the Companies House and registration of the company’s trademark of that particular name. Registering with the Companies House does not give automatic protection for the company’s trademark. In addition, the company may also have other intellectual properties such as copyright, design right and patent. The company ought to consider using more than one type (where applicable) of protection which could be linked to a single product, such as registering the name and logo, protecting the unique shape as registered design, patenting completely a new working part, and using copyright to protect drawings of its product.

Premises

The company may occupy property as office or for storage. Real estate in the UK constitutes land and buildings, the title to which are freehold and leasehold. The advantage of leasehold premises in investment terms in that monies paid as rent will be due to tax treatment; whereas freehold will entitle the holder to the proprietorship of the property which may increase its value as an investment of the company in the long term.

Occupational licence is a means of acquiring rights of possession and usage for a specified period of time (for example, three years). This gives the holder only a contractual interest in the property, to which land law and the relevant remedies do not apply. The advantage is its flexibility of tenure including ease of termination, less rental deposit than obtaining a leasehold, minimal capital tie-up for usage of the property, and limited requirement for guarantees to be given to the licensor. Whether to obtain freehold real estate, leasehold, or a mere licence (such as a serviced office, for instance), it is a decision for the company to make based on the company’s needs, (long-term) business plan, financial position, tax structure and other factors.

Data protection

Any company and individual who have control of the process of personal data in the UK must comply with Data Protection Act 1998 and relevant regulations.[21] The company and individual must:

a)    notify the Information Commissioner that it is processing personal data, the types of data, the purpose and to whom the data may be disclosed or transferred to;[22]

b)    inform the individual whose personal data are processed, the purpose for which the data are processed, together with other specified information;[23]

c)    ensure that personal data is only processed if specified conditions are satisfied;[24]

d)    comply with the Principles of Data Protection as set out in the Act;[25] and

e)    ensure that personal data are only transferred to outside the EEA if certain conditions are satisfied.[26]

Anti bribery

The Bribery Act 2010 came into force on 1 July 2011. A company has a statutory obligation to prepare itself for implementing the Act and have in place procedures[27] to prevent bribery.[28] The company may be liable[29] for failing to prevent a person from bribing on its behalf, but only if that person performs services for the company in business[30].

It is unlikely that a company will be liable for the actions of someone who merely supplies goods to the company. In England and Wales, no one can only be prosecuted unless the Director of Public Prosecutions or the Director of the Serious Fraud Office is personally satisfied that a conviction is more likely than not and that prosecution is in the public interest. We are yet to see how the Act may have an impact on business in real practice.   

Anti slavery

Modern Slavery Act 2015 came into effect on 29 October 2015. The Act applies to all organisations including private company limited by shares, with a total[31] turnover of £36 million or more which are either incorporated in the UK or carry on a business in the UK. Section 54 of the Act requires[32] those companies to prepare and publish a statement[33] setting out the steps that they have taken during the financial year to ensure that slavery, servitude, forced or compulsory labour, human trafficking and exploitation are not taking place in any part of their own business or anywhere in their supply chains.

The Act sets out detailed provisions for offences, penalties, protection of victims and the function of Independent Anti-slavery Commissioner. Over time, organisations and companies will become more familiar with the Act; we will then be able to tell the impact that the Act has on business and our society.