When overseas companies set up in the UK, initial efforts are naturally directed towards sales and marketing, delivery, and customer attraction and retention strategies to generate top-line revenue to justify and fund the expansion. With all that is going on, the back-office function of the new venture can often be put to the back of the mind, which can prove costly.

This article highlights some of the key back-office considerations that an inward investing business needs to address when setting up in the UK that will ensure the smooth transition from a national to an international business, and considers the option of outsourcing this function to a third party.


Legal structure

Choosing the right legal structure for the business is an important decision. The choice of either a subsidiary company or branch impacts on the limitation of liability, public disclosure of financial statements, cost of compliance (audit, tax, etc) and can have a real commercial impact.

A company would be registered with Companies House – the regulatory body in England and Wales. The shares of the subsidiary would typically all be owned by the non-UK parent company. The company’s officers, directors and company secretary may be the directors of the foreign parent company.

Financial statements for the subsidiary must be produced in accordance with UK reporting requirements. The subsidiary’s financials may need to be audited but only the subsidiary’s financial statements must be filed on the public record at Companies House. This means that anyone can look at the accounts filed, but data on the parent company will not be included.

A UK branch of a foreign company would also be registered with Companies House. A branch is not a separate legal entity. Certain details of the foreign parent company must be given as part of the registration procedure, including its principal place of business, the state and governing law under which it is registered and the details of all the company’s officers.

The branch’s own financial statements do not need to be audited or filed for the public record. However, annual accounts will still need to be prepared for taxation purposes, and the parent company’s worldwide accounts will need to be filed on public record at Companies House. This will consist of a balance sheet, income statement and supporting notes to the balance sheet. This is the case regardless of whether the company needs to publish these accounts in its home state.

Trading and taxation

The UK operation may be a fully trading office of the foreign company; alternatively it may be a support operation to the foreign company. If the UK operation is carrying out several activities, each function may operate in a different fashion.

Fully trading

Either a branch or a subsidiary may invoice the group’s UK income: the UK operation would enter into contract with its customers and book that revenue in the UK accounts. Depending on the level of activities, the company may make a profit or a loss in the UK. The foreign parent might charge the UK operation an allocation of overheads or management costs. The parent may also charge a royalty for any intellectual property it owns that is used by the UK operation.

Support operation

The UK entity might instead act as a support and service provider to the foreign company. The parent would enter into any contracts with UK customers (booking all the UK revenue) but then ‘buy’ services from the UK operation. The UK operation would be prohibited from concluding customer contracts but must pass them to the parent.

The UK might be a sales sourcing and marketing operation or supply post-sales support and local technical knowledge. This structure depends on the company’s business being such that the contract may effectively be made between the UK customer and the foreign parent.

Inland Revenue would expect the UK operation to recognise revenue in respect of these services. Subsidiaries and branches may operate on a cost-plus basis: showing revenue of, say, 110% of costs and so net profit equivalent to 10% of costs. A drawback of the cost-plus basis is that the company always makes a profit. Alternatively, the UK arm may operate on a commission basis – to return a profit once the sales into the UK market have reached targets and the commission earned outweighs the costs.

If the UK branch operates on a cost-plus basis, the agreed revenue stream is notional income calculated purely to satisfy HM Revenue & Customs’ (HMRC) requirement that the branch make a profit. Only the costs are consolidated into the foreign company’s accounts.

This might mean that the company pays tax on its UK profits while the foreign company may not be able to claim full double taxation relief, for example, because the parent company’s tax rate might be lower than the UK’s or because its profits may not be sufficient to allow relief.

Contrast this branch situation with that of a subsidiary. A subsidiary must recognise actual income. The parent need not include the UK’s results in its own tax computation. If the UK arm operates on a cost-plus basis, it will invoice the foreign parent for the income. The parent takes a deduction for that cost and, having taken that deduction, it should always get tax relief – even if it is just in the form of increased tax losses.

Where two connected companies trade across borders, any transactions should be invoiced at open market value to avoid transfer-pricing problems with the revenue authorities in each country. The company should also document why it believes the transfer price it has set to be at an open market value. There are penalties for failure to comply and, where Inland Revenue adjusts a transfer price, giving rise to underpayments of tax, interest will also fall due. Similar provisions apply to branches.

Different rules apply to different products and services. Companies should not let VAT conflict with their trading structure. It can add unnecessary complexity to the business and possibly an extra 17.5% onto costs.

Practical considerations

While a branch is part of the foreign company, a subsidiary is a separate legal entity, typically with limited liability. This is an important distinction. Costs incurred by a branch are also costs of the foreign company and will be included in that company’s financial statements and tax return.


People continue to be the company’s most valuable asset. Making sure that remote workers are looked after is key to the successful set up of any overseas business. Locally, this will include finding and recruiting the right people, and advising on relevant terms of employment and related legal obligations.

If sending employees to the UK from outside the EU, it is vital that the appropriate visa and permits are obtained, and that the full range of expatriate tax issues, including international planning, equalisation/protection, social security matters and tax return filings is sorted out in advance of arrival to ensure compliance and to help the company to build its image as a caring employer.

In a competitive marketplace such as the UK, appropriate employee benefits packages will help to attract and retain the best staff. Where a company is looking to include stock options as part of a package, advice should be sought on the different schemes available, which have different benefits to the company and the individual.

Who are the employees?

The business needs to ensure there is a distinction between consultants and employees because each are treated differently. A company that is employing even one staff member will need to ensure compliance with European payroll legislation. At this stage, it will also need to consider commercial insurances such as employer’s liability insurance, which is a statutory requirement.

Finance management

The company must keep accounting records suitable for conversion into statutory accounts, or as the basis of a tax return for HMRC.

Suitable finance facilities need to be implemented to ensure the appropriate control and transfer of funds between Europe and the company’s corporate headquarters.

To ensure the control of available funds through the operation, the European office will need to be able to prepare timely and accurate monthly management accounts and reports and VAT returns (original records should be available to support VAT returns in the UK). It must also deal with purchase ledger management, expense claims, cheques and reimbursement, payments to suppliers and sales invoices.

Keeping control of an accounts function that is a long distance away, especially across time zones, is a challenge and can be time consuming. Someone is needed on site, or

at least in the country, who can be relied upon to carry out independent checks and controls and, importantly, manage the company’s cashflows.

Setting up a back-office function is unlikely to be the biggest consideration when looking to expand overseas; however, not giving it proper consideration can lead to regulatory, cost and operational problems in the longer term.

Outsourcing finance and accountancy has its advantages, but, as with any successful relationship, the right partner must be found to fit with the company’s immediate plans and they must have the skills, experience and resource to grow with the company over the longer term.

Mike Sable is director of outsourcing at UK accountancy firm Tenon.


When looking at a new market, do you really want to commit to headcount for your financials if you do not have to?

More and more businesses are turning to specialist finance and accountancy outsourcers to take control of back-office functions in their international offices. The benefits for these organisations are clear. Passing the responsibility to a third party has enabled them to continue to focus on the key areas in which they specialise, safe in the knowledge that all of the considerations highlighted in this article are being addressed.

Outsourcing can save time and money and improve accounting performance though efficiencies, proven procedures and localised country knowledge.

However, the keys to a successful outsourcing relationship are delegation, not abdication; responsibility to the outsourcer; and putting the time and effort in up-front to ensure that you get the most out of any potential relationship.

Begin with the end in mind

You must be clear about why you want to outsource and set clear objectives for where you want the business to go. Recognising the business goals at the outset will be a deciding factor in whether it is right to outsource all, part or indeed none of your finance processes.

Choose the right partner


This is not all about cost; trust forms the basis of a successful outsourcing relationship. Selecting a partner that will fit with your end goal is the obvious starting point – if the plan is to set up in the UK and then expand into Europe, firms offering a European network that can expand their services as you expand your business will be the starting point.

Managing outsourcing relationships is time consuming and so the more services that an outsourcer can manage ‘under one roof’, the more control and benefits you will get from the relationship. A single point of contact will ensure that you do not take action in one area without due consideration being given to the impact on another. For the back-office function, the right partner should be able to offer a full suite of services including:

  • outsourced accountancy;
  • payroll;
  • international tax advice;
  • individual tax advice;
  • corporate tax and VAT advice;
  • specialist tax-efficient remuneration strategies;
  • employee benefits consultancy;
  • human resources consultancy;
  • wealth management and specialist investments;
  • site selection.

Obtaining client references and case studies from your shortlist of providers will give you the confidence of delivery, experience and regulatory obligation, but, if possible, you should meet with all of the people with whom you will be dealing to ensure that the chemistry is right. It is a partnership, after all.


As in any good relationship, communication is essential. Clear, regular reporting lines and communication channels need to be agreed with an executive appointed from both sides to manage the relationship effectively.

A lot of outsourcing deals fail because the impact on internal employees has not been considered. Lack of communication internally can result in misunderstanding responsibilities. Improved communication on the reasons, benefits and outcomes of the outsourcing arrangements will reassure internal staff and ensure a smooth flow of information and processes.


If you cannot measure it, how can you assess whether it has been a success? Key measurement criteria need to be built into a service level agreement and reviewed and assessed continually. Regular monitoring and evaluation of these key measures will ensure that your outsourcing partner will continue to deliver real tangible value to your business over the term of the contract.