Treasury Today Country Profiles in association with Citi

Doing business in the United Kingdom

A magnet for international investment

Consisting of four nations, England, Wales, Scotland and Northern Ireland, the United Kingdom is a world renowned financial and business centre. A member of the European Union since 1974, the UK has retained its own currency, the pound sterling, and talks of adopting the euro appear to have subsided as monetary policy has turned to addressing the causes and effects of the current economic crisis. The UK authorities have been proactive in providing support for the country’s ailing banking system, cutting interest rates to 0.5%, their lowest ever level, and embarking on a quantitative easing programme.

Photo of UK flag

Key facts

Geography and society

Population:
63 million.
Population growth rate:
0.55%.
Countries:
England, Wales, Scotland and Northern Ireland.
Time zone:
GMT/ CET-1.
Land boundaries:
Ireland (360km).
Coastline:
12,429km.
Economy
Currency:
pound sterling (GBP).
GDP per capita:
£25,492.
FX regime:
free float.
Member of:
EU, BCN, OECD, WTO.
Fiscal year begins:
6th April.
Financial capital:
London.
Average days to start a business:
13.
History and politics
Government type:
Constitutional Monarchy.
Head of state:
Queen Elizabeth II.
Prime Minister:
David Cameron.
Legal systems:
English law, Northern Ireland law and Scots law.
Country credit rating
  • AAA.

Trading partners
Top import sources:
Germany, China, USA, Netherlands, France.
Top export destinations:
USA, Germany, Netherlands, France, Ireland, Belgium.

The Government announced in July 2012 that it was to inject £50 billion into the economy as part of its ongoing monetary easing policy. This will mean that a total of £375 billion has been generated by the Bank of England since it began its quantitative easing programme (QE) in May 2009. This latest tranche of cash will be fed into the economy over a four month period – previous QE liquidity injections had been introduced over three months.

In May, the price of sterling hit a near three-and-a-half year high against the euro in the wake of political uncertainty in the Eurozone (the PSI on Greek debt and French and German elections were held), making the UK – and London in particular – the place to do business for many foreigners. Indeed, at a recent G20 summit in Mexico, a bullish David Cameron even suggested that the UK would ‘roll out the red carpet’ for French firms if newly-elected President François Hollande made good on his pre-election promise to impose higher taxes on the country’s wealthy. In the World Bank’s 2012 survey comparing regulation across global economies, the UK ranks seventh out of 183 countries for ease of doing business worldwide. The UK operates a business-friendly regulatory environment and has attracted significant amounts of foreign direct investment (FDI) in recent years.

Competition is actively encouraged in the UK market. This is particularly true within the financial services sector, and consequently the UK has grown to become the location of choice for overseas financial institutions and investors. The volume of market transactions being carried out in the UK each year also illustrates the leading position of the UK financial services sector, with 53% of world foreign equities turnover and 70% of global bond trading taking place in the UK in 2007.

But despite all these strengths, the UK economy has struggled in recent years to get itself back on the path to growth. The country began to slip back into recession at the beginning of the year after output contracted for two successive quarters. Whilst other EU members such as Austria, Belgium, France, Norway, Sweden and Switzerland have all seen output recover to pre-crisis levels, the fact that the same is not expected in the UK until 2015 only highlights the UK economy’s underlying fragility.

The UK regulatory environment is specifically designed to be pro-business and is in many ways less strict than the regimes operated by other European countries:

  • As the UK’s central bank, the Bank of England (BoE) is responsible for the overall stability of the UK’s financial system and one of the statutory responsibilities of the bank is setting interest rates. There are no central bank reporting or reserve requirements in the UK.

  • Financial services in the UK are currently regulated by the single statutory regulator — the Financial Services Authority (FSA). However, the government announced in June 2010 that it plans to abolish the FSA, separating it into three newly-created bodies — The Financial Policy Committee (FPC), the Prudential Regulation Authority, and the Financial Conduct Authority (FCA).

    • Companies operating in the UK must adhere to both general company and industry- specific regulations, such as the Data Protection Act 1998, which governs the protection of personal data in the UK.

    • UK company law is set out in the Companies Act 2006 (a revision of the 1985 version), which came into force on 1st October 2009.

    • UK accounting standards are set by the Accounting Standards Board (ASB) and apply to all companies operating in the UK. The UK’s ASB is working closely in conjunction with the International Accounting Standards Board to bring UK GAAP in line with IFRS.

    • There are no exchange controls in operation in the UK, and no authorisation is required either to invest in the UK or to export funds from the UK. According to UK trade regulations, goods exported from the UK must be cleared by UK customs but most services can be both imported and exported freely.

Taxation framework

Compared to most other European countries, the level of taxation in the UK is relatively light:

  • In the 2012 budget the Government announced that it would reduce the main rate of corporation tax by an additional 1% from April 2012. The rate fell by 2% from 26% to 24% in April 2012 and this will fall to 23% in April 2013 and to 22% in April 2014. As a result, the UK will have the lowest main corporation tax rate in the G7 and the fourth lowest in the G20. The Office for Budget Responsibility believes that this reduction will increase the level of business investment by around 1% by the end of the forecast period. This is equivalent to an increase in the total amount of business investment of £3.4 billion between now and 2016.

  • The Government is also responding to the Office of Tax Simplification’s reports on small businesses taxation. From April 2013 the Government will introduce a new cash basis for calculating tax for small unincorporated businesses. The Government will consult shortly after the budget on the details of the scheme including extending eligibility to businesses with turnover up to the VAT registration threshold of £77,000 (no update has been published at the time of writing). This will benefit up to 3m small businesses, reducing the time it takes for them to calculate their tax. There are also provisions in the Budget for a 10% rate of Corporation tax on profits related to patents and other types of intellectual property.

  • Corporation tax is levied on company profits, ie trading income and capital gains, on a tiered basis: full rate, upper marginal rate, and small business rate.

  • Foreign companies operating a branch have been subject to revised tax legislation since 1st January 2003. Under this new legislation, a branch is treated as if it were a separate enterprise operating in the UK. This means that the deduction of interest that can be claimed for tax purposes will be reduced.

  • Dividends received by a UK company from a foreign company are exempt from corporation tax.

  • A withholding tax of 20% is applicable on dividends paid to non-residents by REITS (Real Estate Investment Trusts). The same amount of withholding tax is also levied on interest paid to non-residents, unless subject to a tax treaty or exempt under the EC Interest and Royalties Directive. Royalties paid to non-residents are subject to 22% withholding tax, unless the above exceptions apply.

  • Stamp duty is charged on the transfer of UK shares at 0.5%. Stamp duty is also payable on property at rates on a sliding scale of 1% – 4%, depending on the value of the property.

  • The UK government raised its standard VAT rate from 17.5% to 20% on 4th January 2011 in order to tackle the country’s budgetary deficit. Companies with a turnover in excess of £67,000 (2008) are liable to register for VAT purposes. The UK does not charge VAT on basic goods such as food, transport and children’s clothing.

Treasury activities

Local banking sector

The UK’s banking sector has been hard hit by the financial crisis, and has had to lean on the Bank of England, the UK’s lender of last resort, for support against toxic assets. Under the UK Banking Act 2009, which came into force on 21st February 2009, the BoE can provide support to financial institutions in distress without disclosing its actions publicly. The Act also guarantees that eligible depositors are insured up to the value of £50,000, should a financial institution fail.

Payments

  • Cash. Approximately two-thirds of personal transactions are currently carried out using cash and estimates suggest that by 2020, 36% of personal payments will still be made in cash.

  • Cheques. The usage of cheques has declined significantly in the UK in recent years, with only 3% of payments being made in cheques as of 2010. Under the NPP the Payments Council had initially set 2018 as the deadline to eliminate cheques altogether. However, this policy was reversed based on response to NPP’s consultation in 2009. Now, there is no deadline to eliminate cheques, customers can use them for as long as they deem necessary.

  • Direct Debit. Over 50% of regular bills in the UK are paid by direct debit and discounts are frequently offered for paying by this method. Development of a business-to-business direct debit scheme is being investigated under the NPP.

  • Automated credit. As of 2010, over 18% of payments were being made by BACs or Faster Payments transfer, and this is expected to rise to 21% by 2020.

Case study

Transforming overseas payments for UK SMEs

The Equiniti Group

The Equiniti Group is a UK based leading business services provider delivering administration and payment solutions to over 2,000 clients in the UK public and private sectors, including 50% of the FTSE 100.

The challenge

In 2010, Equiniti saw an opportunity to use its core strengths in payments to offer a better deal to UK SMEs when making overseas currency payments. Equiniti aimed to market a value proposition for UK SMEs in response to the poor FX rates, high fees and patchy service frequently experienced when making payments overseas. Most SMEs make international payments using traditional banking methods which often result in them paying more than they need to in order for the recipient to get their full payment. The challenge was to create a compelling alternative international payments proposition to UK SMEs that would be easy to use, robust and provide a good service, all within a short period of time.

The solution

Having worked together since 2006, Citi was Equiniti’s clear choice to help implement a new platform for SMEs to make overseas payments. Citi became the back-end provider for Equiniti to offer UK SMEs new payment and FX capabilities, delivered through a simple online platform. The co-operative effort, known as Paymaster International Payments, delivers to SMEs the foreign currency and payment capabilities of Citi, including the ability to send payments through local clearing houses which reduces the deductions from intermediary and beneficiary banks. SMEs benefit from greater payment transparency and, supported by Citi’s WorldLink platform, over 130 currencies. In addition, SMEs benefit from flexible payment options, including remote cheques and both urgent and non-urgent wires. Backed by Citi Pulse, Paymaster International Payments also offers access to forward contracts. These services are normally reserved for multinational corporations.

The benefits

Since August 2011, Paymaster International Payments has been presenting UK SMEs with a transformational solution for their overseas currency payments. Paymaster International Payments provides dedicated customer service and an online platform which ensures adherence to market-specific transaction regulations, reducing the risk of payment rejection and lowering international transaction costs. Together with Equiniti, Citi has delivered the power of its global network and technology capabilities to SMEs who would have otherwise been left to rely on inefficient and costly overseas payment methods.

Clearing and settlement

There are four main inter-bank clearing systems in the UK:

  • CHAPS. The UK’s sterling-based RTGS for urgent, typically high-value wholesale payments. There is no upper or lower limit on the value of the payment and the system operates between 06.00hrs and 16.00hrs.

  • UK Faster Payments Scheme. Launched on 27th May 2008, this ‘near real-time’ clearing system is operated by CHAPS Co and allows both businesses and consumers to generate or receive payments at any time of day. Payment values are currently restricted to £10,000 for immediate payments and £100,000 for standing orders.

  • Bacs. An ACH used to process regular bulk electronic payments and collections. Bacs operates on a three-day processing cycle and also offers a direct credit service for euro payments within the UK. Transactions are subject to a value limit of £999,999,999 and in the 12 months to 31st January 2009, Bacs processed 5,656,620,000 transactions totalling £3,937,323,000,000.

  • Cheque and credit clearing. This covers cheques in both sterling and euro drawn on banks in England, Scotland and Wales. Cheques drawn in Northern Ireland are processed locally. The clearing cycle for cheques in the UK is three working days.

Cash management

Cash management products in the UK are highly sophisticated, helped by the fierce competition between providers. Under UK regulation, both physical and notional cash pooling are permitted between residents and non-residents, and multilateral netting is allowed, as are most common cash management techniques. Corporate bank accounts in the UK are usually current accounts and interest is generally paid on these, but at a low rate. Both residents and non-residents are eligible to open sterling and foreign currency accounts. Overdrafts can usually be obtained through agreement and are commonly used as a source of short-term funding, though fees are of course applicable.

The main short-term investment instruments available in the UK market include:

  • Commercial paper. Usually issued by large corporates as a means of raising funds, with maturities up to 12 months. Investor appetite has however declined significantly as a result of the financial crisis.

  • Certificates of deposit. Negotiable certificates of deposit (CDs) allow investors to place money at market rates, generally for a period ranging from one week to five years. CDs are fully tradable but the minimum amount that can be invested is usually £50,000, with increments of £10,000 thereafter.

  • Treasury bills. Issued by the UK Debt Management Office, usually with a maturity of no longer than 91 days.

  • Money market funds. These aim to provide an attractive rate of return on short-term deposits, through a diversified portfolio of investments. Many of the UK’s larger money market funds have seen significant inflows of investment since the financial crisis began as investors seek to mitigate risk.

Medium-term notes, with a maturity usually ranging between five and ten years, floating rate notes and structured products are also commonly used investment instruments in the UK.

Key websites

Government website:
www.direct.gov.uk
Bank of England:
www.bankofengland.co.uk
Tax authorities:
www.hmrc.gov.uk
Financial Services Authority:
www.fsa.gov.uk
UK Statistics Authority:
www.statistics.gov.uk
Accounting Standards Board:
www.frc.org.uk/asb/
London Stock Exchange:
www.londonstockexchange.com
British Bankers’ Association:
www.bba.org.uk

Citi’s capabilities in the UK

Citi was established in the UK in 1902, when it became the first foreign bank to set up a branch in London. In 1984, Citi became the first overseas financial institution to join the UK clearing system. Today, Citi is one of the largest foreign banks operating in the UK and holds a prominent position in the London foreign exchange markets.

Citi covers the whole range of corporate, transactional, trading, retail and private banking services with London being Citi’s regional headquarters for the EMEA region.

Citi has approximately 10,000 employees in the UK spread over London, Belfast, Edinburgh, Glasgow, Derby and Jersey. Citi Transaction Services employs over 600 staff in the UK.

Citi has a long history of commitment to the UK banking sector. Citi was a founding member of the UK payments association (APACS), the high value UK clearing system (CHAPS) and, more recently, the new Faster Payments Scheme. Citi is also a direct member of the low value UK clearing system (BACS) and is now one of only a small handful of banks in the UK who are a member of all three electronic payments schemes. In response to the increasing importance of the Chinese currency Renminbi (RMB) in clients’ treasury management, Citi offers cash management and trade solutions as well as security and fund services for RMB transactions out of London.

In the UK, Citi provides transaction services that help corporate, public sector and financial institutions meet their diverse business objectives. Citi Transaction Services offers liquidity management, investment, payments, receivables and trade finance solutions as well as a range of commercial and prepaid card programmes. With its unrivalled international network, Citi is a leader in the international payments space and offers a full range of basic and structured trade services and finance solutions.

Citi clients include a large percentage of the FTSE 100 companies and several of the largest public sector entities in the UK to whom the bank provides advisory, financing, treasury and trade solutions.

Contact details:
Tony McLaughlin
Managing Director
Head of Citi Transaction Services
UK

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