Corporate Treasury & Cash Management in the UK
Corporate Treasury & Cash Management in the UK
About The UK
The UK is the fifth-largest economy in the world, and the second largest in Europe, as measured by the International Monetary Fund (IMF). It is ranked eighth in the World Bank’s Doing Business 2020 report. It is also one of the world's premier financial centres, has a skilled workforce and strong rule of law, and complies with international regulatory standards.
The UK left the EU on 31 January 2020 and a transition period ended on 31 December 2020. The EU-UK Trade and Cooperation Agreement (EU-UK TCA) governing post-Brexit trading terms was signed on 30 December 2020.
The UK is an attractive location for regional treasury centres as it offers one of the world's largest tax treaty networks, with agreements with more than 130 countries. The UK also acts as the world's western hub for renminbi business, while the launch of Shanghai-London Stock Connect gives investors in both locations access to each other’s markets.
In addition, the UK has advanced banking facilities, strong regulation, a broad talent pool and advanced IT and telecoms systems, as well as the world's largest foreign exchange market and the deepest international debt market. More than 300 banks have offices in the UK, primarily in London, with many choosing the city for their headquarters.
Corporate Treasury in The UK
The UK is one of the world’s premier financial centres. Here, we highlight some of the key benefits relevant to treasury and cash management.
Financial Market Development
- The UK is ranked as the second most competitive financial market in the world in the 2021 Global Financial Centres Index by Z/Yen Partners.
- The UK is one of the three key financial centres of the global economy, has a skilled workforce and strong rule of law, and complies with international regulatory standards.
- There are no restrictions on capital flows in and out of the UK.
Sophistication of Banking Systems
- The UK is the largest financial exporter in the world and a leading centre of international finance.
- More than 300 banks have offices in the UK, primarily in London, with many choosing the city for their headquarters. Around half of these banks are incorporated in the UK and half are incorporated outside of it.
- The UK is the largest foreign-exchange market in the world, according to the Bank for International Settlements triennial global survey.
- London offers access to the deepest pool of international capital in the world. There are more than 14,500 debt securities with a value of GBP1.65 trillion listed on the London Stock Exchange Main Market. A total of 1,402 bonds raised GBP514 billion in 2020.
- The Prudential Regulatory Authority, part of the Bank of England (the central bank), is the prudential regulator of the banking industry in the UK. The Financial Conduct Authority (FCA), which is separate from the Bank of England, regulates the conduct of banks and ensures financial markets work effectively. The regulatory framework is in line with international standards.
- The corporate income tax rate is 19%, the lowest rate in the G7. The rate will rise to 25% on profits of more than GBP250,000 in April 2023.
- Resident companies are generally taxed on their worldwide income. Non-resident companies pay corporate income tax on income attributable to UK-sourced income and gains on the disposal of UK property, and are subject to income tax at 20% without any allowances.
- Companies may also be liable for diverted profits tax at 25% under certain circumstances.
- There is no branch profits remittance tax on the remittance of profits to a head office by the branch of a foreign company.
- A foreign tax credit is available on tax paid overseas on non-UK-sourced profits against UK tax on the same profits, provided the laws and treaties permit.
- UK companies are exempted from paying corporate income tax on most foreign and UK dividends. Withholding tax of 0% to 20% may be charged on interest, depending on whether a tax treaty is in place and the taxpayer can product a relevant Certificate of Residence.
- Capital gains are generally assessed with ordinary income and subject to corporate income tax. Capital losses can only be offset against capital gains.
- Unrealised exchange gains and losses on debts and derivatives are generally taxed or allowed on an accounts basis.
- There is no safe harbour provision or prescribed debt-to-equity ratio in the UK although companies are expected to transact their business at arm's length. For a UK group, the net interest deduction is limited to 30% of UK tax-EBITDA and it cannot be higher than the net interest as stated in the group’s worldwide consolidated financial statements.
- Stamp duty of 0.5% is charged on the purchase price or value of shares, whichever is higher.
- The standard rate for Value Added Tax (VAT) is 20% on most goods and services. Domestic fuel and power and certain other supplies are charged VAT of 5%. Most exports, foods and other essential goods are zero-rated for VAT.
- The UK has tax treaties with more than 130 countries and territories.
- The UK is a signatory to the Organisation for Economic Co-operation and Development’s Multilateral Competent Authority Agreement, through which information is exchanged between tax administrations, to provide a single, global picture on some key indicators of economic activity within multinational enterprises.
Benefits for Company Treasury Centres and Operations
- The UK has advanced banking facilities, strong regulation, a broad talent pool, and advanced IT and telecoms systems, as well as the world’s largest foreign-exchange market and the deepest international debt market.
- It currently requires that non-resident companies pay corporate tax only on trading profits attributable to a UK permanent establishment. It has one of the world’s largest tax treaty networks, with agreements with more than 130 countries.
- The UK is the second-largest offshore renminbi pool and the RMB centre for Europe.
- Cash concentration is widely available in the UK on a domestic and cross-border basis. Different legal entities can participate in the same cash-concentration structure.
- Notional pooling is allowed in the UK on both a domestic and cross-border basis. Different legal entities can participate in the same notional cash pooling structure.
- Resident and non-residents: May hold foreign and domestic currency (GBP) accounts, both domestically and overseas. Domestic currency accounts held overseas are freely convertible.
- Overdrafts: Available to residents and non-residents.
- Interest: Offered on current, savings and short-term deposit bank accounts.
Legal and Regulatory
- Bank of England acts autonomously and is a member of the European System of Central Banks.
- The Financial Conduct Authority is responsible for regulating the banking sector.
- A company is resident if it is incorporated in the UK or centrally managed and controlled in the UK.
- In light of the UK voting to leave the European Union (EU) on 23 June 2016, financial regulations will be subject to change when Article 50 is ratified. The EU and UK have agreed that, as part of the Withdrawal Agreement, there will be an implementation period for financial institutions to continue their activities in the UK and prepare for withdrawal from the EU until the end of 2020. Anti-money laundering and counter-terrorism financing legislation are in place. In preparation for the triggering of Article 50, the legislation has undergone revisions and changes to accommodate the UK’s position outside of the EU. The UK is a member of the Financial Action Task Force (FATF), among others.
- The UK has established a Financial Intelligence Unit (FIU) within the National Crime Agency (NCA), which is a member of the Egmont Group.
|UK's Real Time Gross Settlement system (RTGS)|| |
(Trans-European Automated Real-time Gross Settlement Express Transfer system)
|Europe's RTGS|| |
(Bankers' Automated Clearing Services)
Electronic, low-value multilateral net settlement system
(Faster Payments Service)
|24/7 multilateral net settlement system|| |
|C&CC system, a paper-based clearing system||Paper-based clearing system|| |
- Are paper-based or automated (through BACs), and used for the majority of payroll, supplier and third-party payments.
- Part of SEPA initiative for EUR-denominated retail payments (approx. 55 banks in the UK participate).
- High-value and urgent GBP-denominated credit transfers cleared and settled through CHAPS in real time.
- High-value and urgent domestic EUR-denominated credit transfers processed through TARGET2 or the Euro Banking Association’s EURO1 system.
- Low-value, non-urgent and high-volume GBP-denominated credit transfers processed through BACS (within three days) or the Faster Payments Service (within approximate real time).
Direct Debits (auto debits)
- Used predominantly for low-value regular payments such as utility bills.
- Preauthorised direct debits processed through BACS on three-day basis.
- SEPA Direct Debit scheme available.
Card & Mobile Payments
- The cashless payment ecosystem in the UK consists of credit, debit, and pre-paid cards as well as mobile wallets and other online payment platforms.
- The main cashless payment options are Visa, MasterCard, American Express and Diners Club (cards); and Apple Pay, Samsung Pay and Google Pay (digital wallets). Oyster cards (pre-paid travel cards) and PayPal (online) are also in wide use.
- Contactless payment facilities have been adopted by the majority of debit cards and credit cards. Payments are processed via VocaLink same day and credit card payments cleared by the card-issuing companies.
- With the rapid rise of cashless payments, ATM numbers continue to decline while point of sale (POS) terminals increase significantly each year. Both ATM and POS terminals are Europay, Mastercard and Visa (EMV)-compliant.
- Mobile banking is overtaking online banking as a preferred banking medium. Provided by major banks and third-party mobile banking apps such as Monzo and Metro Bank.
- The UK’s Financial Conduct Authority does not classify cryptocurrencies as currencies or commodities but does acknowledge their potential use as financial instruments. Although not currently regulated in the UK, certain types of cryptocurrencies may be regulated depending on how they are structured. Cryptocurrencies are currently separated into utility, security and exchange types.
- The UK government has been active in supporting and promoting the domestic development of blockchain technology, as used by cryptocurrencies.
- In March 2020, the Bank of England published a discussion paper outlining the risks and benefits on the possibility of issuing a digital pound sterling. In April 2021, the Central Bank Digital Currency (CBDC) Taskforce was created to coordinate the evaluation of CBDC in the UK.
Cash, Cheques and Other Payment Systems
- Debit cards have recently overtaken cash as the most popular form of payment in the UK. The trade association UK Finance estimates that cash payments will fall to less than 16% of transactions by 2027.
- Cheque payments have been a common form of payment, but are also in decline as high and low-value transactions are increasingly paid electronically.
- Cheques are truncated and processed through a C&CC system, and settled within three days.
- Bills of exchange are used for trade finance within the UK. They are cleared through the C&CC system.
- Bank drafts offer a secure form of payment, but are not common and are high cost. They are cleared through the C&CC system.
The UK has no foreign exchange controls and has the largest foreign exchange market in the world. Here are some more details about foreign exchange in the UK.
- The official currency of UK is the pound sterling which is fully convertible.
- Sterling is the fourth most traded currency in the world and acts as a reserve currency. It is one of five currencies included in the IMF special drawing rights basket.
- UK monetary policy is set and managed by central bank the Bank of England, which also sets interest rates.
- Sterling has a floating exchange rate with its value determined by market forces, such as supply and demand for the currency.
- London is the world’s largest FX centre globally and it has built on this status and its overlapping trading hours with China to become the largest offshore renminbi centre outside of Asia.
- Resident companies can have accounts denominated in both local and a wide range of foreign currencies, both domestically and overseas. The foreign exchange accounts are freely convertible.
- Non-resident companies may also hold accounts in both local and foreign currencies. The foreign exchange accounts are freely convertible.
- Resident and non-resident companies can take out foreign currency loans in the UK.
- A wide range of products to help companies manage FX risk are available in the UK, including FX options, FX spot and FX forward, cross currency swap, and non-deliverable forward.
- The UK does not have any foreign exchange controls. No prior approval is required for payments and remittances in any currency to other countries.
- There is no tax on foreign exchange transactions, although foreign exchange gains are subject to tax, while losses can be used to offset it.
- There are no restrictions on forward foreign exchange markets in the UK.
- There are no restrictions on capital flows in and out of the UK.
- There are no restrictions on the remittance of profits from the UK, and tax is generally not withheld on the transfer of profits from the UK branch of a company to the head office. There is no withholding tax on dividends.
- Both domestic and cross-border intercompany loans are allowed in the UK, subject to transfer pricing rules.
- Foreign currency invoices must be converted into sterling for value added tax purposes.
The UK has been a member of the World Trade Organisation since 1995 and of the General Agreement on Tariffs and Trade since 1948. It formally left the European Union on 31 January 2020 and no longer trades under EU rules. Here are some details about the UK’s current trading landscape.
- The EU-UK Trade and Cooperation Agreement governing post-Brexit trading terms was signed on 30 December 2020, at the end of the UK’s post-EU transition period. While it does not match the level of economic integration that existed when the UK was an EU member state, it offers a level of cooperation that goes beyond traditional free trade agreements. Full details can be found here: https://ec.europa.eu/info/relations-united-kingdom/eu-uk-trade-and-cooperation-agreement_en
- The UK is looking to reproduce the effects of the EU agreements it was previously under to ensure continuity of trading arrangements for UK businesses. If it is unable to do this, trade with other World Trade Organisation (WTO) members will take place on WTO terms. Details on the UK’s trade agreements can be found here: https://www.gov.uk/government/collections/the-uks-trade-agreements
- The UK’s largest trading partners are the US, Germany and China, as measured by the total trade in goods for both imports and exports in sterling.
- Precious metals, mechanical appliances, motor vehicles, electronic equipment and mineral fuels are the top five goods imported into the UK. The import of pharmaceutical products increased by 62.8% in 2020.
- The government plans to create eight freeports in the UK as part of its post-Brexit trade strategy. According to its policy briefing, freeports are “intended to be national hubs for global trade and investment”, with access to incentives relating to customs, tax, planning, regeneration, infrastructure and innovation.
- Of particular note is the government’s proposed customs model for freeports whereby “a firm can import goods into a freeport without paying tariffs, process them into a final good and then either pay a tariff on goods sold into the domestic market, or export the final goods without paying UK tariffs.” (briefing paper: UK Government policy on freeports)
- The locations of eight freeports were revealed in the 2021 Budget: East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth & South Devon, Solent, Thames and Teesside.
- The UK implements a global human rights sanctions regime through the Sanctions Act. It covers trade sanctions, such as the import, export and movement of goods and technology, including arms embargoes and restrictions on dual-use items, as well as financial sanctions and immigration sanctions.
- Trade restrictions covering more than 70 countries are currently in place, including arms embargoes and transit controls.
- The Office of Financial Sanctions Implementation (OFSI) publishes a list of individuals and terrorist groups against which financial sanctions apply. Companies involved in transactions with individuals on this list require a special licence from the OFSI.
- UK sanction measures apply to action taken by anyone in the UK, UK nationals outside of the UK and companies incorporated in the UK.
- An import licence is generally not required, although companies need a licence or certificate to import certain products, such as plant or animal products, high-risk food or feed, medicines, textiles, chemicals or firearms.
- An EORI (Economic Operators Registration and Identification) number is required to import goods into the UK from both EU and non-EU countries. After 31 December 2020 all EORI numbers must begin with GB. Companies can apply for an EORI number through the Government Gateway, which is also used for tax calculations and payments.
- Importers with a taxable trade turnover of more than £85,000 must register for value added tax (VAT).
- Companies that meet certain conditions, such as being established in the UK and having a good customs compliance record, can apply to use simplified declarations for imports.
- The UK Global Tariff, which varies according to the product, applies to all goods imported into the UK unless the country from which they are being imported has a trade agreement with the UK. In some cases, tariff suspensions are in place, while goods coming from developing countries are covered by the Generalised Scheme of Preferences.
- Excise duties are charged on most alcoholic drinks, tobacco products and hydrocarbon oil products imported into the UK. VAT is charged on imported goods. The standard rate is 20%, with some goods charged at a reduced rate of 5% and others are zero-rated.
- There are no financing or risk mitigation requirements for imports into the UK. Import insurance and financing is widely available, with options including letters of credit, import collections, and buyer loans.
- An export licence is needed for certain goods, such as military goods and technology, specialist computers and radios, art, antiques and cultural goods, firearms, and controlled chemicals. Other products, including rough diamonds and medical devices require a certificate to be exported.
- An EORI number is required to export goods from the UK. After 31 December 2020 all EORI numbers must begin with GB. Companies can apply for an EORI number through the Government Gateway, which is also used for tax calculations and payments.
- There are no export taxes or tariffs levied on goods exported from the UK. Most exports are zero-rated for VAT.
- There are no risk mitigation or financing requirements for UK exports. Export insurance and a range of export financing options are available, including letters of credit, documentary collections, and accounts receivable finance.
- UK Export Finance is a government body that supports UK exporters in obtaining export finance and insurance by providing insurance to exporters and guarantees to banks to share the risk of providing export finance.
For more information, login to Treasury Prism for contextual insights on market regulations that are relevant to your cash management structure.
Sources (Intro & Corporate Treasury)
The World Economic Forum, the Bank of England, the Government of the UK, PwC, Trading Economics, IMF, CEIC, CIA World Factbook, LSE, BIS, the Office of National Statistics, Z/Yen
Sources (Banking & Payments)
BACS, Bank of England, European Central Bank, Faster Payments, Link, UK Finance
Sources (Foreign Exchange)
The Bank of England, Bank for International Settlements, PwC, Deloitte, IMF
Department of International Trade, WTO, UK Export Finance, PwC, UK House of Commons Library