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What’s the difference between a branch or a subsidiary in the UK?

At RPGCC we know that expanding a business internationally is a massive step and one that demands thorough examination of various factors and research into areas such as legal obligations, financial reporting, and compliance, as well as everyday operational concerns.

When considering entering the UK market, businesses face a crucial decision.  The question we are asked the most often is should we establish an overseas branch or a subsidiary in the UK

Both options carry distinct advantages and challenges, which can make this decision a complex one.  So, let’s look at the question, should you set up a branch or a subsidiary in the UK?  Below we explore the key factors businesses should consider when choosing between a branch or a subsidiary in the UK and highlight the long-term impacts of each option.

Branch or a subsidiary in the UK – The Legal and Tax Considerations

The UK’s legal and tax framework plays a pivotal role in the decision-making process when considering whether to set up a branch or a subsidiary.

A subsidiary is a distinct legal entity, separate from its parent company, which provides limited liability protection. This means the parent company’s assets are shielded from financial or legal issues that may arise in the subsidiary’s operations.

Conversely, an overseas branch is not treated as a separate entity; it functions as an extension of the parent company. This means the parent company assumes full liability for any legal or financial issues arising from the branch’s operations, putting its assets at risk.

A UK subsidiary only has to file entity level accounts in the UK whereas a branch filing would be on the basis of the parent company consolidated group filing.

Group structures are common for multinational businesses and therefore have a layer of familiarity both to internal and external stakeholders such as employee, suppliers and customers in the UK.

In general, any branch losses are more likely to be available for offset against the foreign parent company’s profits (as opposed to UK subsidiary losses) but local advice would need to be sought on this.

Branch or a subsidiary in the UK – Control and Flexibility

Establishing a subsidiary offers more control over operations in the UK, as the parent company can appoint its own directors, develop strategies, and implement policies tailored to the local market. This autonomy can be crucial if the parent company plans to tailor its business model to the unique demands of the UK market.

In contrast, a branch operates under the direct control of the parent company, offering a more streamlined approach but limiting flexibility. A branch may not have the same ability to respond quickly to market conditions, as it must adhere to the parent company’s overall strategy and operations.

Branch or a subsidiary in the UK – Financial Impact

The financial implications of choosing a branch or a subsidiary are significant.

Setting up a subsidiary may involve higher initial costs, such as registration fees, legal expenses, and compliance requirements. A subsidiary also requires its own capital structure and may need separate funding, which can complicate financing.

Alternatively, establishing a branch can be more cost-effective, as it operates under the financial umbrella of the parent company. However, accounting for the branch’s activities can be challenging, as the financial performance must be integrated into the parent company’s records. Additionally, establishing a branch requires completion of various forms, including submitting documents by post to Companies House.

Branch or a subsidiary in the UK – Reputation and Market Perception

The structure of your business can influence how it is perceived by customers and stakeholders.

Subsidiaries often signal a stronger commitment to the local market, which can enhance customer trust and loyalty. This perception can be particularly beneficial in industries where a deep local presence is valued.

On the other hand, some companies may choose to operate as a branch to leverage the reputation and brand equity of the parent company. This approach is ideal for businesses that want to maintain a consistent global identity, while still establishing a presence in the UK market.

Branch or a subsidiary in the UK – Long-Term Growth and Exit Strategies

Considering long-term growth and exit strategies is crucial when deciding between a branch and a subsidiary. Subsidiaries offer more flexibility for future expansion and potential divestment. If the parent company decides to exit the UK market, selling the subsidiary is often a simpler process compared to dismantling a branch.

In contrast, closing a branch can be more complex, requiring the disentangling of assets and legal obligations from the parent company. The process of closing a subsidiary may take 3-4 months, as notices must be published in the Gazette and stakeholders are given time to raise objections. However, a branch can be closed in just a few days.

In some cases, market validation may lean in favour of a branch setup, particularly when external investment from angel investors or venture capitalists is involved. However, for practical business operations such as opening a bank account, securing mobile contracts, or signing lease agreements, a subsidiary is often more advantageous due to its legal structure.

Branch or a subsidiary in the UK – Conclusion, helping you make the right choice!

The decision to set up a branch or a subsidiary in the UK is a critical one for international businesses. Both options have their strengths and weaknesses, but the right choice depends on the specific needs and objectives of the business.

A subsidiary offers enhanced legal protection, operational autonomy, and credibility in the local market. However, it comes with higher costs and a more complex financial structure. On the other hand, a branch offers simplicity, lower setup costs, and a unified brand identity, but it exposes the parent company to higher risks and limits flexibility in decision-making.

Ultimately, the decision should be based on a careful assessment of long-term goals, risk tolerance, financial capacity, and growth strategies. Seeking expert guidance from legal and financial professionals, such as RPGCC, can help navigate the complexities of expanding into the UK market.

At RPGCC, we offer a wide range of services designed to support your international expansion.  Whether you need assistance with company formation, audit, corporate tax, VAT, payroll, accounting, or banking, we are here to provide expert advice and guidance every step of the way.

Let us help you make the right choice for your business’s success in the UK.