Welcome to “Doing Business in the United Kingdom,” the seventh in our “Going Global” blog series. Designed for companies looking to expand globally, our series has already covered China, the Czech Republic, Hungary, France, Italy and Canada. This series is intended to address important but below-the-radar finance and accounting issues. (Please note: this series is not intended to provide cross-cultural tips.)
The United Kingdom, which is comprised of England, Northern Ireland, Scotland and Wales, has the seventh-largest economy in the world and the second-largest economy in the European Union, according to the State Dept. London is probably the world’s leading international financial center, and services, particularly banking, insurance, and business services, account by far for the largest proportion (77.8 percent) of businesses there.
The U.K. is also the U.S.’s seventh largest trading partner, according to the Dept. of Commerce, behind Canada, China, Mexico, Japan, Germany and South Korea. In the first four months of 2012, the U.S. conducted nearly $38 billion in trade with the U.K. (To put that figure in context, the U.S. conducted $48 billion in trade with Canada just in January 2012.) According to the U.S. State Dept., from 1999 through 2010, the U.S. maintained a negative trade balance with the U.K. The good news for U.S. companies looking to expand their presence in the U.K., in the 16 months since Jan. 2011, the U.S. has enjoyed a positive trade balance. Which is to say: there is strong demand for U.S. exports in the U.K.
Need another reason to consider expanding operations into the U.K. (notwithstanding that the two countries are separated by a common language)? According to the CIA World Fact Book, the U.K. economy had the 9th highest GDP, following the EU, U.S., China, India, Japan, Germany, Russia and Brazil.
The U.S. is the U.K.’s single largest exports partner , and represents 11.4 percent of total exports followed by Germany (11.2 percent), Netherlands (8.5 percent), France (7.7 percent), and Ireland (6.8 percent). As an import partner, the U.S. ranked 5th at 5.8 percent, behind Germany (13.1 percent), China (9.1 percent), Netherlands (7.5 percent), and France (6.1 percent). (Export and import figures are from 2009.) Overall, the U.K.’s imports of $654.9 billion (2011 estimates) make it the 7th largest importer in the world.
In 2012, the World Bank ranked the U.K. 7th (out of 183 economies), based on ease of doing business there as determined by 10 different variables. Some of the factors include the ease of starting a business: (19th), getting credit (ranked 1st), protecting investors (10) and enforcing contracts (21) – all good criteria for U.S. companies considering expansion into the U.K. As it is, the U.K. is largely seen by U.S. companies as the best country from which to gain a foothold in the EU.
The U.K.’s $2.481 trillion (2011) economy showed an annual growth rate of 1.1 percent GDP in 2011, lower than the growth rate posted by Canada (2.2 percent GDP growth in 2011), according to the CIA Fact Book, placing the country at 182 (ahead of Ireland at 183, which is tracked separately, but behind Slovenia (180) and the Cayman Islands (181) and ahead of Italy (194). A growth rate of 1.1 percent may not seem like much, but it is better than 2009′s 4.4 percent loss. Unemployment ranks at 8.1 percent, ranking it 97th in the world, ahead of the U.S., ranked 103 at 9 percent for 2011.
Step #1: Realize that the U.K. is a member of the European Union, but there are essential differences between U.K. and EU accounting rules. For many of us, the U.K. seems very familiar (if not just because of Harry Potter), but we’d bet there are plenty of misperceptions about our closest ally, including:
- Unlike the other 26 countries in the European Union, the U.K. has maintained its own separate currency, the British pound sterling, and does not accept the euro.
- England, Northern Ireland, Scotland and Wales are distinct countries that operate with differing levels of administrative authority based on their own capital cities – while operating under a single constitutional monarchy with a parliamentary system. (There have rumblings that the Scottish Parliament could vote to break away from the U.K. The same could be true for Northern Ireland and Wales.)
- Companies in England, Northern Ireland, Scotland and Wales all follow U.K. Generally Accepted Accounting Practice (UK GAAP), which are developed by the Accounting Standard Board, the equivalent of the U.S.’s Financial Accounting Standard Board. (Please note: U.K. GAAP also covers companies operating in the Republic of Ireland.)
- Just like the other EU countries, the U.K. does apply Value Added Taxes (VAT) to the sale and purchase of goods and services.
- The U.S. and U.K. both speak English, but use some terms differently, including:
- Limited (U.K.) = incorporated (U.S.).
- Advocate (Scotland) or solicitor/barrister (U.K) = attorney or lawyer (U.S.).
- Adverts (U.K.) = ads or commercials (U.S.).
- Accountancy (U.K.) = accounting firm (U.S.).
- Funding schemes (U.K.) = funding plans (U.S.).
- Director (U.K.) = VP or “C” level- (U.S.)
- Finance Director (U.K.) = CFO (U.S.).
- Managing Director (U.K.) = CEO (U.S).
- Director of Procurement (U.K.) = VP Procurement (U.S).
- Turnover (U.K.) = Revenues (U.S.).
- Bespoke (U.K.) = Custom (U.S.)
- Purchase Dept. (U.K.) = Accounts Payable (U.S.).
- Sales Dept. (U.K.) = Accounts Receivable (U.S.).
- Stock (U.K.) = Inventory (U.S.).
- Shares (U.K.) = Stock (U.S.).
- Tax year end: April 5 (U.K.) = Dec. 31 (U.S.).
Tomorrow, we’ll discuss two steps U.S. companies should consider before they open operations in the U.K.
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