The cost-saving CEO

This article contains frequent comments from CEOs and CFOs of many companies investing in the UK. Beneath these is a commentary provided by Taylor Wessing?s Inward Investment Team addressing the identified situations.

1. ?I don?t need an employee or an entity. I will use a contractor instead.?

Let?s contrast an employee with a contractor, under English law. Nine times out of ten a so-called contractor is actually an employee. Under English law employees have a right to receive a contract or note of their terms and conditions and should be given a statutory period of notice, or a common law period of notice, before their contract can be terminated. During that notice period the employee continues to be employed unless specific provisions are contained in the contract of employment allowing for payment in lieu of notice. Employees also have a right to be consulted concerning many issues affecting their employment. Employees have rights to substantial termination payments when their employment is terminated after 51 weeks of continuous employment (known as compensation for unfair dismissal) with damages payable of up to £66,000 in addition to their paid notice period and statutory basic award calculated on the basis of up to £450 for each completed year of service.

An employee receives salary less compulsory deductions of income tax and social security payments (called Employee National Insurance Contribution) and the employer pays 12.8% employers NIC (National Insurance Contribution) as a further social security payment. HM Revenue & Customs charges penalties and interest on non-payment of these taxes especially where a consultant is in effect an employee.

A ?consultant? who is actually an employee working in the UK will be employed automatically by the overseas company which will probably be operating an unregistered branch unless steps are taken to formalise the UK presence by registering a branch or subsidiary. The overseas company will be subject to UK corporate tax on its profits but will have no control over the amounts of tax payable (if any) unless it takes steps to do so. Compared to an employee, a contractor can be terminated by giving the agreed contractual period of notice and typically will work for one or many companies providing consultancy services, for which he may or may not charge VAT depending on his turnover. A genuine contractor does not create an unregistered branch of the overseas company and is not an employee - but genuine consultants are rare animals.

To emphasise the above - most contractors are actually employees and their use will eventually lead to wasted management time and professional fees in sorting out the unwanted contractual and taxation position which results.

2. ?We granted options to our UK employees from our main stock option plan.?

Compliance with securities legislation in the UK requires a UK sub plan be created excluding parts of the parent company?s main plan.

Under English tax rules, 12.8% employers NIC (the same social security charge as mentioned in 1 above) is payable by the employing entity on exercise by a UK employee on or around a liquidity event on the spread i.e. the difference between the option price and the exercise price.

A liquidity event is regarded as an IPO or a trade sale of the business. Because of these rules there have been some very substantial tax liabilities in the past for UK entities of overseas companies. This area of taxation is perhaps the most complicated part of English law for an inward investor, (other than compliance with English Financial Services Act rules by inbound banks and financial institutions). It is possible to move the liability to pay the 12.8% to the employee (and the employee receives tax relief on it) and for smaller entrepreneurial companies to provide an extremely tax efficient option called an EMI (Enterprise Management Incentive).

3. ?Our UK employee took a great risk in joining us and we have agreed his termination package in advance, so we are in great shape!?

Whilst it is an advantage to have an employment contract, some parts of English employment law apply irrespective of what is written down between the parties. In termination discussions it is not possible to finally agree a settlement with a departing employee without his solicitor (or certain other authorised persons) signing the settlement agreement (known as a compromise agreement) after the termination. An agreement to pay damages at the beginning or during employment acts as an additional payment to the employee but does not exclude his right to an unfair dismissal payment. Accordingly, legal advice is always recommended on special terms of employment like this and we recommend use of a standard form employment contract which has recently been updated to comply with the ever-changing landscape of English and EU employment law.

Additional Coments

Please note that legal advice really is needed when dealing with these three situations. It is not expensive when regard is taken of the consequences of not taking legal advice.

Care needs to be taken to record ownership of the UK employee?s designs, patents, copyrights and any other intellectual property or know-how created by the UK employee under English law principles (which are different from many other countries). these arrangements should ideally be reflected in an agreement between the English entity, the overseas company and the employee.

We find that in around 50% of start-ups of technology companies the initial employee is terminated within two years of the start-up. In many cases the employee is no longer needed because he ?has done his job in starting up the UK entity?. Terminating a UK employee?s employment will always be expensive but the legal and termination costs can be kept under control with sensible drafting of the employment contract and frequent reviews of the employee?s behaviour if the employee?s performance is declining.

If you are contemplating expanding your business into Europe the UK is often the first step. We would very much like to hear from you so that we can explain in more detail our experiences over the last 20 years as one of the leading law firms advising inward investors.

Setting up in the UK is relatively easy from the legal point of view but there are a few key areas which really do need to be covered and understood. Taylor Wessing provides start-up advice on fixed fees. All initial advice is free of charge.

If on reading this article you have any questions about setting up in the UK please do not hesitate to write to or email the author at: