In a global business environment where enterprises regularly take on workers from countries and jurisdictions beyond where they are based, facilitating overseas payments quickly and easily is more important than ever.
For US companies who are considering expanding and taking on employees and/or independent contractors in the UK, there are an increasing number of options open to them in order to ensure that payments are made correctly and on time.
However, understanding the most efficient and cost-effective cross-border available is essential to any business growing into new territories, as the costs associated with hiring and managing new staff can be one of the key factors in determining the success or otherwise of any expansion.
A further consideration when expanding into new markets in which a business might not normally operate or have experience is ensuring that sufficient and appropriate financial planning has been done to ensure that costs and overheads — including those associated with hiring and onboarding — can be covered.
Likewise, a priority has to be ensuring that all systems and procedures with regard to overseas payments are compliant with UK employment and taxation laws.
Determining Your Expansion Budget
A US enterprise looking to take on either employees or independent contractors based in the UK (or any other part of the world), needs to consider the various hiring options open to them, and the financial costs and implications associated with each.
In most instances, one of the following three models will usually be the most efficient and cost effective.
Setting up a local legal entity
Establishing a local entity in the UK as part of an expansion is one way a US enterprise can ensure that it is compliant with local laws regarding employment and taxation. It is possible to do this in a variety of ways, such as setting up a representative office, creating a branch office, or establishing a foreign subsidiary.
If you are planning on hiring a large UK workforce, the legal entity route makes most sense, but it needs to be borne in mind that doing so has significant associated costs in terms of set up and the time required.
For start ups, or enterprises in the early stages of exploring the UK market, these costs can be a barrier, although it is important to note that setting up a foreign subsidiary in the UK does provide access to benefits such as tax rebates.
Engaging the services of a global PEO
An alternative approach is to engage the services of a global professional employer organisation (PEO), which can take care of a wide range of that tasks and responsibilities that are part of an expansion.
For instance, a PEO can assume responsibility for hiring and onboarding of workers, managing payroll (including tax and other deductions), and overseeing compliance. Using a PEO ad part of a UK expansion therefore means that management and leaders are more able to focus on core operations without having to devote valuable time and money setting up HR and payroll departments.
Pay international employees as contractors
For startups and other enterprises in the earlier stages of growth and expansion, hiring UK workers as independent contractors or freelancers can make more sense than taking them on as employees.
However, it is imperative when going down this route to make sure that workers are properly classified with regard to employment and taxation law. For instance, businesses in the UK employing independent contractors are required by the IR35 tax regulations to categorize them as independent contractors. Incorrectly classifying workers, resulting in their rights being violated or the proper deductions not being made for payments, can lead to heavy penalties and fines, so it is essential that contractors are being engaged and paid in accordance with UK legislation.
Payment methods for paying foreign workers
For a US business looking to expand into the UK and take on local workers, either as employees or independent contractors, there are three ways in which payroll payments will usually be processed. Below is a brief outline of each, or if you want to know more this comprehensive guide by Papaya describes the relative merits and drawbacks of each in more detail.
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Bank transfers
While bank transfers are a relatively efficient way of paying people internationally, the associated costs can be a significant barrier, both in terms of bank fees and the associated administration. If you are paying just one or two contractors for a limited period of time, bank transfers might be an option, but if you have multiple workers who you have engaged over an extended period of time, this is probably the most inefficient way of paying them.
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Online payment platforms
There is no doubt that financial services technology has made the business of moving money across borders significantly cheaper and easier. There is a drawback, however, in that it still requires knowledge and experience on the part of HR and payroll staff, and this can be unnecessarily time consuming.
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Foreign exchange services
While it can be cost effective to use foreign exchange services to pay UK employees or contractors, the same limitations apply in that it still requires expertise and time on the part of payroll and HR staff to ensure compliance with UK tax and employment laws.
Plus, there are additional costs associated with each transaction when you send money from the US to the UK.
Understanding US to UK transactions
While the United States and the United Kingdom do not have a specific treaty in place regarding how money can be transferred between the two, there are nevertheless a number of agreements, regulations and practices in place that govern financial exchanges between the two jurisdictions, particularly in the business sector. Here are some of these regulations.
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Atlantic Declaration
While not a free trade deal, the Atlantic Declaration (signed in June 2023) is a bilateral agreement that covers a broad range of trade, economic, technological and commercial areas in which the two countries cooperate. It is intended as a partnership to reinforce both countries’ standing and role in the global economy.
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UK/US Tax Treaty
The U.S./U.K. tax treaty is designed to protect US expats living and working in the UK from paying more US tax than they are legally required to do. For a US enterprise expanding into the UK and relocating US workers as part of the process, this is an important treaty for HR and payroll staff to understand and to implement.
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Banking regulations
The UK-U.S. Financial Regulatory Working Group, which essentially oversees banking regulations, exists to promote bilateral regulatory cooperation between the two countries, so as to increase financial stability, protect investors, and ensure that markets are operated in a fair, orderly, and efficient manner.
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SWIFT network
Both the US and UK are part of the Society for Worldwide Interbank Financial Telecommunications (SWIFT) network, which is used to facilitate a large majority of the world’s international money and security transfers. Essentially, SWIFT enables both individuals and businesses to take and make electronic payments (including by card) even when the two parties use different banks.
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Foreign exchange regulations
Currently, there are no controls in place restricting the transfer of funds into or out of the UK from the US or any other jurisdiction. At the same time, it should be noted that the UK has stringent money laundering laws in place, which any US business operating in the UK, or hiring workers based there, should be aware of.
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FATCA compliance
The Foreign Account Tax Compliance Act (FATCA) is legislation designed to facilitate compliance with US tax laws. It imposes obligations with regard to due diligence and reporting on UK and other foreign financial institutions to report US citizens or US tax-resident account holders to the US Internal Revenue Service (IRS).
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GDPR compliance
US companies are subject to General Data Protection Regulation (GDPR) regarding the data it collects on individuals in the EU. Since Brexit, the UK has its own data protection standards (essentially equivalent to EU law) with which US companies nevertheless need to comply.
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Currency considerations
Any US enterprise operating or employing workers in the UK needs to take into considerations currency fluctuations, as these can significantly impact on overall employment costs. In nominal terms, Pound Sterling (GBP) has traditionally been stronger than the US Dollar (USD), so it is especially important for US enterprises operating in the UK to understand how currency appreciation impacts costs and prices.
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Potential Brexit impact
Post Brexit, the US-UK trading relationship remains significant. For instance, in 2022 the United States was the UK’s largest trading partner by country, while the UK was the US’ seventh-largest goods trade partner and largest trade partner in terms of services. Free trade agreement negotiators continue between the two governments.
Conclusion
For any US enterprise looking to set up as a legal entity in the UK, hire employees or engage independent contractors, a primary consideration should always be choosing the appropriate model for the business, taking into consideration its size, scope and the products/services it offers.
In addition, while hiring foreign workers is considerably simpler than it once was, there are a number of significant issues that US companies must address if they are are to ensure compliance, and that workers are hired and paid in a accordance with all relevant legislation.
For most enterprises in the early stage of growth and expansion, engaging the services of a PEO will most likely be the most effective and cost efficient solution, at least in the initial stages.
Once a more permanent, robust business presence has been established, a foreign subsidiary may well be the most efficient and cost effective conditions under which to operate.
