The United Kingdom (U.K.)

Introduction

 

About The UK

The UK is the fifth-largest economy in the world, and the second-largest in Europe. It is ranked as the fourth-most competitive economy in Europe and the eighth strongest in the world,  according to The Global Competitiveness Report 2018. It is also one of the world's premier financial centres and has a skilled workforce, strong rule of law and complies with international regulatory standards.

For many businesses around the world, the UK is a gateway for trade with and investment in the rest of the EU. It remains to be seen, however, how the UK’s exit from the EU (Brexit) will impact this status as the terms on which the UK will trade with Europe are still unclear. It is currently scheduled to leave the EU on 31 October 2019. 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 130 countries. China is the UK’s sixth-largest export market and fourth-largest source of imports, and the UK government is committed to creating closer ties with China. It is the world's western hub for renminbi business, and plans to launch a Shanghai-London Stock Connect are underway.

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.
 

 

UK Market Profile Infographic_small

What solutions are available in The United Kingdom (U.K.)?

Solution Description
Treasury Centres A centralised treasury is one way to reduce the tax burden, centralise risk management, improve liquidity and enhance yield on cash.
Interest Optimisation Maximise your interest yield from for your balances held with the bank.
Notional Pooling Cash balances in different accounts are notionally offset to derive the net balance, which is then used to calculate interest.
Sweeping/ Zero Balance Account (ZBA) ZBA are checking accounts with zero balances where funds are physically swept to eliminate excess balances and maintain greater control over disbursements.
Intercompany loans Similar to bank loans, intercompany loans refer to lending between entities within the same group.

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 World Economic Forum ranks the UK 8th in the world for the development of its financial system in The Global Competitiveness Report 2018.
  • The impact of Brexit could undermine the UK’s competitiveness, particularly if UK-based finance companies lose their EU ‘passporting rights’ allowing them to market products and services in any EU country without having to set up a branch there.
  • The UK is one of the three ‘command centres’ of the global economy, has a skilled workforce, a 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 (Bank for International Settlements triennial global survey 2019). 
  • 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 2,074 bonds raised GBP347 billion in 2018, 53% of which was raised by international issuers.

 

Regulatory Bodies

  • 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.

 

Tax

  • The corporate income tax rate is 19%, the lowest rate in the G7, and is proposed to fall to 17% in April 2020.
  • Resident companies are generally taxed on their worldwide income. Non-resident companies pay corporate income tax on income attributable to UK-sourced income 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.
  • 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. 
  • 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.
  • The UK’s time zone overlaps with both Asian and North American business hours.
  • It has one of the world’s largest tax treaty networks, with agreements with 130 countries.
  • It currently has a relatively benign tax environment for non-resident companies, which only pay corporate tax on trading profits attributable to a UK permanent establishment.
  • The UK is the second-largest offshore renminbi centre 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.
 

 

Login to Treasury Prism banner

Banking

 

Banking System

  • Four banking groups dominate the UK’s domestic banking sector: HSBC, Barclays, Lloyds Banking Group (which includes Bank of Scotland and Lloyds Bank) and Royal Bank of Scotland (includes NatWest).
  • There are 157 UK-incorporated banks and 43 building societies (financial institutions that offer banking facilities). There are also 160 foreign banks with branches in the UK.
  • The UK has the highest number of foreign banks in the world.
  • As of 1 January 2019, the largest banks are required to separate their investment and retail banking operations.

 

Bank Accounts

  • 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.

 

Payments

Payment Systems

CHAPS

(Clearing House Automated Transfer System)

 

UK's Real Time Gross Settlement system (RTGS)

  • Operated by CHAPS Clearing Company.
  • 34 direct participants.
  • Processes high value and urgent GBP-denominated credit transfers (no threshold).
  • Effects final settlement of participants' net balances from other UK clearing houses.
  • Settlement in real time and across the participant banks' corresponding accounts at Bank of England.

TARGET2

(Trans-European Automated Real-time Gross settlement Express Transfer system)

Europe's RTGS

  • Operated by Eurosystem.
  • Second generation of TARGET.
  • Settled and with finality in real time.
  • No value thresholds.
  • Settles euro-denominated interbank and individual customer payments, as well other institutional payments and high value net settlement systems.

BACS

(Bankers' Automated Clearing Services)

Electronic, low-value multilateral net settlement system

  • Operated by VocaLink.
  • 25 direct participants
  • Processes low value, non-urgent and bulk GBP-denominated credits and debits.
  • Uses BACSTEL-IP secure and direct online connection service which can be tracked by all customers online.

FPS

(Faster Payments Service)

24/7 multilateral net settlement system

  • Operated by Faster Payments Scheme Limited.
  • 30 direct participants
  • Processes one-off GBP-denominated electronic payments (max. GBP 250,000) done online or by telephone, and standing orders.
  • Cleared and settled in approximate real time using VocaLink Real-Time Payments Platform. Standing orders settled same day.
  • Final net settlement done across participants' accounts at Bank of England.

C&CC system, a paper-based clearing system

Paper-based clearing system

  • Operated by the Cheque and Credit Clearing Company.
  • Uses the 2-4-6 principle, which enables customers to receive interest within two days of a cheque being deposited, so funds are available within four days, and certainty of clearance is within six days.
  • Settlement done same day if submitted before 14.00 GMT.
  • Processes GBP and EUR-denominated paper-based instruments (no threshold).
  • Cheques truncated before processing. GBP-denominated payments are settled on three-day cycle.

 

 

 

Payment Instruments

 

Credit Transfers

  • Credit Transfers are paper-based or automated (through BACs).
  • 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 Payments

  • Debit card payments are the most common form of payment in the UK. This is partly due to the roll out of the contactless payment facility, which has been adopted by 78% of debit cards and 62% of credit cards as of the end of 2017 (UK Finance). The adoption by retailers of contactless payment devices has had good take up, and in turn will increase over time.
  • Visa and MasterCard are the main credit cards used, with American Express and Diners Club also available. Visa is the main debit card used, and Maestro and Solo cards are used to a lesser extent.
  • Transactions are processed via VocaLink same day and credit card payments cleared by the card-issuing companies.
  • There are 63,152 ATMs (www.link.co.uk) and 2.42 million point of sale (POS) terminals (www.statista.com) in the UK. With the continued rise of cashless payments, ATM numbers have been declining since 2016 while POS terminals increase significantly each year. Both ATM and POS terminals are Europay, Mastercard and Visa (EMV)-compliant.
  • Oyster cards are issued by Transport for London and can be used on the London Underground and Overground and selected National Rail networks. They are contactless, pre-paid cards that can be used with pay-as-you-go credit or as travel cards.
  • Other multipurpose pre-paid cards include the Cashplus MasterCard, Visa Prepaid and Quidity, a pre-paid Maestro card.

 

Online Payments

  • Mobile banking is overtaking online banking as a preferred banking medium. Services are provided by major banks and third-party mobile banking apps such as Monzo and Metro Bank. There was a 57% increase in transactions, with 86% increase in managing large accounts (e.g. mortgages and investments) and 46% in managing credit card accounts in 2016 (British Bankers’ Association). 
  • Mobile wallet usage has grown exponentially, with 336% growth in 2017 in the amount spent in 12 months (Worldpay). The most popular payment apps are Apple Pay, Samsung Pay and Google Pay. Retailers and third-party providers such as PayPal have a strong presence in mobile payments for customers and businesses.   
  • Online payments are common and are being increasingly adopted by retailers. Third-party payment providers are overtaking the use of payment cards, with PayPal dominating the online payment market.

 

Digital Currencies

  • 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 categories.
  • The UK government has been active in supporting and promoting the domestic development of blockchain technology, as used by cryptocurrencies.

 

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 payment has been a common form of payment, but it is in decline (cheque usage has dropped 15% per year between 2015 and 2017) 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.

 

Demographics

UK Market Profile Infographic

1 (Main) reduced and zero-rated VAT for certain goods and services

2 For all profits except ring fence profits

3 (Progressive) max rate for incomes over £150,000

 

 

This Market Profile is brought to you by DBS. Get in touch with us for further insights on doing treasury in the UK and take advantage of our innovative solutions to empower your business. Click here to find out more.

 

Sources: World Economic Forum, Bank of England, UK Parliament, PwC, International Monetary Fund, CIA World Factbook, Trading Economics, Organisation for Economic Co-operation and Development, Bank for International Settlements, London Stock Exchange, Building Societies Association, Bank of England, BACS, Faster Payments Service, UK Finance, LINK, Statista, Worldpay, Financial Conduct Authority and DBS.

The information herein is published by DBS Bank Ltd. (“DBS Bank”) and is for information only. The information is assembled based on information available and accurate as at Oct 2019.

The information is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

The information herein may be incomplete or condensed. Any terms, conditions and opinions contained herein may have been obtained from various sources and neither DBS Bank, its subsidiaries/affiliates nor any of their respective directors or employees (collectively the “DBS Group”) make any warranty, expressed or implied, as to its accuracy or completeness and thus assume no responsibility of it. The information herein may be subject to further revision, verification and updating and DBS Group undertakes no responsibility thereof.

DBS Bank Ltd. All rights reserved. All services are subject to applicable laws and regulations and service terms. Not all products and services are available in all geographic areas. Eligibility for particular products and services is subject to final determination by DBS Bank Ltd and/or its affiliates/subsidiaries.