The United Kingdom (U.K.)

Introduction

 

About The UK

The UK is the fifth largest economy in the world , the second largest in Europe and the 13th most complex economy according to the Economic Complexity Index. 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. 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 trading partner and the UK government is committed to creating closer ties with China. It is also the world's western hub for renminbi business.

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.

The onset of the exit of the UK from the EU (Brexit) has introduced a degree of uncertainty into the business and financial environment and will have an impact going forward that has yet to be established.

 

 

What solutions are available in UK?

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.
In-house Banks (IHB) In-house banks provide corporate treasurers with another method of centralising and consolidating their business.
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 13th in the world for financial market development in The Global Competitiveness Report 2017-2018.
  • It notes that the outcome of Brexit negotiations are likely to undermine the UK’s competitiveness, while its macroeconomic environment remains challenging.
  • 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.
  • The UK is the largest foreign-exchange market in the world (Bank for International Settlements triennial global survey 2016). 
  • 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 and international government bonds from 37 countries and territories in 11 different currencies.

 

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.
 

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 45 building societies (financial institutions that offer banking facilities). There are also 156 foreign banks with branches in the UK.
  • The UK has the highest number of foreign banks in the world.
  • As of 2019, the largest banks will be 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.
  • 25 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.
  • 16 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.
  • 14 direct participants
  • Processes one-off GBP-denominated electronic payments (max. GBP 100,000) 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 have recently become the most common form of payment in the UK. This is partly driven by the roll out of the contactless payment facility adopted on 70% of debit cards and 51% of credit cards at the end of 2016 (Payments UK). 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.
  • Processed via VocaLink same day and credit card payments cleared by the card-issuing companies.
  • There are 70,270 ATMs (www.link.co.uk) and 1.96 million point of sale (POS) terminals (www.statista.com) in the UK, and they are increasing significantly in number 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. 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 365% growth 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 and is expected to issue guidelines for the sector later in 2018.
  • 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 25% of transactions by 2026.
  • 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

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

 

Recent Developments

 

Consolidation of Payment System Operators 

Retail payment systems in the UK are being streamlined with the New Payment System Operator (NPSO) taking over responsibility for Bacs and Faster Payments. NPSO will also take over operating the Cheque and Credit Clearing Company in the coming months. The move is in line with the aim of Payment Systems Regulator and the Bank of England to help develop the capabilities of the three operators and reduce the associated costs and complexity.

Read more about the development here.

 

The rise of the payment app

Person-to-person payment (P2P) apps are becoming incresingly popular among younger generations. Such P2P apps, like PayPal-owned Venmo, Zelle, Apple Pay, Facebook Messenger, WeChat Pay, and Square Cash, let you pay someone in seconds because they're hooked up to your bank account, credit card or debit card. They are proving popular with young people wanting a convenient, cash-free way to pay friends back for coffees, takeaways or cocktails, but are also being used for larger payments.

Read more about the development here

 

Nearly half of all UK payments are contactless

The UK is continuing to lead the way as a global leader in payments technology, according to new data from Mastercard. The firm has revealed that almost half of all in-store card transactions made in the UK use contactless technology, making it the most widely-used form of electronic payment in Europe. 

Read more about the development here.

 

 

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: IMF, The World Economic Forum The Global Competitiveness Report 2017-2018, Economic Complexity IndexBank for International Settlements, London Stock Exchange, Bank of England, PwC, OECDAssociation for Finance Professionals

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Last updated on 24 Sep 2018