UK

Country Name UK
Country Region Western Europe

Economic and Political Environment

The Banking Environment

The UK environment is a liberal banking environment, underpinned by the presence of a major financial centre in London.

Most of the main UK clearing banks have nationwide branch coverage throughout England and Wales but not all have branch coverage in Scotland. These branch networks are facilitated by a common IT infrastructure, which means that corporates do not need to hold accounts in different locations for the purposes of paying-in cash and cheques as well as making withdrawals – instead, pay-ins and withdrawals can be made at any branch.

The UK has an efficient postal system. Delivery times can be next-day (First Class) or two days (Second Class). These timings can go one day longer depending on the time of day of posting, and the two end-points, but in principle the delivery timescales are homogenous nationwide.

Lockbox type facilities are a common feature in collecting receivables. This also makes it easy for businesses to pay their suppliers by sending cheques through the post as settlement.

Retail companies with major cash takings no longer bank these themselves; it is more common for the tills themselves to be locked at the company premises and collected by a security carrier (Securicor, BrinksMat), and processed at the security carrier’s premises. This process embraces cheques and card payments as well as cash. The availability date for cash deposits is usually D+2 , the same as for cheques. A differential charge is made for notes that can be loaded into an ATM, compared to those that cannot. Retails tills have now become a major source of cash withdrawal under the “Cashback” facility – the shopper can ask for up to £50 cash to be added to their Debit Card charge, which will be given out in non-ATM notes.

The main drivers of UK processes are automation and efficiency rather than savings on mail float. It would be unusual for corporates to maintain two lockboxes at different locations solely for cutting mail float.

Most banks in the UK will pay credit interest currency accounts and offer a range of options depending on deposit value. UK banks do not generally pay credit interest on sterling current accounts but instead, offer business “high interest” accounts that sit alongside the current account.

These interest-bearing accounts are usually instant access and it is normal for there to be an automatic transfer to/from the current account.

Corporate customers are also able to set-up Group Account arrangements with a Treasury Account to facilitate the investment of funds on the UK Money Markets.

UK banks generally collect current account charges on a per item (different charges per transaction type). Credit allowances are often available to offset credit interest against charges.

Overdraft is a popular borrowing form. The interest rate on an overdraft is usually expressed relative to the Bank of England Base Rate.

Other regular forms of short-term borrowing are:

Money market loan, based on LIBOR
Discount of a bill drawn against trade/lease receivables, discounted at a bank whose accepted bills are eligible for re-discount at the Bank of England; the discount rate is based on “EBDR” – the Eligible Bill Discount Rate
For larger companies, GBP Commercial Paper

The key features of the environment are the following, with further detail of some of the features given below:

Overdraft on a current account is a common form of core funding and does not attract penalty rates
Banks can pay credit interest on operating accounts, both in GBP and foreign currency and there will be a variety of models of tiered interest and pooled interest
There are no distinctions in the treatment of resident accounts and non-resident accounts
There are no costs for individual account-holders associated with the deposit insurance fund
Central bank reserve costs for the banks associated with the make-up of their assets and liabilities are not converted into an explicit charge on account-holders
No exchange control or central bank reporting on cross-border movements of money
Cross-border movements of money priced per-item; lifting fees as a percentage of face value are uncommon
Limited circumstances in which banks adjust interest paid/received in order to comply with regulations on withholding tax. In general, corporates can operate free from withholding tax at source where the tenor of assets/liabilities is below 1 year
There are many foreign banks active in the treasury and money markets, and in lending to corporates, though their service range is limited when it comes to Cash Management services
As a result the foreign banks play a very limited role in corporate business other than in the Multinationals segment
Borrowing markets are liquid and a range of instruments in both GBP and foreign currency exists
The major UK banks are permitted to offer a universal banking service, including investment and insurance products, although competition from specialised providers of each such service is intense
The major UK banks operate nationwide and they have a commanding market share in handling payments by cash, cheque, and ACH
Foreign banks and specialist banks use the major UK banks for these services and so are second-tier participants, with the consequent effect on their prices
It is possible and legal to operate one’s account at one bank over the counters of another thanks to the Bank Giro Credit system and the Agency system, and the open ATM network. The branch density of the major UK banks is great enough in urban areas for this not to be required, but rural areas are less well served
It is cheaper to use a major UK banks than foreign banks, and it is cheaper to use the branches of your main bank than use the multibanking facilities
Nevertheless, the most effective model is to use a major UK bank as the core bank and then to use multibanking facilities through other major UK banks where a particular office or subsidiary is located remotely

Tax Considerations

A company is UK resident if it is either incorporated in the UK or it is centrally managed and controlled in the UK. A company is considered non-resident if it does not fulfil the above criteria, or if it does fulfil them, but is regarded as resident in another country for purposes of a double taxation treaty. There is no difference in status between the accounts of resident and non-resident customers. The pricing is identical and there are no restrictions regarding the range of products and services that are available.

The standard Corporation tax rate is 30%. The rate for small companies (i.e. those whose annual profit dos not exceed £0.3million) is 20%. Residents are taxed on their worldwide income (after deduction of expenses linked directly to trade), and worldwide capital gains. Non-resident companies are only taxed on “UK-source” income at the basic rate of 23% (and at 20% on interest, and 0% on bank deposit interest).

Generally there is no withholding tax on dividends paid to resident or non-resident companies. However, a withholding tax is levied on dividends paid to non-resident shareholders qualifying for the imputation tax credit (i.e. non-resident companies with a share of 10% or more in a UK company, who are located in a country holding and appropriate tax treaty with the UK). 

A withholding tax of 20% is levied on interest paid to resident and non-resident companies. No withholding tax is levied on interest payments to banks or branches of foreign banks in the UK, to a UK parent from a 51% subsidiary (provided a group income election is made), and to non-residents on quoted Eurobonds. The payment of short interest (broadly, loans with a term of less than 365 days) is also exempt from withholding tax.

Non-resident companies may qualify for a reduction of, or exemption from withholding tax on interest if their parent is located is a country with which the UK holds a tax treaty.

Arm’s-length pricing principles are applied in accordance with OECD guidelines.

There are no specific thin capitalisation laws but the arm’s-length principle applies where payments are made to related companies. Excessive interest paid to non-residents can be denied.

The standard rate of VAT is 17.5%.

Central Bank Reporting

There are no reporting requirements imposed by the Bank of England. 

Foreign Exchange Controls

As a member of the European Union, the UK applies no exchange control.

There are no lifting fees.

In respect of non-UK resident accounts, the Bank of England has provided for the inclusion of such entities within UK cash pools, subject to the same legal right of set-off requirement. The UK therefore is regarded as an attractive location for treasury vehicles, despite there being no special tax incentives.

Payments and Collections

Payment Instruments

Cheques remain popular in the business sector for paying suppliers. Cheque volumes reached a peak in 1990 but usage has fallen since then, mainly owing to increased use of plastic cards and direct debits by personal customers, and usage of BACS credits by business customers. Overall cheque volumes are expected to continue to fall from a level of 2.8 billion in 1999 to about 1.7 billion by 2009.

The Association for Payment Clearing Services (APACS) was set up in 1985 as a non-statutory Association of major banks and building societies and has become the umbrella body at the heart of the UK payments industry. APACS provides the forum for banks and building societies to discuss non-competitive issues relating to money transmission.

One of APACS' principal tasks is to manage the major UK payment clearing systems and to maintain their operational efficiency and financial integrity.

This task is currently carried out by three operational clearing companies:

Cheque and Credit Clearing Company
CHAPS Clearing Company
BACS
A range of other senior industry groups also operate under the umbrella of APACS:

Card Payments Group, covers all types of cards - credit, debit and charge cards as well as ATM and cheque guarantee cards and cards that combine more than one of these functions
Cash Services Group, is the industry body for cash and covers all non-competitive issues concerning notes and coin
City Markets Group, gives the view of the securities settlement banks on issues affecting their operation or future development, working with the Bank of England, CRESTCo and other institutions and associations both in London and overseas
Currency Clearings Committee, oversees the daily clearing of paper-based currency payments. The Currency Clearings handle cheques, bankers' payments, bank drafts and mandated currency debits provided they are drawn on UK accounts.

Cheques

The Cheque and Credit Clearing Company is responsible for the bulk clearing of cheques and paper credits throughout Great Britain.

Cheque clearance time is D+2, but banks often only give availability at D+3. A cheque is usually considered good if it has not been returned by the debiting bank by D+7, but the legal return limit is longer.

Cheques are truncated at the depositing bank. Several UK clearing banks have a joint venture – IPSL – that carries this out on their behalf.

Bilateral balances are cleared over accounts at the Bank of England, and these accounts zero-balance to the participants’ main accounts at the BoE.

Only the 12 main banks are direct clearers of cheques; smaller banks, building societies and foreign banks have a relationship with one of the main banks. Customers of such banks tend to pay higher per-item charges and to get their information later on what monies will clear on D.

Collections

Options for collecting cheques

Self-deposit - customers with smaller volumes of cheques to collect will receive these direct through the post, reconcile their A/R, and deposit the cheques at their local branch
Lockbox - for customers with high volumes of cheques to collect, Lockbox services are readily available. The service relieves the corporate of the administrative burdens of handling, banking, and reconciling cheques as well as maximising value dating benefit
Thanks to the Bank Giro Credit system, it is possible to pay cheques and cash into a UK bank account over the counters of any bank, although this will attract a fee payable directly by the depositor.

A middle way is to set up an Agency Agreement, which depends on the customer’s bank having an agreement with a convenient branch of another bank. The customer make its pay-in’s over the counters of the convenient branch and is charged by its own bank, based on the fees agreed under the Agency Agreement between the two banks.

Disbursements

Smaller companies will complete cheques by hand.

Options for larger companies:

continuous cheque run where a remittance document with tear-off cheque is produced at the companies office
outsourcing option where company sends a file of remittances to the outsource, who then do the same as in (1) above

Electronic Payments

There are high-value and low-value circuits for both GBP and EUR.

CHAPS Clearing Company

Provides electronic same-day clearings in sterling and euro. CHAPS was developed in 1984, and is one of the largest real-time gross settlement systems in the world, second only to Fedwire in the US. CHAPS offers its Members and their participants an efficient, risk-free, reliable same-day payment mechanism. Every CHAPS payment is unconditional, irrevocable and guaranteed..

CHAPS Sterling's 20% volume growth over the last two years has been in all sectors and for all purposes of payment. However, the areas of strongest growth have been in inter-account transfers, housing and payments to individuals. Despite a rise in business use of CHAPS Sterling, the financial sector still dominates with 50% of volumes and 90% of value.

There are 13 participants in CHAPS GBP.

CHAPS EURO

TARGET is the pan-European clearing system which interlinks the national RTGS systems of the EU member states - CHAPS Euro provides UK access to TARGET. It runs to TARGET operating hours.

There are 20 participants.

ACH - BACS

Operates the bulk electronic clearing. BACS was established in 1968 and remains the largest and oldest ACH service in the world. BACS processes Direct Credits, Direct Debits and Standing Orders.

Only the 14 main banks are direct clearers of cheques; smaller banks, building societies and foreign banks have a relationship with one of the main banks. Customers of such banks tend to pay higher per-item charges and to get their information later on what monies will clear on D.

BACS’ infrastructure is being greatly renewed in 2003/4.

BACS operates a three-day clearing cycle:

D – Company sends payments electronically to BACS for overnight processing
D+1 - BACS Member bank processing
D+2 - Simultaneous settlement of obligations between BACS Members with debit and credit of relevant account holders. As a consequence there is no funds clearance delay for the beneficiaries or float income for BACS Members.

Customers access BACS in several ways:

by asking their bank to perform an interbank transfer, via eb or via a paper order that the bank converts; in this case the customer is often debited on D whereas the payment is made on D+2. For this reason this method is common only for individual payments where the remitter may be unaware that BACS is the settlement circuit
third-party software that enables the customer to send a file direct to BACS
outsource agency for payroll and receivables that sends a file direct to BACS
Where a file is sent direct to BACS, the file has to contain the identifier of the user, who in turn has to be set up in BACS by its bank. The bank has to agree a credit limit with BACS stating both maximum file size and item size.

If the conditions are met, the file is processed by BACS and the payments are then all made on D+2.

ACH Credits

BACS Direct Credit volumes have grown steadily and 90% of the UK workforce is paid through in this way. In addition, most corporates are increasingly paying their suppliers by BACS Credit to increase their purchase ledger efficiencies and reduce their costs  -  BACS charges levied by the banks are much lower than those for clearing cheques.

ACH Debits

BACS Direct Debits are fast becoming the preferred way to pay regular bills so corporate customers will want to set these up against their accounts. 73% of adults in the UK now use them and APACS research suggests their usage is likely to double over the next decade.  The organisations able to make direct debits are known as originators. They must meet the approval of a major bank or building society before they are allowed access to the Direct Debit Scheme. They only have authority to collect amounts authorised by the customer and only on or after a specified and pre-notified date, which forms part of the Direct Debit Guarantee by which they are bound.

Direct Debits are also processed by BACS within a three-day clearing cycle:

D - The company, or originator, (see above) wishing to make the direct debit sends BACS a computerised listing of the bank account, amount and other details of the customers who are to be debited.
D+1 - Very early in the morning, details of the direct debits (and other transactions processed by BACS - direct credits and standing orders) are passed to BACS Member banks and building societies, providing each with a complete list of all their customers' accounts which have to be debited (or credited).
D+2 - The direct debit payers' accounts are debited and the account of the originator is credited simultaneously. The BACS Member banks and building societies settle the values of the transactions across their accounts at the Bank of England.

Cards

Cards are extremely widely used. Customers have multiple cards of the same type. While charge cards like Amex and Diners Club are frequent, the vast majority of cards have linkage to either Visa or Mastercard.

Card issuers are banks, building societies, storechains.

Cards have further linkages such as Delta, Switch, Cashpoint and so on, but the broad principles are:

cards are either debit or credit cards
debit cards are debited straight to a bank account, attract a lower fee for the merchant, and are eligible for Cashback
credit cards require a minimum of 5% of the month’s balance to be paid off, attract high interest on the rest, cost 3-4% to the merchant and are ineligible for Cashback
Both can be used to get cash from ATMs, but the cash drawn off a credit card attracts interest on the card account straight away
There are no ATM charges at present and any card can be used in almost any ATM
EFTPOS is possible in the vast majority of retail outlets
Purchasing card programmes for corporates, with detailed reporting back to the corporate, have become increasingly popular.

Retailers need to set up a relationship with one or more acquirers. Any acquirer will be able to set up an interchange with other card networks so that the retailer can accept Visa, Mastercard, Amex etc., but it is the scale of interchange fees that may induce a retailer to set up multiple relationships.

Account opening for category (c) types will be on a case-by-case basis

Electronic Banking

Electronic Banking is a common feature of banking in the UK, with sophisticated options available to meet diverse customer needs. Access is through a mixture of dial-up software and the Internet options.

Depending on volumes, the following are all possible:

Individual payments on eb, high and low value, domestic and foreign
File transfer
File upload
Host-to-Host link
A major user of BACS will take a third-party software product such as Microgen or Bottomline.

Information reporting can be provided via eb, or in files or Host-to-Host.

Reporting on BACS, cheque and cash activity will be drawn from special reports showing debit and credit totals for the day and allowing drill-down, since the entries to the customer’s account may occur at the end of D+2 rather than the start. If the bank is not a direct member of these clearings, though, the customer may not see the activity on D+2 in time to take the monies into position.

Due to nationwide banking, the reach of the major UK banks and the existence of Bank Giro Credit and Agency arrangements, the corporate customer will usually be in a position where cash balances reside in the same bank at the end of the business day, and in a contained number of current accounts.

For the purposes of investing or borrowing in the money market (which is liquid up to mid-afternoon), the customer will be able to predict his position by collecting:

Previous day reporting
Information on FX, money market and treasury operations settling today
Information feeds on cheque, cash and BACS activity that affects funds availability today
The customer will no doubt try to disposition the “big numbers” into the money market and then allow the residual amounts to be managed inside the system of bank accounts.

Please note that it is customary for related companies, when all are UK incorporated, to register as a tax group with the UK Inland Revenue. As a result they can lend to one another – discreetly or in the context of a zero-balancing system – with no tax issues.

Most cash pooling systems are allowed in the UK, Including zero balancing systems, and notional pooling. In order to satisfy Bank of England regulations, a legal right of set-off must be obtained from each legal entity included in the cash pool, to support notional pooling. This is achieved via Cross-Composite guarantees.

In respect of non-UK resident accounts, the Bank of England has provided for the inclusion of such entities within UK cash pools, subject to the same legal right of set-off requirement. Where a non-UK resident company is included within a cash pool, then both an English Law clause and a legal opinion from each jurisdiction is required to support the pooling arrangement.

Banks offer a range of investment options ranging from the money markets (overnight investment, instant access and fixed term) to open ended investment vehicles.

UK - Legal Entity Types

Legal Entity Types - Mainstream

UK Legal Entity Types - Non-mainstream

Other Legal entity types that exist: