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United Kingdom: Market Profile

Picture: UK factsheet
Picture: UK factsheet

1. Overview

The United Kingdom, a leading trading power and financial centre, is a trillion-dollar economy in Western Europe. As one of five permanent members of the United Nations (UN) Security Council, a founding member of the North Atlantic Treaty Organisation (NATO), and a member of the Commonwealth, the United Kingdom pursues a global approach to foreign policy. Over the past two decades, the government has greatly reduced public ownership. Long-term political, economic and regulatory strength, coupled with relatively low rates of taxation and inflation, are key factors that have made the United Kingdom attractive to foreign investors. Although the United Kingdom continues to attract major inward investment from around the world and retains its top-tier status in business, tertiary education, industrial and scientific research and innovation, the prolonged uncertainty surrounding the country's departure from the European Union (EU) will likely subdue investment and economic growth in the near term.

Sources: World Bank, Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

June 2016
A majority of voters opted for the United Kingdom to leave the EU. Prime Minister David Cameron resigned and was succeeded by Theresa May.

June 2017
Theresa May called early elections that resulted in a hung parliament and a Conservative minority government, supported by an agreement with the main party in Northern Ireland, the Democratic Unionists.

July 2018
Jeremy Hunt became Secretary of State for Foreign and Commonwealth Affairs. Dominic Raab replaced David Davis as Brexit Secretary.

October 2018
In the 2018 Budget statement, the Chancellor of the Exchequer indicated his intention to introduce a tax on search engines, social media platforms and online marketplaces at a rate of 2% on their United Kingdom revenue by April 2020. The aim is to reflect the value they derive from the participation of users in the United Kingdom.

October 2018
The United States aircraft manufacturer Boeing opened its first production facility in Europe in Sheffield.

December 2018
The Office for National Statistics reported that foreign direct investment in the United Kingdom had reached a record high. There was a 300%-plus increase in investments from India. The manufacturing sector was one of the largest growth areas.

January 2019
In the same week that Japan's Prime Minister Shinzō Abe visited London, it was announced that Japanese imports of British lamb and beef could resume after being banned for 23 years, following the EU export ban on British beef in 1996.

January-March 2019
Following several votes by the House of Commons to reject the EU Withdrawal Agreement negotiated by May's government, members of parliament were divided on the way forward and the EU stated that the agreement will not be altered.

March 2019
Despite Brexit uncertainty, Toyota announced plans to build a new hybrid car for Suzuki at two United Kingdom sites beginning in late 2020.

March-April 2019
Having reached the end of the two-year negotiation phase, the United Kingdom was technically able to become a third party and begin fully fledged trade talks with the EU after March 29. However, because the United Kingdom government and House of Commons were unwilling to countenance a so-called 'no-deal' Brexit, the United Kingdom government petitioned the EU for a long Article 50 extension and this was granted until October 31, 2019.

April 2019
According to an annual survey of investment trends by the EY, the United Kingdom became the world's top investment destination in the world, overtaking the United States. Official economic data further shows that despite the weight of uncertainty caused by Brexit the United Kingdom economy is resilient and continues to outperform the eurozone.

May 2019
The United Kingdom government's climate change advisor released a report that recommends the toughest measures in the industrial world – affecting industry, aviation and agriculture – to reduce net emissions to zero by 2050.

May 2019
The loss of more than 1,300 seats in local council elections increased the pressure on May to resign as leader of the Conservative Party. Theresa May announced that she would be stepping down from the post in June 2019.

July 2019
Boris Johnson became the new Prime Minister after becoming the head of the Conservative Party. As one of his first acts, Johnson replaced half of the cabinet and appointed Dominic Raab as the new foreign secretary and Jacob Rees-Mogg as the leader of the House of Commons.

December 2019
The 70th anniversary of NATO would be marked at a special summit to be held in London.

December 2019
An early general election was scheduled for December 12, 2019 as Prime Minister Johnson hopes to secure enough of a majority to easily pass new laws, especially concerning Brexit.

January 2020
The Brexit deadline has been extended to January 31, 2020. Brexit could happen earlier if the negotiated Withdrawal Agreement is passed.

Sources: BBC Country Profile – Timeline, Fitch Solutions, Office for National Statistics, Japan Times, City A.M., Daily Business, Bloomberg, BBC, NATO

3. Major Economic Indicators

Graph: United Kingdom real GDP and inflation
Graph: United Kingdom real GDP and inflation
Graph: United Kingdom GDP by sector (2018)
Graph: United Kingdom GDP by sector (2018)
Graph: United Kingdom unemployment rate
Graph: United Kingdom unemployment rate
Graph: UK current account balance
Graph: UK current account balance

f = forecast
Sources: IMF, World Bank, Fitch Solutions
Date last reviewed: November 8, 2019

4. External Trade

4.1 Merchandise Trade

Graph: United Kingdom merchandise trade
Graph: United Kingdom merchandise trade

Source: WTO
Date last reviewed: November 8, 2019

Graph: United Kingdom major export commodities (2018)
Note: Unclassified products account for USD21.4 billion of exports
Graph: United Kingdom major export commodities (2018)
Note: Unclassified products account for USD21.4 billion of exports
Graph: United Kingdom major export markets (2018)
Graph: United Kingdom major export markets (2018)
Graph: United Kingdom major import commodities (2018)
Note: Unclassified products account for USD13.9 billion of imports
Graph: United Kingdom major import commodities (2018)
Note: Unclassified products account for USD13.9 billion of imports
Graph: United Kingdom major import markets (2018)
Graph: United Kingdom major import markets (2018)

Sources: Trade Map, Fitch Solutions
Date last reviewed: November 8, 2019

4.2 Trade in Services

Graph: United Kingdom trade in services
Graph: United Kingdom trade in services

e = estimate
Source: WTO
Date last reviewed: November 8, 2019

5. Trade Policies

  • The United Kingdom currently participates in the free trade arrangements (FTAs) of the EU and European Free Trade Association, and is a member of the World Trade Organization (WTO). The EU has a common set of tariffs and customs levied on various imports and exports. The Untied Kingdom's trade policy is largely identical to that of the wider regional bloc. The EU updated its trade policy (and its import tariffs, customs, duties and procedures) in 2017. Trade arrangements with the EU are, however, almost certain to change after Brexit.

  • The United Kingdom government has made clear that part of its overall Brexit strategy is to build closer trade relations with non-EU countries. In November 2017, a Trade Bill put in place the legal powers and structures to enable the United Kingdom to operate an independent trade policy, including maintaining United Kingdom businesses' access to public contract opportunities under the WTO Agreement on Government Procurement, and in September 2018 a Taxation Act established a standalone customs regime to ensure that value added tax and excise arrangements operate effectively on the United Kingdom's exit from the EU. The United Kingdom government aims to transition existing EU-third country trade agreements into United Kingdom agreements with those countries. Both Canada and Japan have sent encouraging signals about preserving the status quo, while some countries – such as South Korea and Chile – have indicated they will try to use leverage to improve conditions in any future trade deal. So far the Untied Kingdom is thought to have secured continuity agreements with a minority of countries and regions.

  • The EU is party to some 50 FTAs and, consequently, the United Kingdom's access to the markets of the countries concerned is currently mediated through those agreements. The EU's scheme on generalised system of preferences (GSP) entered into effect on January 1, 2014. Under the scheme, tariff preferences are removed for imports into the EU from countries where per capita income has exceeded USD4,000 for four years in a row. As a result, the number of countries that enjoy preferential access to EU markets was reduced from 176 to less than 80. While Mainland China remains a beneficiary, many of its exports, such as toys, electrical equipment, footwear, textiles, wooden articles, and watches and clocks have already been 'graduated' from the preferential treatment. Hong Kong has been fully excluded from the EU's GSP scheme since May 1, 1998.

  • In 2018, the EU modernised its trade defence instruments in response to EU states' wanting to shield EU producers from damage caused by unfair competition and ensure a level playing field that was fair for businesses. Anti-dumping and anti-subsidies regulations have been amended to better respond to unfair trade practices, and to furnish Europe's trade defence instruments with more transparency, quicker procedures and more effective enforcement. In exceptional cases, such as in the presence of distortions in the cost of raw materials, the EU will be able to impose higher duties through the limited suspension of the lesser duty rule.

  • The European Commission (EC) has introduced an import licensing regime for certain iron, steel and aluminium products exceeding 2.5 tonnes. The regulation will be active until May 15, 2020.

  • Currently, a number of products originating from Mainland China are subject to the EU's anti-dumping duties, including bicycles, bicycle parts, ceramic tiles, ceramic tableware and kitchenware, fasteners, ironing boards and solar glass, which are of interest to Hong Kong and regional exporters. In November 2016, the EC imposed a provisional anti-dumping duty on imports of some primary and semi-processed metals from Mainland China. The rate of duty is between 43.5% and 81.1% of the net, free-at-Union-frontier price before duty, depending on the company. As of October 2019, the EU is not applying any anti-dumping measures on imports from Hong Kong.

  • To combat the spread of the Asian long-horned beetle, the EU introduced emergency controls on wooden packaging material originating in the Chinese mainland in July 1999. Wood covered by the measures must be stripped of its bark and free of insect bore holes greater than 3mm across, or have been kiln-dried to below 20% moisture content.

  • For health reasons, the EU has adopted a directive on the control of the use of nickel in objects intended to be in contact with the skin, such as watches and jewellery. The EU has also adopted a directive to ban the use of some phthalates in certain PVC toys and childcare articles on a permanent basis, which came into effect from January 16, 2007. In addition, the EU has adopted a directive to prohibit the trading of clothing, footwear and other textile and leather articles which contain azo-dyes, from which aromatic amines may be derived.

  • The EU has adopted a number of directives for environmental protection, which may have an impact on the sales of a wide range of consumer goods and consumer electronics. Notable examples include the Directive on Waste Electrical and Electronic Equipment (WEEE), implemented in August 2005, and the Directive on Restriction of Hazardous Substances (RoHS), implemented in July 2006. On December 3, 2008, the EC presented two proposals: one for a recast RoHS Directive and the other for a recast WEEE Directive. The recast RoHS Directive was published on July 1, 2011 and entered into force on January 2, 2013. The directive continues to prohibit EEE that contains the same six dangerous substances as the old RoHS directive. From July 22, 2019, the new Directive will widen the current scope of the previous RoHS Directive by including any EEE that will have fallen out of the old RoHS Directive's scope, with only limited exceptions.

  • The recast WEEE Directive entered into force on August 13, 2012. In brief, the WEEE Directive imposes higher collection/recycling targets (a 45% collection rate as of 2016 and 65% as of 2019) and a wider scope of measure covering essentially all electric and electronic equipment, while establishing producer responsibility as a means of encouraging greener product designs. On the heels of the recast RoHS and WEEE directives, the EU's new framework Directive for setting eco-design requirements for energy-related product (ErP) is now in place. The ErP Directive is no longer limited to only EEE (as it was under its predecessor, the energy-using product Directive), but potentially covers any product that is related to the use of energy, including shower heads and other bathroom fittings, as well as insulation and construction materials.

  • REACH, an EU Regulation which stands for Registration, Evaluation, Authorisation and Restriction of Chemicals, entered into force in June 2007. It requires EU manufacturers and importers of chemical substances (whether on their own, in preparation or in certain articles) to gather comprehensive information on properties of their substances that are produced or imported in volumes of 1 tonne or more per year, and to register such substances prior to manufacturing in or import into the EU.

  • Nine types of goods imported into the EU are subject to licensing. These goods are (broadly) textiles, various agricultural products, iron and steel products, ozone-depleting substances, rough diamonds, waste shipments, harvested timber, endangered species, and drug precursors. No quotas are imposed on textiles and clothing exports, as well as non-textile products exports from Hong Kong and Mainland China at present.

Sources: WTO – Trade Policy Review, UK Department for International Trade, UK Parliament, European Commission, BBC, CBI, Fitch Solutions

6. Trade Agreements

6.1 Trade Updates

To date, the United Kingdom has signed 'continuity' deals with 18 countries and regions, including Chile, Eastern and Southern African states, the Faroe Islands, Switzerland, the Palestinian Authority, Israel, Liechtenstein, the Pacific Islands (Fiji and Papua New Guinea), Caribbean states, Norway and Iceland, Andean states (Colombia, Ecuador and Peru), Central America (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama), South Korea, Lebanon, Tunisia, Southern Africa customs union (Botswana, Eswatini, Lesotho, Namibia and South Africa) and Mozambique, Georgia and Morocco.

6.2 Multinational Trade Agreements

Active

  1. The EU Common Market: The transfer of capital, goods, services and labour between member nations enjoy free movement. The common market extends to the 28 member nations of the EU, namely Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom.

  2. European Economic Area (EEA)-EFTA: This economic integration agreement entered into force on January 1, 1994. The EEA unites the EU member states and the European Free Trade Association states (Iceland, Liechtenstein, Norway and Switzerland) into an internal market governed by the same basic rules. These rules aim to enable goods, services, capital and persons to move freely about the EEA in an open and competitive environment, a concept referred to as the four freedoms. While it enhances trade flows between these countries and the EU, only Switzerland is a fairly major trading partner.

  3. EU-Turkey Customs Union: The EU and Turkey are linked by a customs union agreement which came into force on January 1, 1996. Turkey has been a candidate country to join the EU since 1999 and is a member of the Euro-Mediterranean Partnership. The customs union with the EU provides tariff-free access to the European market for Turkey, benefitting both exporters and importers. Turkey is the EU's fourth-largest export market and its fifth-largest provider of imports. The EU is by far Turkey's number one import and export partner. Turkey's exports to the EU are mostly machinery and transport equipment, followed by manufactured goods. At present, the customs union agreement covers all industrial goods, but does not address agriculture (except processed agricultural products), services or public procurement. Bilateral trade concessions apply to agricultural, coal and steel products. In December 2016, the EC proposed the modernisation of the customs union and to further extend the bilateral trade relations to areas such as services, public procurement and sustainable development.

  4. EU-Canada Comprehensive Economic and Trade Agreement (CETA): CETA is expected to strengthen trade ties between the two regions, having been signed in October 2016 and provisionally come into effect on September 21, 2017. Some 98% of trade between Canada and the EU is duty-free under CETA. The agreement is expected to boost trade between partners by more than 20%. CETA also opens up government procurement. Canadian companies will be able to bid on opportunities at all levels of the EU government procurement market and vice versa. CETA means that Canadian provinces, territories and municipalities are opening their procurement to foreign entities for the first time, albeit with some limitations regarding energy utilities and public transport.

  5. EU-Japan Economic Partnership Agreement (EUJEPA): In July 2018, the EU and Japan signed a trade deal that promises to eliminate 99% of tariffs that cost businesses in the EU and Japan nearly EUR1 billion annually. According to the EC, the EU-Japan Economic Partnership Agreement (EPA) will create a trade zone covering 600 million people and nearly a third of global GDP. The result of four years of negotiation, the EPA was finalised in late 2017 and came into force on February 1, 2019 after the EU parliament ratified the agreement in December 2018. The total trade volume of goods and services between the EU and Japan is an estimated EUR86 billion. The key parts of the agreement will cut duties on a wide range of agricultural products and it seeks to open up services markets, particularly financial services, e-commerce, telecommunications and transport. Japan is the EU's second-biggest trading partner in Asia after Mainland China. EU exports to Japan are dominated by motor vehicles, machinery, pharmaceuticals, optical and medical instruments, and electrical machinery. As things currently stand, the United Kingdom will only benefit from EUJEPA until January 2020 before it has to try to conclude a rollover agreement with Japan.

  6. EU-Southern African Development Community (SADC) EPA (Botswana, Lesotho, Mozambique, Namibia, South Africa and Eswatini): An agreement between EU and SADC delegations was reached in June 2016 and entered into force in October 2016 for five SADC members, joined by a sixth in February 2018 following the ratification of the agreement by Mozambique. The remaining six members of SADC not included in the deal (the Democratic Republic of the Congo, Madagascar, Malawi, Mauritius, Zambia and Zimbabwe) are seeking economic partnership agreements with the EU as part of other trading blocs – such as with East or Central African communities.

Provisionally Active

  1. The CETA: The CETA is an agreement between the EU and Canada. CETA was signed in October 2016 and ratified by the Canadian House of Commons and EU Parliament in February 2017. However, the agreement has not been ratified by every European state and has only provisionally entered into force.

  2. EU-Central America Association Agreement (Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica, Panama, Belize and the Dominican Republic): An agreement between the parties was reached in June 2012 and is awaiting ratification (30 of the 34 parties have ratified the agreement as of October 2019). The agreement has been provisionally applied since August 2013.

Ratification Pending

  1. EU-Central America Association Agreement (Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica, Panama, Belize and the Dominican Republic): An agreement between the parties was reached in June 2012 and is awaiting ratification (30 of the 34 parties have ratified the agreement as of 2019). The agreement has been provisionally applied since August 2013.

  2. EU-MERCOSUR: The EU and Mercosur (Argentina, Brazil, Paraguay and Uruguay) signed a trade deal on June 28, 2019, after 20 years of negotiations. The trade agreement for goods and services will cover nearly 25% of global GDP and almost 800 million people. The deal is expected to cut duties on EU exports to Mercosur by EUR4 billion annually and eliminate tariffs on 93% of Mercosur's exports to the EU and 91% of EU exports to Mercosur states. The deal will also include access to public procurement contracts. Mercosur states will greatly benefit from increased access to the EU for agricultural goods, which has resulted in opposition to the deal by European farmers. European firms, especially those in the manufacturing and industrial sector, will have an advantage over other competitors after the removal of high tariffs.

Under Negotiation

  1. EU-Australia: The EU, Australia's second-largest trade partner, has launched negotiations for a comprehensive trade agreement with Australia. Bilateral trade in goods between the two partners has risen steadily in recent years, reaching almost EUR48 billion in 2017, and bilateral trade in services added an additional EUR27 billion. The negotiations aim to remove trade barriers, streamline standards and put European companies exporting to or doing business in Australia on an equal footing with those from countries that have signed up to the Trans-Pacific Partnership or other trade agreements with Australia. The Council of the EU authorised opening negotiations for a trade agreement between the EU and Australia on May 22, 2018.

  2. EU-United States Trans-Atlantic Trade and Investment Partnership (TTIP): This agreement was expected to increase trade in goods and services, but talks were suspended at the end of 2016. In January 2019, the EC published its draft negotiating directives, which include a trade agreement focused on the removal of tariffs on industrial goods, excluding agriculture. On April 15, 2019, EU member states gave the EC their approval to start formal negotiations. The negotiating directives for the Trans-Atlantic Trade and Investment Partnership are no longer relevant.

  3. EU-Vietnam FTA: In July 2018, the EU and Vietnam agreed on final texts for the EU-Vietnam FTA and the EU-Vietnam Investment Protection Agreement. The EU describes the agreement as the most ambitious it has ever concluded with a developing country, expecting it to increase EU exports to Vietnam by around 29% and Vietnam's exports to the EU by around 18%. As of October 2019, the final text of the agreement has been finalised and is awaiting signature and conclusion.

Active, Under Re-Negotiation

  1. The United Kingdom joined the European Economic Community (as it then was) on January 1, 1973, along with Denmark and Ireland. The EU, as it has become, now comprises 28 member states and the United Kingdom currently follows the EU's common external trade policy and measures, which enables it to benefit from tariff-free trade with the 27 other member states across Europe. These 28 member nations constitute a 'common market' in which the transfer of capital, goods, services or labour between member nations enjoys 'free movement'. Meanwhile, 19 EU members – including Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain – have adopted the euro as their legal tender.

  2. On March 29, 2017, the Untied Kingdom initiated the formal process of withdrawing from the EU. Under EU rules, the United Kingdom and the EU have two years to negotiate the terms of the United Kingdom's withdrawal. A withdrawal agreement has been agreed between the United Kingdom and the EU, but by March 29, 2019, United Kingdom parliament had not passed it. Therefore, as of October 2019, the United Kingdom government has been granted an extension until January 31, 2020, in the hope parliament will pass the agreement and negotiations can begin on the future relationship between the United Kingdom and the EU.

Sources: WTO Regional Trade Agreements database, European Commission, Bruegel, UK Government, BBC, Institute for Government, CBI, Fitch Solutions

7. Investment Policy

7.1 Foreign Direct Investment

Graph: United Kingdom FDI stock
Graph: United Kingdom FDI stock
Graph: United Kingdom FDI flow
Graph: United Kingdom FDI flow

Source: UNCTAD
Date last reviewed: November 8, 2019

7.2 Foreign Direct Investment Policy

  1. The United Kingdom actively encourages foreign direct investment (FDI). The United Kingdom imposes few impediments to foreign ownership and throughout the past decade has been Europe's top recipient of FDI. The Untied Kingdom government is a strong defender of the rights of any British-registered company, irrespective of its nationality of ownership.

  2. The United Kingdom is well supported by sophisticated financial and professional services industries and has a transparent tax system in which local and foreign-owned companies are taxed alike. The British pound is a free-floating currency with no restrictions on its transfer or conversion. Exchange controls restricting the transfer of funds associated with an investment into or out of the United Kingdom do not exist.

  3. As in all other EU member countries, foreign equity ownership in the air transportation sector is limited to 49% for investors from outside of the EEA. Foreign ownership is limited in only a few strategically privatised companies, such as Rolls Royce (aerospace) and BAE Systems (aircraft and defence). No individual foreign shareholder may own more than 15% of these companies. Theoretically, the government can block the acquisition of manufacturing assets from abroad by invoking the Industry Act 1975, but it has never done so. Investments in energy and power generation require environmental approvals. Certain service activities (like radio and land-based television broadcasting) are subject to licensing.

  4. The United Kingdom requires that at least one director of any company registered in the United Kingdom must be ordinarily resident in the United Kingdom. The United Kingdom, as a member of the Organisation for Economic Cooperation and Development (OECD), subscribes to the OECD Codes of Liberalisation, committed to minimal limits on foreign investment.

  5. Although the United Kingdom does not have a formalised investment review body to assess the suitability of foreign investments in areas of national security sensitivity, an ad hoc investment review process does exist and is led by the relevant government ministry with regulatory responsibility for the sector in question (for example, the Department for Business, Energy and Industrial Strategy, which would have responsibility for the review of investments in the energy sector).

  6. The United Kingdom government seeks to facilitate investment by offering overseas companies access to widely integrated markets. Proactive policies encourage international investment through administrative efficiency. The online business registration process is clearly defined, although some types of companies cannot register as an overseas firm in the United Kingdom, including partnerships and unincorporated bodies. Registration as an overseas company is only required when it has some degree of physical presence in the United Kingdom. After registering a business with the United Kingdom government, overseas firms must register for corporation tax within three months.

  7. The Industry Act (1975) enables the United Kingdom government to prohibit transfer to foreign owners of 30% or more of important United Kingdom manufacturing businesses if such a transfer would be contrary to the interests of the country.

  8. The United Kingdom has concluded more than 100 bilateral investment treaties (BITs), which are known in the United Kingdom as Investment Promotion and Protection Agreements (IPPAs). These agreements cover a number of states in Asia, Europe, Latin America and Africa. Of these, several have been terminated, but 94 are in force and 11 others are signed, but not yet in force. The United Kingdom has also signed Treaties with Investment Provisions (TIPs) with 78 countries or economic blocs.

  9. In the United Kingdom, expropriation of corporate assets or the nationalisation of industry requires a special act of parliament. A number of key United Kingdom banks became subject to full or part-nationalisation from early 2008 as a response to the financial crisis and banking collapse. In the event of nationalisation, the government follows customary international law by providing prompt, adequate and effective compensation.

  10. The United Kingdom does not impose forced data localisation rules and does not require foreign IT firms to turn over source code. The Investigatory Powers Act became law in November 2016 addressing encryption and government surveillance. It permitted the broadening of capabilities for data retention and the investigatory powers of the state related to data. As of May 2018, companies operating in the United Kingdom need to comply with the EU General Data Protection Regulation. The GDPR will have a significant impact on the business practices of companies operating in the United Kingdom. The extent to which the United Kingdom will maintain the requirements of the GDPR after the United Kingdom withdraws from the EU is unknown at this time.

  11. The United Kingdom Department for International Trade has a Global Entrepreneur Programme to help overseas-based business people to set up in the United Kingdom, as well as the Sirius Programme, which is aimed at graduate entrepreneurs from around the world looking to start their business venture in the United Kingdom.

Sources: WTO – Trade Policy Review, International Trade Administration, UNCTAD, UK Government

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
Research and Development (R&D) incentivesSmall- to medium-sized enterprises are entitled to a deduction equal to 230% of the qualifying expenditure on R&D in the year in which it is incurred, which can be surrendered for a cash payment (at a rate of GBP33.35 for each GBP100 of qualifying R&D spend) by companies that are trading at a loss or have not yet started to trade. Large companies are granted an R&D 'above the line' tax credit of 12% (increased from 11% from January 1, 2018) of their qualifying expenditure. Where the taxable profits can be attributed to the exploitation of patents, a lower effective rate of corporation tax applies. For 2018-2019, the rate is 10%. Profits can include a significant part of the trading profit from the sales of a product that includes a patent, not just income from patent royalties. This scheme closed to new entrants in June 2016 (but will continue until 2021 for existing taxpayers) when a new arrangement was introduced. The new scheme retains several of the features of the earlier scheme, but focuses more on United Kingdom-based activities and meets revised principles from the Organisation for Economic Cooperation and Development.
Regional incentivesThe Department of International Trade actively promotes foreign direct investment and prepares market information for a variety of industries. The United Kingdom offers a range of incentives for companies of any nationality locating to depressed regions of the country, as long as the investment generates employment. The state authorities work with partner organisations in the devolved administrations – Scottish Development International, the Welsh government and Invest Northern Ireland – and with London and Partners and Local Enterprise Partnerships throughout England, to promote each region's particular strengths and expertise to overseas investors. Local authorities in England and Wales also have power under the Local Government and Housing Act of 1989 to promote the economic development of their areas through a variety of assistance schemes, including the provision of grants, loan capital, property or other financial benefits. Separate legislation, granting similar powers to local authorities, applies to Scotland and Northern Ireland. Where available, both domestic and overseas investors may also be eligible for loans from the European Investment Bank.
Other incentivesAll businesses, regardless of size, can claim an annual investment allowance of 100% on the first GBP200,000 tranche per annum of capital expenditure incurred on the most qualifying expenditure. From January 1, 2019, this has been temporarily increased to GBP1,000,000 for two years. This is restricted to a single allowance for groups of companies or associated businesses. A deduction equal to 150% of the qualifying expenditure on the remediation of contaminated or derelict land is given in the year incurred, which can be surrendered for a cash payment (at a rate of GBP24 for each GBP100 of qualifying land remediation spend) by companies that are trading at a loss.

There are special tax reliefs available for certain expenditure on Untied Kingdom film production, high-end television, animation, video games, theatres, orchestras, and museum and gallery exhibitions. There are no tax holidays and no other special foreign investment incentives in the United Kingdom.

Sources: HM Revenue & Customs, Fitch Solutions

8. Taxation – 2019

  • Value Added Tax: 20%
  • Corporate Income Tax: 19%

Source: HM Revenue & Customs

8.1 Important Updates to Taxation Information

  • The United Kingdom's corporate tax system has been extensively reformed in recent years to create a system that is easy to understand, simple to engage with and hard to evade. The reformed system is also intended to ensure that the United Kingdom remains a competitive global economy, where business investment is supported and hard work encouraged. There has been increased use of digital tax-collection systems and a significant amount of policy reform measures have been introduced to curb tax evasion and unacceptable tax avoidance.

  • The rate of corporation tax is 19% for both large and small companies. Legislation has been enacted to further decrease the rate to 17%, effective from April 1, 2020. The main rate of corporation tax for ring-fence profits (that is, profits from oil extraction and oil rights in the United Kingdom and the United Kingdom continental shelf) is 30% (small profits rate of 19%). The rates for ring-fence profits are not scheduled to change.

  • The United Kingdom has ratified its agreement to the OECD's multilateral convention to implement tax treaty-related measures to prevent base erosion and profit shifting (BEPS). The means to do this is known as the multilateral instrument or MLI, which entered into force in the United Kingdom on October 1, 2018, and will have a fundamental impact on how taxpayers access the double tax treaties (DTTs) to which it applies (for withholding taxes from January 1, 2019, and for corporation tax from April 6, 2019). The precise date of DTTs affected will vary depending on whether treaty partners have ratified with the OECD.

  • Specifics on all major changes on treatment of tax are subject to developments as a consequence of the United Kingdom leaving the EU.

8.2 Business Taxes

Type of TaxTax Rate and Base
Corporate Income Tax (CIT)
19% (but where the taxable profits can be attributed to the exploitation of patents, a lower rate of 10% applies).
Profits that arise from oil or gas extraction, or oil or gas rightsSubject to a full rate of 30% and a small profit rate of 19%
Banking Sector TaxAs well as normal CIT, a supplementary tax is applicable to the banking sector at 8% on profits in excess of GBP25 million, and carried forward trading losses are restricted.
Bank levy- 0.16% of a bank's short-term relevant liabilities

- 0.08% of long-term equity and liabilities

- Staged reductions are proposed by 2021 to 0.10% and 0.05% respectively
Digital Services TaxFrom April 2020 a tax of 2% will be levied on the United Kingdom revenue of certain digital businesses with global revenue of more than GBP500 million.
Capital Gains TaxGains on capital assets are taxed at the normal corporation tax rates.
Diverted Profits Tax (DPT)DPT is separate from other corporate taxes. It is levied at 25% (or 55% in the case of United Kingdom ring-fence operations; that is, broadly oil-extraction operations) on diverted profits (as defined) and may apply in two circumstances: where groups create a tax benefit by using transactions or entities that lack economic substance (as defined); and/or where foreign companies structure United Kingdom activities to avoid a United Kingdom permanent establishment.
Withholding TaxFor both residents and non-residents, generally the rate is 0% on dividend income and 20% on both royalties and interest, though treaties may mean different rates for non-resident recipient corporations and individuals.
VAT
- Standard rate of 20%

- A lower rate of 5% applies to some goods and services, like home energy

- Most foodstuffs, medicines, transport, books and publications are zero rated
Stamp Duty Reserve Tax0.5%, imposed on transfers of shares, securities and interests in certain partnerships
Stamp Duty Land Tax (SDLT)- Acquisitions of non-residential or mixed land and buildings in England, Wales and Northern Ireland are charged SDLT at rates of up to 5%.

- Acquisitions of residential property by companies and similar non-natural persons and by individuals acquiring second homes are charged at rates of up to 15% (whereas acquisitions by individuals who do not own any other properties or who are replacing their main residence are capped at 12%).

- Grants of new commercial leases or residential leases are charged SDLT at 1% of the net present value of the rents payable in excess of GBP150,000.

- Land and buildings in Scotland and Wales are subject to transactions tax in place of SDLT.

- Rates are graduated up to 12% (or up to 15% where the additional 3% for second homes or buy-to-lets applies).
Social security contribution- Employers pay 13.8% national insurance contributions on all earnings above GBP162 per week.

- Employers are exempt from the first GBP3,000 per annum.
Apprenticeship levyEmployers pay 0.5% of their total payroll in excess of GBP3 million to create a fund to support apprenticeships.

Source: HM Revenue & Customs
Date last reviewed: November 8, 2019

9. Foreign Worker Requirements

9.1 Foreign Worker Permits

United Kingdom employers are now required to pay an Immigration Skills Charge for employing Tier 2 General and Tier 2 ICT migrant workers, with some exceptions. The exact amount depends on the type of visa, where you are and the occupation, but may amount to more than GBP1,400. The Tier 2 Minister of Religion category applies to individuals coming to the United Kingdom as religious workers for religious organisations. Individuals coming to the United Kingdom under this category are required to meet the English language requirement at Level B2.

Immigration rules (HC1888) – which came into effect on April 6, 2012 – have wide-ranging implications for foreign employees, primarily affecting businesses looking to sponsor migrants under Tier 2 as well as migrants looking to apply for settlement in the United Kingdom. In particular, the United Kingdom government has introduced a 12-month cooling-off period for Tier 2 General applications similar to the one that is currently in place for Tier 2 Intra-Company Transfers. As a result, those who enter the Untied Kingdom under a Tier 2 General visa to work for one company will be able to apply in-country under this visa to work for another company. If they leave the United Kingdom, they will not be able to apply to re-enter the Untied Kingdom under a fresh Tier 2 General visa until 12 months after their previous Tier 2 General permission has expired.

In addition, those who enter the United Kingdom under a Tier 2 Intra-Company Transfer visa after April 6, 2011, will not be able to change their status in-country to a Tier 2 General visa under any circumstances. If they leave the Untied Kingdom, they will also not be able to apply to enter the Untied Kingdom under the Tier 2 General visa until 12 months after their previous Intra-Company Transfer permission has expired. These provisions represent a significant tightening of the Tier 2 requirements. One of the consequences is that where an individual is sent to the Untied Kingdom on assignment under an Intra-Company Transfer permit, and the sponsoring company subsequently wishes to hire them permanently in the United Kingdom, they will not be able to apply either to remain in the United Kingdom under a Tier 2 General visa or leave the United Kingdom and submit a Tier 2 General application overseas. This change will mean that employers will have to carefully consider the long-term plans for all assignees that they send to the United Kingdom and whether the Tier 2 Intra-Company Transfer is the most appropriate category. If the assignee is subsequently required in the United Kingdom on a long-term basis, it will not be possible for them to make a new application under a Tier 2 General visa until at least 12 months after their Tier 2 Intra-Company Transfer permission has expired.

In 2016, the British government increased the Tier 2 minimum salary threshold to GBP30,000 for experienced workers. This change was phased in, with the minimum threshold increased to GBP25,000 in fall 2016 and to GBP30,000 in April 2017. The minimum threshold for new entrants will remain at GBP20,800. Employers will continue to be able to recruit non-EEA graduates of United Kingdom universities without first testing the resident labour market and without being subject to the annual limit on Tier 2 General visas, which will remain at 20,700 places per year. Additionally, it shall give extra weighting within the Tier 2 General limit to businesses sponsoring overseas graduates, and will allow graduates to switch roles within a company once they have secured a permanent job at the end of their training programme.

9.2 Localisation Requirements

The United Kingdom government does not mandate stringent local employment rules, although at least one director of any company registered in the United Kingdom must be ordinarily resident in the United Kingdom.

The Untied Kingdom invoked Article 50 of the Lisbon Treaty on March 29, 2017, thereby triggering a two-year period in which the United Kingdom is set to negotiate new relationships with the EU and its member states, covering areas including immigration and trade. Notably, the ability of EEA nationals to live and work in the United Kingdom will continue unimpeded at least until the United Kingdom formally exits the EU, which has now been delayed until January 31, 2020, or earlier if the negotiated Withdrawal Agreement is passed. It is expected that EEA nationals who are currently living and working in the United Kingdom will be permitted to stay once the United Kingdom has left the EU, but this is subject to a final agreement between the United Kingdom and the EU. It is also unclear whether EEA nationals who seek to enter the United Kingdom after the United Kingdom has left the EU will be required to obtain work permission and, if so, whether they will need to do so on the same terms as non-EEA nationals. The Untied Kingdom government has set up an EU Settlement Scheme, which is granting eligible applicants settled status to remain in the United Kingdom after Brexit.

9.3 Entry Requirements

In general, to enter the United Kingdom, visitors must have a travel document (in most cases a passport) that is usually required to be valid for six months after the proposed return date. Regardless of the duration or purpose of their visit, nationals of certain countries must obtain entry clearance (a visa) before travelling to the Untied Kingdom. Individuals from the relevant countries are commonly known as 'visa nationals'. In contrast, 'non-visa nationals' are not required to obtain entry clearance if travelling to the United Kingdom as visitors or business visitors (performing certain activities) for a period not exceeding six months. If the purpose of the visit is for work or employment, individuals (including non-visa nationals) must obtain appropriate entry clearance before travelling to the United Kingdom.

The United Kingdom government has introduced an immigration health surcharge (separate from the visa fee). The surcharge is payable by most non-EEA migrants coming to the United Kingdom for more than six months (to live, work or study), with exemptions available in some cases. The surcharge is set at GBP200 per year for the main applicant and each dependent, and GBP150 per year for a student.

Individuals coming to the Untied Kingdom as tourists or business visitors are normally granted admission for a period of six months. The rules regarding business visitors are complex and should be considered on a case-by-case basis. In general, business visitors are prohibited from working while in the United Kingdom or receiving a salary in the United Kingdom. However, they are allowed to attend meetings, transact business and negotiate contracts with United Kingdom companies. It is advisable that an individual planning to come to the United Kingdom as a business visitor have a letter from his or her employer stating the purpose and duration of the visit. The Untied Kingdom government has identified specific categories of individuals who are permitted to perform paid activities in the United Kingdom.

Nationals of all EEA member countries, except Croatia, have full rights of free movement in the United Kingdom and do not require a work permission in order to work. Their dependents, including a spouse or civil partner, children and grandchildren who are under 21 years of age and parents or grandparents, may join them in the United Kingdom, and enjoy a right of residence. For the purposes of entry on the grounds of employment, the list of countries extends to Switzerland even though the country is not a member of the EEA. Nationals of EEA countries have varying degrees of access to the United Kingdom labour market.

Sources: UK Government, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
Aa2 (Negative)08/11/2019
Standard & Poor'sAA (Negative)
27/06/2016
Fitch Ratings
AA (Rating watch, negative)18/10/2019

Sources: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201820192020
Ease of Doing Business Index
7/190
9/1908/190
Ease of Paying Taxes Index
23/19023/19027/190
Logistics Performance Index
9/160N/AN/A
Corruption Perception Index
11/180N/AN/A
IMD World Competitiveness20/6323/63N/A

Sources: World Bank, IMD, Transparency International, Fitch Solutions

10.3 Fitch Solutions Risk Indices


World Ranking
201720182019
Economic Risk Index RankN/A19/20215/201
Short-Term Economic Risk Score
67.668.271.0
Long-Term Economic Risk Score7474.476.2
Political Risk Index RankN/A10/20223/201
Short-Term Political Risk Score75.872.767.9
Long-Term Political Risk Score88.988.982.7
Operational Risk Index RankN/A8/2019/201
Operational Risk Score77.277.576.7

Source: Fitch Solutions
Date last reviewed: November 8, 2019

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK
The economy will perform poorly in 2019, held back by soft business investment and weaker growth in key trading partners. Subdued investment, elevated economic uncertainty, deleveraging pressures, rising inflation and weak nominal wage growth will underpin a slowdown in economic growth in the coming quarters. The economy has remained resilient since the June 2016 referendum and initial recession fears have proven unfounded. However, falling real incomes will undermine private consumption as the main driver of growth in coming years. The highly uncertain outcome of Brexit remains the key risk to the outlook. The United Kingdom continues to run a sizeable fiscal and current account deficit, posing some financing risks if downside risks materialise and capital flight accelerates in the coming quarters on the back of elevated uncertainty about Brexit. The risk of capital flight and rapid exchange rate depreciation have eased following a gradual tightening of the monetary policy from the Bank of England. Overall, despite ongoing Brexit-related uncertainty, the United Kingdom's safe haven status is intact, and a balance of payments crisis remains a relatively remote risk.

OPERATIONAL RISK
Although the economy will see downside risks over a multi-year horizon as Brexit-related economic restructuring and labour shortages start to take shape, the risk of a sharp correction is limited. This is because the Untied Kingdom is one of the most globalised economies among developed states, with a world-leading financial services sector and deep and liquid domestic markets. The improvement in global economic conditions will provide much-needed tailwinds to growth and the business environment. The government's reform agenda, if successful, could see the United Kingdom economy become more competitive and dynamic over the longer term compared to its European peers. The United Kingdom vote to leave the EU offers an opportunity for the United Kingdom to deepen trade ties with higher growth markets globally, at more favourable terms as new bilateral trade deals are negotiated. The ease of doing business in the United Kingdom will be impacted by the outcome of Brexit negotiations in the quarters ahead.

Source: Fitch Solutions
Data last reviewed: November 1, 2019

10.5 Fitch Solutions Political and Economic Risk Indices

Graph: United Kingdom short term political risk index
Graph: United Kingdom short term political risk index
Graph: United Kingdom long term political risk index
Graph: United Kingdom long term political risk index
Graph: United Kingdom short term economic risk index
Graph: United Kingdom short term economic risk index
Graph: United Kingdom long term economic risk index
Graph: United Kingdom long term economic risk index

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Economic and Political Risk Indices
Date last reviewed: November 8, 2019

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
United Kingdom Score76.7
71.4
79.0
78.2
78.2
Developed States Average72.664.671.377.177.4
Developed States Position (out of 27)7
7
1
15
17
Global Average49.750.349.849.349.2
Global Position (out of 201)9
9
418
20

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index

Graph: United Kingdom vs global and regional averages
Graph: United Kingdom vs global and regional averages
Country/Region
Operational Risk Index
Labour Market Risk Index
Trade and Investment Risk IndexLogistics Risk IndexCrime and Security Risk Index
Denmark80.4
74.8
76.2
88.582.3
Switzerland78.875.1
77.6

79.3

83.2
Netherlands78.466.0
78.288.880.7
United States77.981.375.385.869.3
Sweden77.867.778.186.778.6
New Zealand77.673.7
75.772.888.3
United Kingdom76.771.479.078.278.2
Canada76.674.375.4
75.181.6
Norway76.364.072.281.287.9
Finland74.655.874.184.783.7
Austria74.460.871.983.581.5
Ireland
73.566.878.070.479.0
Luxembourg73.454.277.682.479.3
Germany72.265.569.080.873.6
Australia72.067.872.168.379.9
Japan71.772.465.577.571.5
France71.660.171.182.672.8
Liechtenstein71.659.878.165.083.2
Iceland71.460.667.269.988.1
Spain71.259.468.980.576.0
Belgium71.1
58.272.882.371.1
Portugal69.651.766.581.678.4
Isle of Man67.669.162.456.682.4
Israel
67.271.464.670.162.7
Malta65.154.969.062.973.7
Italy
63.654.559.776.164.3
Greece58.2
54.249.269.859.6
Developed Markets Averages72.664.671.377.177.4
Global Markets Averages49.750.349.849.349.2

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: November 8, 2019

11. Hong Kong Connection

11.1 Hong Kong’s Trade with the United Kingdom

Graph: Major export commodities to UK (2018)
Graph: Major export commodities to UK (2018)
Graph: Major import commodities from UK (2018)
Graph: Major import commodities from UK (2018)

Note: Graph shows the main Hong Kong exports to/imports from the United Kingdom (by consignment)
Date last reviewed: November 8, 2019

Graph: Merchandise exports to UK
Graph: Merchandise exports to UK
Graph: Merchandise imports from UK
Graph: Merchandise imports from UK

Note: Graph shows Hong Kong exports to/imports from the United Kingdom (by consignment)
Exchange Rate HK$/US$, average
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
7.83 (2018)
Sources: Hong Kong Census and Statistics Department, Fitch Solutions
Date last reviewed: November 8, 2019


2018
Growth rate (%)
Number of United Kingdom citizens visiting Hong Kong572,739
3.1
Number of European residents visiting Hong Kong1,961,4481.7

Source: Hong Kong Tourism Board
Date last reviewed: November 8, 2019


2017
Growth rate (%)
Number of United Kingdom citizens residing in Hong Kong17,942
1.6
Number of developed state citizens residing in Hong Kong65,6801.6

Source: United Nations Population Division – Department of Economic and Social Affairs, Fitch Solutions
Date last reviewed: November 8, 2019

11.2 Commercial Presence in Hong Kong


2019
Growth rate (%)
Number of United Kingdom companies in Hong Kong7130.1
- Regional headquarters141
2.9
- Regional offices206
-5.9
- Local offices366
2.8

Sources: Business Expectation Statistics Section of the Hong Kong Census and Statistics Department, Fitch Solutions

11.3 Treaties and agreements between Hong Kong and the United Kingdom

  1. Double Taxation Agreement between Hong Kong and the United Kingdom (effective date: December 20, 2010)
  2. IPPA between Hong Kong and the United Kingdom (effective date: April 12, 1999)
  3. BIT between Hong Kong and the Untied Kingdom (effective date: April 12, 1999)
  4. Double Taxation Agreement between Mainland China and the United Kingdom (effective date: December 13, 2013)
  5. BIT between Mainland China and the United Kingdom (effective date: May 15, 1986)

Sources: Hong Kong Department of Justice, Hong Kong Trade and Industry Department, UNCTAD

11.4 Chamber of Commerce or Related Organisations

The British Chamber of Commerce in Hong Kong
Address: Room 1201, Emperor Group Centre, 288 Hennessy Road, Wan Chai, Hong Kong
Email: info@britcham.com
Tel: (852) 2824 2211
Fax: (852) 2824 1333

Sources: The British Chamber of Commerce in Hong Kong, Fitch Solutions

British Consulate-General in Hong Kong
Address: 1 Supreme Court Road, Admiralty, Hong Kong
Contact Form: Click here
Tel: (852) 2901 3000
Fax: (852) 2901 3008

Sources: British Consulate-General in Hong Kong, Fitch Solutions

11.5 Visa Requirements for Hong Kong Residents

Visa-free access for 180 days available.

Source: UK Government
Date last reviewed: November 8, 2019

Content provided by Picture: Fitch Solutions – BMI Research
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