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Diplomacy in Action

2013 Investment Climate Statement - United Kingdom


2013 Investment Climate Statement
Bureau of Economic and Business Affairs
February 2013
Report
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Openness to Foreign Investment

The United States remains the primary source of foreign direct investment (FDI) into the UK. In FY 2011-2012, the United States contributed 24% of all inward investment projects to the UK and over 30% of all inward investment-generated jobs. In 2011, the United States contributed FDI inflows of USD 227 billion, an increase of 15% from 2010. The UK was the world's seventh largest recipient of foreign direct investment in 2011, slipping from fifth position in 2012, receiving USD 53.9 billion, according to the United Nations Conference on Trade and Development (UNCTAD). Despite the drop in ranking, however, inflows increased 7 percent over 2011. The UK attracted 17 percent of all European Union (EU) FDI inflows, the highest percentage for a single EU country, but this position is being challenged, with Germany’s share of FDI rising for the fifth year in a row to reach 15 percent.

With a few exceptions, the UK does not discriminate between nationals and foreign individuals in the formation and operation of private companies. U.S. companies establishing British subsidiaries generally encounter no special nationality requirements on directors or shareholders, although at least one director of any company registered in the UK must be ordinarily resident in the UK. Once established in the UK, foreign-owned companies are treated no differently from UK firms. Within the EU, the British Government is a strong defender of the rights of any British- registered company, irrespective of its nationality of ownership.

Market entry for U.S. firms is greatly facilitated by a common language, legal heritage, and similar business institutions and practices. Long-term political, economic, and regulatory stability, coupled with relatively low rates of taxation and inflation make the UK particularly attractive to foreign investors. The Coalition Government, formed between Conservatives and Liberal Democrats in May 2010, is committed to economic reforms, including privatization, deregulation, and support for competition. Both political parties in the coalition believe in a liberal economic policy.

The UK imposes few impediments to foreign ownership. The UK subscribes to the OECD Codes of Liberalization of Capital Movements and of Current Invisible Operations, as well as the OECD National Treatment Instrument.

U.S. companies have found that establishing a base in the UK is an effective means of accessing the European Single Market, and the abolition of most intra-European trade barriers enables UK-based firms to operate with relative freedom throughout the EU. Many U.S. companies have operations in the UK, including all top 100 of Fortune 500 firms. The UK hosts more than half of the European, Middle Eastern and African corporate headquarters of American-owned firms.

Taxation

Local and foreign-owned companies are taxed alike. Inward investors may have access to certain EU and UK regional grants and incentives that are designed to attract industry to areas of high unemployment, but no tax concessions are granted. The UK taxes corporations 24 percent on profits over GBP 1.5 million (USD 2.4 million). Small companies are taxed at a rate of 20 percent for profits up to GBP 300,000 (USD 471,000) and marginal tax relief is granted on profits between these thresholds. Tax deductions are allowed for expenditure and depreciation of assets used for trade purposes. These include machinery, plant, industrial buildings, and assets used for research and development. A special rate of 20 percent is given to unit trusts and open-ended investment companies.

Corporate Tax rates for 2008–2012

 

2008–2010

2011

2012

Small profits rate

21%

20%

20%

Small profits upper limit

£300,000

£300,000

£300,000

Marginal relief limits

£300,001 – £1,500,000

£300,001 – £1,500,000

£300,001 – £1,500,000

Main rate

28%

26%

24%

The UK government announced an increase in the tax levied on North Sea oil and gas production in April 2011. The increase in the levy was not pre-announced or consulted, and oil and gas producers in the region, as well as the Scottish Executive (many of the jobs and revenues associated with North Sea energy extraction are generated in Scotland), complained that they had not been consulted and that investment in the region would be curtailed. Investment decisions were delayed at the time, but the continued high level of the oil price has meant that new North Sea energy extraction continues.

The UK has a simple system of personal income tax. The basic income tax rate is 20 percent on income over a personal tax free allowance of GBP 8,105 (USD 13,010) and less than GBP 34,371 (USD 55,172). For earnings over GBP 100,000 (USD 160,500) and less than GBP 116,210 (USD 186,517), the tax free allowance is reduced by GBP 1 for every GBP 2 of over additional income. As part of the Coalition Government's plan to reduce the significant UK budget deficit, tax rates on income over GBP 35,000 will increase from 40 to 45 percent as of April 2013UK citizens also make mandatory payments of about 12 percent of income into the National Insurance system, which funds social security and retirement benefits. The UK requires non-domiciled residents of the UK to either pay tax on their worldwide income or the tax on the relevant part of their remitted foreign income being brought into the UK. If they have been resident for 7 years or more, and they choose to pay tax only on their remitted earnings, they may be subject to an additional charge of GBP 30,000 (USD 48,141).

The Scottish Parliament has the legal power to increase or decrease the basic income tax rate in Scotland, currently 20 percent, by a maximum of 3 percentage points. The Scottish Government has been opposed to a rise in tax. However, in practice HM Revenue & Customs (HMRC) admitted to the Scottish Cabinet Secretary for Finance in 2010 that the computer systems between Scotland and the HMRC are incapable of processing collections that fall under this category of devolved taxation power.

British Overseas Territories

The British Overseas Territories (BOTs) comprise Anguilla, British Antarctic Territory, Bermuda, British Indian Ocean Territory, British Virgin Islands, Cayman Islands, Falkland Islands, Gibraltar, Montserrat, Pitcairn Islands, St. Helena and its dependencies Ascension and Tristan da Cunha, Turks and Caicos Islands, South Georgia and South Sandwich Islands, and Sovereign Base Areas on Cyprus. The BOTs retain a substantial measure of responsibility for their own affairs. Local self-government is usually provided by an Executive Council and elected legislature. Governors or Commissioners are appointed by the Crown on the advice of the British Foreign Secretary, and retain responsibility for external affairs, defense, and internal security. However, the UK imposed direct rule on the Turks and Caicos Islands in August 2009 after an inquiry found evidence of corruption and incompetence. Its Premier was removed and its constitution was suspended. The UK restored Home Rule following elections in November 2012.

The UK's Department for International Development (DFID) is committed to “help to provide an improved environment for economic and social development and promote self-sustainability” of the BOTs. Many of the territories are now broadly self-sufficient. However, DFID maintains development assistance programs in St. Helena, Montserrat and Pitcairn, including budgetary aid to meet the islands' essential needs and development assistance to help encourage economic growth and social development. Other BOTs receive small levels of assistance through "cross-territory" programs for issues such as environmental protection, disaster prevention, HIV/AIDS and child protection. The UK also lends to the BOTs as needed, up to a pre-set limit, but assumes no liability for them if they encounter financial difficulty.

Many of the BOTs, particularly those in the Caribbean, have been hit hard by the financial crisis. In the Cayman Islands, the British Virgin Islands, the Turks and Caicos and Anguilla, decreases in financial services activity and tourism have resulted in falling output and government revenue. Fisheries and tourism activity in the Falkland Islands have fallen while the government revenues of Gibraltar, with its more diversified economy, have been resilient. To mitigate the impact of the crisis, the territories are reprioritizing government expenditure and looking at ways to increase revenue. Additionally, BOTs may request higher borrowing limits from the UK.

Seven of the BOTs have financial centers: Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Montserrat and the Turks and Caicos Islands. In April 2009, during the London G20 Summit, all of these territories were placed on the OECD's "grey list" of jurisdictions that have committed to the internationally agreed tax standard, developed by the OECD, but have not yet substantially implemented it by signing the 12 tax information exchange agreements. As of October 11, 2010, all but Montserrat were listed on the OECD's list of jurisdictions that have substantially implemented the internationally agreed tax standard.

Anguilla: Anguilla is a neutral tax jurisdiction. There are no income, capital gains, estate, profit or other forms of direct taxation on either individuals or corporations, for residents or non-residents of the jurisdiction. The territory has no exchange rate controls. Non-Anguillian nationals may purchase property, but the transfer of land to an alien includes a 12.5 percent tax.

British Virgin Islands: The government of the British Virgin Islands welcomes foreign direct investment and offers a series of incentive packages aimed at reducing the cost of doing business on the islands. These range from relief on customs duties on imported capital goods to relief from corporation tax payments over specific periods. Crown land grants are not available to non-British Virgin Islanders, but private land can be leased or purchased following the approval of an Alien Land Holding License. Company tax is 15 percent on chargeable income. Personal income taxes are payable at the rate of three percent on the first USD 2,500 of income, six percent on the next USD 5,000, ten percent on the next USD 7,500, 15 percent on the next USD 10,000 and 20 percent on income exceeding USD 25,000.

Cayman Islands: There are no direct taxes in the Cayman Islands. The government charges stamp duty of six percent on the value of real estate at sale and there is a one percent fee payable on mortgages of less than CID 300,000, and one and a half percent on mortgages of CID 300,000 or higher. There are no controls on the foreign ownership of property and land. Investors can receive import duty waivers on equipment, building materials, machinery, manufacturing materials, and other tools.

Falkland Islands: Companies located in the Falkland Islands are charged corporation tax at 21 percent on the first GBP one million and 26 percent for all amounts in excess of GBP one million. The individual income tax rate is 21 percent for earnings below GBP 13,000 and 26 percent above this level.

Gibraltar: The government of Gibraltar encourages foreign investment. Gibraltar is a low-tax jurisdiction (no capital or sales taxes) with a stable currency and few restrictions on moving capital or repatriating dividends. It is a member of the EU and offers EU funding for projects that improve the island's economic development.

Montserrat: The government of Montserrat welcomes new private foreign investment. Foreign investors are permitted to acquire real estate, subject to the acquisition of an Alien Land Holding license. Foreign investment in Montserrat is subject to the same taxation rules as local investment, and is eligible for tax holidays and other incentives. Montserrat has preferential trade agreements with the United States, Canada and Europe. The government allows 100 percent foreign ownership of businesses but the administration of public utilities remains wholly in the public sector.

St. Helena: The island of St. Helena is open to foreign investment and welcomes expressions of interest from companies wanting to invest. Its government operates an Approved Investor scheme, which offers concessions to businesses that meet a set of criteria outlined in the government's Economic Development Ordinance and Tourism Policy – particularly tourism projects that will be trading at the time of the opening of the St. Helena airport. All applications under the scheme are processed by the St. Helena Development Agency.

Pitcairn Islands: The Pitcairn Islands have approximately 50 residents, with a workforce of approximately 15. The territory does not have an airstrip or safe harbor. Residents exist on fishing, subsistence farming, and handcrafts.

The Turks and Caicos Islands: The islands operate an "open arms" investment policy. Through the policy, the government commits to: a streamlined business licensing system; a responsive immigration policy to give investment security; access to government-owned land under long-term leases; and a variety of duty concessions to qualified investors. The islands have a "no tax" status.

Measure

Year

Index/Ranking

TI Corruption Perceptions

2012

74/17th

Heritage Economic Freedom

2013

74.8/14th

World Bank Doing Business

2013

185/7th


Currency Conversion and Capital Transfer Policies

The British pound sterling is a free-floating currency with no restrictions on its transfer or conversion. There are no exchange controls restricting the transfer of funds associated with an investment into or out of the UK.

The UK is not a member of the Euro zone; the current Coalition government has no plans to join over the next five-year Parliament. Any decision to join would likely require a national referendum.

The Finance Act 2004 repealed the old rules governing thin capitalization, which allowed companies to assess their borrowing capacity on a consolidated basis. Under the new rules, companies who have borrowed from a UK or overseas parent need to show that the loan could have been made on a stand-alone basis or face possible transfer pricing penalties. These rules were not established to limit currency transfers, but rather to limit attempts by multinational enterprises to present what is in substance an equity investment as a debt investment to obtain more favourable tax treatment.

Expropriation and Compensation

Expropriation of corporate assets or nationalization of an industry requires a special Act of Parliament, as seen in the February 2008 nationalization of Northern Rock. In the event of nationalization, the British government follows customary international law, providing prompt, adequate, and effective compensation.

Dispute Settlement

International disputes are resolved through litigation in the UK Courts or by arbitration, mediation, or some other alternative dispute resolution (ADR) method. Over 10,000 disputes a year take place in London, many with an international dimension, reflecting its strong position as an international center for legal services. Most of the disputes center on the maritime, commodities, financial services, and construction sectors. The London Court of International Arbitration and the International Chamber of Commerce's International Court of Arbitration are the leading administrators of international arbitrations. The Stock Exchange Panel on Takeovers and Mergers mediates takeover bid disputes, and there is a further right of appeal to the Stock Exchange Appeals Committee.

As a member of the International Center for Settlement of Investment Disputes (ICSID), the UK accepts binding international arbitration between foreign investors and the state. As a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the UK permits local enforcement on arbitration judgments decided in other signatory countries.

Performance Requirements/Incentives

UK business contracts are legally enforceable in the UK, but not in the United States or other foreign jurisdictions. Performance bonds or guarantees are generally not needed in British commerce, nor is any technology transfer, joint venture, or local management participation or control requirement imposed on suppliers. Government and industry encourage prompt payment, but a tradition does not exist of providing an additional discount to encourage early settlement of accounts.

The UK offers a wide range of incentives for companies of any nationality locating in depressed regions of the country, as long as the investment generates employment. The Grants for Business Investment (GBI) program provided government grants to qualifying projects in parts of the UK needing investment to revitalize their economies, but closed on February 1, 2011. It was replaced by the Regional Growth Fund (RGF). The RGF has £1.4billion to spend across England from 2011 to 2014. Its funds are aimed at supporting projects and programs that leverage private sector investment creating economic growth and sustainable employment, particularly in those areas and communities currently dependent on the public sector to make the transition to sustainable private sector-led growth and prosperity. Further information can be found at: http://www.bis.gov.uk/policies/economic-development/regional-growth-fund.

Additionally, assistance can be obtained through the EU Structural Funds available through 2013. The UK will receive approximately €9.4 billion (USD 12.6 billion) in structural funds including: approximately €2.6 billion (USD 3.5 billion) in convergence funding for the UK's poorest regions; approximately €6.2 billion (USD 8.4 billion) in competitiveness and employment funding for other regions; and approximately €0.6 billion (USD 0.8 billion) in cooperation funding for cross-border and trans-national activities. Assistance is offered to companies that meet the government's objectives for convergence, cooperation, competitiveness and employment. Convergence funding is available to companies that locate in areas with GDP per capita below 75 percent of the EU average. In the UK, these regions are Cornwall, the Isles of Scilly, West Wales and the Welsh Valleys.

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 benefit. 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.

Right to Private Ownership and Establishment

The Companies Act of 1985, administered by the Department for Business, Innovation and Skills (BIS), governs ownership and operation of private companies. On November 8, 2006 the UK passed the Companies Act of 2006 to replace the 1985 Act. The law simplifies and modernizes existing rules rather than make any dramatic shift in the company law regime.

BIS uses a transparent code of practice that is fully in accordance with EU merger control regulations, in evaluating bids and mergers for possible referral to the Competition Commission. The Competition Act of 1998 strengthened competition law and enhanced the enforcement powers of the Office of Fair Trading (OFT). Prohibitions under the act relate to competition-restricting agreements and abusive behaviour by entities in dominant market positions. The Enterprise Act of 2002 established the OFT as an independent statutory body with a Board, and gives it a greater role in ensuring that markets work well. Also, in accordance with EU law, if deemed in the public interest, transactions in the media or that raise national security concerns may be reviewed by the BIS Secretary of State. The Competition Commission and the OFT are due to be merged into a single Non Departmental Government Body, although this is unlikely to alter UK competition policy.

Only a few exceptions to national treatment exist. For example, foreign (non-EU or non-EFTA, European Free Trade Association) ownership of UK airlines is limited by law to 49 percent. Registration of shipping vessels is limited to UK citizens or nationals of EU/EFTA member states resident in the UK. For some of these companies, restrictions of foreign ownership of ordinary shares apply. Citizenship requirements for certain senior executive and non-executive posts also apply for these enterprises. Foreign investment in financial services that are not covered by EU Directives on banking, investment, services, and insurance may be subject to a bilateral agreement.

The Takeover Panel, an independent authority that administers the City of London’s code on takeovers and mergers, has recently considered the code as it relates to hostile takeovers and the impact on existing shareholders for the target firm. They have made a range of amendments to their code to reduce the negative impact of hostile takeovers, with the stated objective of: increasing the protection for offeree companies against protracted ‘virtual bid’ periods; strengthening the position of the offeree company; increasing transparency and improving the quality of disclosure; and providing greater recognition of the interests of offeree company employees.

The privatization of state-owned utilities is now essentially complete. With regard to future investment opportunities, the few remaining state-owned enterprises or remaining government shares in other utilities are likely to be sold off to the private sector when market conditions improve. These include the postal service and parts of the air traffic control service.

Protection of Property Rights

The UK legal system provides a high level of intellectual property rights (IPR) protection. Enforcement mechanisms are comparable to those available in the United States. The UK is a member of the World Intellectual Property Organization (WIPO). The UK is also a member of the major intellectual property protection agreements: the Bern Convention for the Protection of Literary and Artistic Works; the Paris Convention for the Protection of Industrial Property; the Universal Copyright Convention; the Geneva Phonograms Convention; and the Patent Cooperation Treaty. The UK has signed and, through various EU Directives, implemented both the WIPO Copyright Treaty (WCT) and WIPO Performance and Phonograms Treaty (WPPT), known as the internet treaties.

In November 2010, Prime Minister David Cameron announced an independent review of the nation’s IP framework, chaired by Professor Ian Hargreaves. The Hargreaves Review, released in May 2011, covers all aspects of how intellectual property (IP) is created, used and protected in the UK. It concludes that the current UK IP framework impedes innovation and economic growth and outlines ten recommendations to make the UK a more competitive IP marketplace. The UK government responded positively to the Review and has committed acting upon all ten Hargreaves. Some the more controversial recommendations include creating copyright exemptions around format shifting and clearing patent thickets. The government is currently consulting with stakeholders and preparing draft legislative and regulatory remedies to address the Hargreaves recommendations. Progress is slow and no legislative action is expected before 2013. The Hargreaves Review is the fifth in a series of IPR reviews since 2006: the Gowers Review (2006), the Creative Economy Programme (2007), the Digital Britain Review (2008-2009) and the Copyright Strategy (2009).

Patents: Many of the key features of the UK Patents Act 2004 entered into force in January 2005. The Act is designed to bring UK patent law into line with the updated European Patent Convention (2000) and lifts restrictions on filing patent applications from abroad, with exceptions made for military technology and applications whose contents could affect UK national security. The Act expands options for non-binding, written opinions on patent infringement to be issued by the UK Patent Office. The legislation also lays out significant changes to the process of approaching alleged infringers (sometimes known as "threats"). The changes are designed to aid genuine attempts to settle infringement disputes while providing protection -- particularly to small and medium enterprises -- against frivolous threats. A UK patent application requires that an invention be new, involve an innovative step, and be capable of industrial application. A patent cannot be granted in the UK for any invention used for offensive, immoral, or anti-social purpose, for any variety of animal or plant, or for a biological process used in its production. The UK IPO and the U.S. Patent and Trademark Office (USPTO) are cooperating in various ways (including a 2007 Patent Prosecution Highway (PPH) scheme) to allow U.S. or UK patent applicants who have received a report by either the UK IPO or the USPTO to request accelerated examination of a corresponding patent application filed in the other country.

Copyright: The Copyright, Designs and Patents Act of 1988 grants the originator the exclusive right to assign those rights or to exploit them through copying, dissemination, publication, or sale. Computer programs and semiconductor internal circuit designs are included as works that are protected by this act. Under the terms of a 1988 EU Directive, databases are also protected in each EU-member country by the national legislation that implements the Directive.

Trademarks: The UK submits to the WIPO system of international registration of marks, as governed by the Madrid Agreement and the Madrid Protocol. The UK Trade Marks Act of 1994 is the current law providing for the registration and protection of trade marks in the UK, and has been harmonized with EU Directive No 89/104/EEC. Trademarks are considered personal property in the UK, and are normally registered for a period of 10 years with an option to renew. However, trademarks may be removed from the register if a period of five years has elapsed, during which time there has been no bona fide use of the trademark in relation to the goods by the proprietor.

Trade Secrets/Confidential Test Data: Commercially sensitive information is not itself specifically subject to legal protection, but the misappropriation of such information from business premises may be subject to criminal law. Action under employment law may also be taken against an employee who, by disclosing information, breaches a contract with his or her employer. In addition, confidential test data, submitted in conjunction with a registered application for pharmaceuticals or veterinary products, enjoys ten years of exclusive protection from the date of authorization, provided the product is marketed in the UK.

Transparency of the Regulatory System

U.S. exporters and investors generally will find little difference between the U.S. and UK in the conduct of business. Common law prevails in the UK as the basis for commercial transactions, and the International Commercial Terms (INCOTERMS) of the International Chambers of Commerce are accepted definitions of trading terms. In terms of accounting standards and audit provisions firms in the UK must use the International Financial Reporting Standards (IFRS) set by the International Accounting Standards Board (IASB) and approved by the European Commission. The UK's Accounting Standards Board provides guidance to firms on accounting standards and works with the IASB on international standards.

Statutory authority over prices and competition in various industries is given to independent regulators. These include the Office of Communications (OFCOM), the Office of Water Regulation (OFWAT), the Office of Gas and Electricity Markets (OFGEM), the Office of Fair Trading (OFT), the Rail Regulator, and the Financial Services Authority (FSA), which is scheduled to be dissolved in 2013 (see capital markets section). The Competition Commission and the OFT are due to be merged into a single Non Departmental Government Body, although this is unlikely to alter UK competition policy. These regulators work to protect the interests of consumers while ensuring that the markets they regulate are functioning efficiently. Most laws and regulations are published in draft for public comment prior to implementation.

The Coalition government has stated its ambition to reduce the regulatory burden on firms. To do so, they have established a Cabinet Office subcommittee to review all planned regulation inherited from the previous government, scrutinize all new regulation and implement the new ‘one in, one out’ rule of regulation. This rule, applied to new regulation from every government department, means that for every piece of regulation a department introduces, it must find a regulation to remove in order to keep the regulatory burden to a minimum.

Efficient Capital Markets and Portfolio Investment

The City of London houses one of the world's largest and most comprehensive financial centers. London offers all forms of financial services: commercial banking; investment banking; insurance; venture capital; private equity; stock and currency brokers; fund managers; commodity dealers; accounting and legal services; as well as electronic clearing and settlement systems and bank payments systems. London has been highly regarded by investors because of its solid regulatory, legal, and tax environment, a supportive market infrastructure, and a dynamic and highly skilled workforce. The financial services industry contributed approximately 10 percent to UK GDP in 2012, employs approximately a million people and contributes 11 percent of UK tax receipts. While banks remain concerned that excessive regulation in the wake of the financial crisis could drive business and talent away from London, the UK is expected to maintain its position as a top financial hub.

UK banks have been particularly hard-hit by the global financial crisis. Large-scale lay-offs have been common over the past year and business conditions in financial services in 2013 are expected to remain difficult. Mergers, nationalizations, and bank failures have left a consolidated playing field. Northern Rock, wholly nationalized by the government during the financial crisis, has recently been sold back to the private sector (Virgin Money). The Government also announced a series of "bank rescue measures" including taking large equity stakes in two key banks, the Royal Bank of Scotland and Lloyds Banking Group. Government stakes are managed at arm's-length by UK Financial Investments (UKFI) and are approved by the European Commission to comply with state intervention rules.

Since the beginning of the financial crisis in 2008, the UK’s economy has taken longer to recover than other G8 economies. Since contraction began in the second quarter of 2008, the UK has experienced a double dip recession and remains more than 3 percent below its pre-crisis GDP. After three consecutive quarters of negative growth, the UK barely emerged from its latest recession with 0.9 percent growth in the third quarter of 2012. Most observers believe 3Q 2012 growth reflected a one-off boost from the 2012 Summer Olympics and Paralympics, and favorable comparisons to the previous quarter. Bank of England (BoE) Governor Mervyn King, Business Secretary Vince Cable, and a growing chorus of analysts and economists have pointed to the growing risk of a triple-dip recession in 2013 after possible negative growth in Q4 2012.

Looking forward, slow growth is expected: 1.2% in 2013 and 2.0% in 2014, according to the Office of Budget Responsibility; with marginal increases every year following and expansion reaching a peak of 2.8% by 2017-18. In 2013, a challenged financial services sector, which continues to lay off workers and struggles to adapt to increasing regulation; declines in North Sea oil and gas production; and the ongoing eurozone crisis will continue to weigh heavily on the UK economy. Property values, which have been a major driver of household consumption in the UK, are 11 percent lower than before the credit crunch. Unemployment stands at 7.8% (December 2012). The BoE, whose quantitative easing program has helped stimulate the economy in recent past, now says its ability to ease further will have limited effect. Inflation is currently at 2.7 percent – above the BoE’s 2.0 percent target rate, but down from its recent high of 5.2 percent in September 2011.

Following fiscal stimulus under the previous Labour government, in 2010 the Coalition Government committed to a deficit reduction plan to cut GBP 81 billion (USD 127 billion) from the budget, eliminate the structural deficit, and begin reducing the national debt by 2014-15. While reaffirming the Government’s commitment to deficit reduction, in December 2012, Chancellor Osborne announced that the target of reducing public debt as a share of GDP by fiscal year 2015-16 would not be met, pushing the date out further to 2016-17. Debt-to-GDP is expected to peak in 2015-16 at 79.9% and then start declining. In addition, the Chancellor said the Government will take another year, until 2017-18, to eliminate the structural deficit. Ratings agencies are concerned; both Fitch and S&P have placed the UK on Negative Outlook, warning that the UK’s coveted AAA bond rating may be in jeopardy if economic and fiscal recovery weaken further. The Coalition government views fiscal consolidation as essential to restore confidence in the UK economy and to avoid the fates of other European countries.

In all observable circumstances, foreign investors, employers, and market participants have been treated equally and benefit from government initiatives equally. There are no signs of increased protectionism against foreign investment, and none are expected. Recently, a Parliamentary committee opened an investigation into tax avoidance by multinational companies, including several major U.S. firms. However, foreign and UK firms remain subject to the same tax laws, and several UK firm have also been criticized for tax avoidance.

Government policies are intended to facilitate the free flow of capital and to support the flow of resources in the product and services markets. Foreign investors are able to obtain credit in the local market at normal market terms, and a wide range of credit instruments are available. The principles involved in legal, regulatory, and accounting systems are transparent, and they are consistent with international standards. In all cases, regulations have been published and are applied on a non-discriminatory basis by a single regulatory body, the Financial Services Authority (FSA). The FSA is set to be dissolved by 2013; a new Prudential Regulatory Authority (PRA) will be created and report to the Financial Policy Committee (FPC) in the Bank of England. The FPC will be headed by a new Deputy Governor (the first of whom will be current FSA Chief Executive Hector Sants). The PRA will be responsible for supervising the safety and soundness of individual financial firms, while the FPC will take a systemic view of the financial system and provide macro-prudential regulation and policy actions. A new Consumer Protection and Markets Authority (CPMA) will be created to act as a single integrated regulator focused on conduct in financial markets.

The London Stock Exchange is one of the most active equity markets in the world. London's markets have the advantage of bridging the gap between the day's trading in the Asian markets and the opening of the U.S. market. This bridge effect is also evident as many Russian and Central European companies have used London stock exchanges to tap global capital markets. The Alternative Investment Market (AIM), established in 1995 as a sub-market of the London Stock Exchange, is specifically designed for smaller, growing companies. The AIM has a more flexible regulatory system than the Main Market and has no minimum market capitalization requirements. Since its launch, the AIM has raised approximately GBP 24 billion (USD 38 billion) for more than 2,200 companies.

The UK banking sector is the largest in Europe. According to TheCityUK, 164 financial services firms from the EU are based in the UK and EU banks in the UK hold GBP 1.4 trillion in assets, 17 percent of total UK bank assets.

State-Owned Enterprises

There are 20 state-owned, or partially-owned, enterprises in the UK, with a combined turnover of about GBP 11.5 billion (USD 17.9 billion) in the year ending March 2011. The UK's state-owned enterprises (SOEs) are spread across a wide range of sectors: from large, well-known companies such as the Royal Mail, to small trading funds like the UK Hydrographic Office that supplies marine navigational information and services, to government financing bodies such as the Exports Credit Guarantee Department and the student loans company. Some of these, where appropriate, are due to be sold to the private sector over the next few years. The government has already successfully sold Northern Rock, the bank nationalized during the financial crisis in 2007. It has also sold its shares in betting firm Tote for GBP 265 million.

The UK's Shareholder Executive, within the Department for Business, Innovation and Skills (BIS), works with government departments and management teams to ensure proper corporate governance and help these companies perform effectively. It advises government ministers and officials on a wide range of shareholder issues including objectives, governance, strategy, performance, monitoring, board appointments and remuneration. It sets overall objectives for the businesses and agrees on a strategic plan with the board for delivering those objectives; the board is then accountable for delivery. Where appropriate, it appoints the Chair and actively participates in other board appointments. It sets compensation principles, works with the business to agree dividend policy, and monitors performance. Under the terms of the Government-Owned Business Framework, the UK government must provide all external financing for SOEs, which are charged at the market rate to ensure they do not receive any commercial advantage from the ability to borrow at, or below, the market rate.

During 2008 and 2009, the UK government nationalized two banks, Northern Rock and Bradford & Bingley, and took significant stakes in the Royal Bank of Scotland (RBS) and Lloyds Banking Group. The government's stake in these banks is managed, at arm's-length, by UK Financial Investments (UKFI), a company wholly owned by HM Treasury. With the exception of Bradford & Bingley (which will be wound down), UKFI will execute an investment strategy for disposing of the investments through sale, redemption or buy-back. The UK government does not intend to be a permanent investor in UK financial institutions. The government has successfully sold the “good bank” section of Northern Rock to VirginMoney. Sale of RBS and Lloyds is expected once market conditions improve. The rescue packages were authorized by the European Commission under EC Treaty State Aid rules, which ensures state aid packages do not result in significant market distortions. At the end of 2009, the European Commission approved state aid measures for RBS and Lloyds but insisted on substantial divestments to limit market distortions. These divestments of retail branches have been fulfilled.

Corporate Social Responsibility

Businesses in the UK are accountable for some activities that fall under corporate social responsibility (CSR) – such as human resources, environmental issues, sustainable development, and health and safety practices – through a wide variety of existing guidelines at national, EU and global levels. There is a strong awareness of CSR principles among UK businesses, promoted by UK business associations such as the Confederation of British Industry and the UK government.

The UK government is an adherent of the OECD Guidelines for Multinational Enterprises. The government is committed to the promotion and implementation of these Guidelines and encourages UK multinational enterprises to adopt high corporate standards involving all aspects of the guidelines. The UK established a National Contact Point (NCP) to promote the Guidelines and to consider allegations that a multinational enterprise's behavior is inconsistent with them. It is housed in the Department for Business, Innovation and Skills and is partially funded by the UK Department for International Development (DFID). A Steering Board monitors the work of the UK NCP and provides strategic guidance. It is composed of representatives of relevant government departments and four civil society members nominated by the Trades Union Congress, the Confederation of British Industry, the All Party Parliamentary Group on the Great Lakes Region of Africa, and the NGO community.

Political Violence

The United Kingdom is politically stable, with a modern infrastructure, but shares with the rest of the world an increased threat of terrorist incidents. On June 29-30, 2007, terrorists unsuccessfully attempted to bomb a nightclub area in London and the Glasgow airport. In August 2006, the UK government heightened security at all UK airports following a major counterterrorism operation in which individuals were arrested for plotting attacks against U.S.-bound airlines. On July 7, 2005, a major terrorist attack occurred in London, as Islamic extremists detonated explosives on three Underground trains and a bus in Central London, resulting in over 50 deaths and hundreds of injuries. Following the attacks, the public transportation system was temporarily disrupted, but quickly returned to normal. A similar, but unsuccessful attack against London's public transport system took place on July 21, 2005. UK authorities have identified and arrested people involved in these attacks. These attacks do not seem to have significantly impacted investment in the UK.

With the Northern Ireland Assembly elections of May 2011, Northern Ireland marked the successful completion of the first full term of representative, power-sharing government in its history. The first anniversary of fully- devolved policing and justice powers into Northern Ireland was also was celebrated in 2011. Despite continuing political stability and progress, certain small but potentially violent groups opposed to the peace settlement have targeted police, military, and justice-related entities with firearms and explosives. It is likely possible that these groups, to include dissident republican groups such as the Real IRA and Continuity IRA, will attempt future attacks on security targets. Most recently, in December 2012 and January 2013, frequent demonstrations have taken place in Belfast due to a decision by Belfast City Hall to limit the amount of days the Union flag will fly over the building. Some of these demonstrations have turned violent, resulting in injuries to police, opposition, and personal property; arrests; and, in some cases, criminal charges being brought against the participants. These demonstrations remain highly localized and do not negatively affect the positive overarching investment climate in Northern Ireland.

Environmental pressure groups in the UK have been involved in numerous protests against a variety of business activities; including airport expansion, bypass roads, offshore structures, wind farms, civilian nuclear power plants, and petrochemical facilities. These protests tend not to be violent but are disruptive and work toward obtaining maximum media exposure.

Corruption

Although isolated instances of bribery and corruption have occurred in the UK, U.S. investors have not identified corruption of public officials as a factor in doing business in the UK.

The UK formally ratified the OECD Convention on Combating Bribery in December 1998. The UK also signed the UN Convention Against Corruption in December 2003 and ratified it in 2006. The UK has launched a number of initiatives to reduce corruption overseas. In 2007, the UK Law Commission began a consultation process to draft a Bribery Bill that met OECD standards. The new Bill was adopted by Parliament with cross-party support as the 2010 Bribery Act, which came into force on July 1, 2011. It amends and reforms the UK criminal law and provides a modern legal framework to combat bribery in the UK and internationally. The scope of the law is extra-territorial; under the Bribery Act, a relevant person or company can be prosecuted for bribery if the crime is committed abroad. The Act applies to UK citizens, residents and companies established under UK law. In addition, non-UK companies can be held liable for a failure to prevent bribery if they do business in the UK.

Section 9 of the Act requires the Government to publish guidance on procedures that commercial organizations can put in place to prevent bribery on their behalf. It creates the following offences: Active bribery - promising or giving a financial or other advantage; Passive bribery- agreeing to receive or accepting a financial or other advantage; Bribery of foreign public officials, and; the failure of commercial organizations to prevent bribery by an associated person (corporate offence). The first prosecution under the Act (a domestic case) went forward in 2011. A UK administrative clerk faces charges under Section 2 of the Act for requesting and receiving a bribe with the intent to improperly perform his functions as a result.

Bilateral Investment Agreements

The U.S. and UK have no bilateral investment treaty (BIT), although parts of the Treaty of amity, commerce, and navigation (Jay Treaty; 1795) and the Treaty for amicable settlement of all causes of differences (Treaty of Washington; 1871) are still in force. A Bilateral Tax Treaty, reviewed in 2008, protects U.S. and UK investors from double taxation. The UK has its own bilateral tax treaties with more than 100 (mostly developing) countries and a network of about a dozen double taxation agreements.

The UK has concluded 106 BITs (known in the UK as Investment Promotion and Protection Agreements) with other countries, of which 94 are in force. These countries are: Albania, Antigua and Barbuda, Argentina, Armenia, Azerbaijan, Bahrain, Bangladesh, Barbados, Belarus, Belize, Benin, Bolivia, Bosnia & Herzegovina, Bulgaria, Burundi, Cameroon, Chile, China, Congo, Cote D’Ivoire, Croatia, Cuba, Dominica, Ecuador, Egypt, El Salvador, Estonia, Georgia, Ghana, Grenada, Guyana, Haiti, Honduras, Hungary, India, Indonesia, Jamaica, Jordan, Kazakhstan, Kenya, Korea, Kyrgyzstan, Laos, Latvia, Lebanon, Lesotho, Lithuania, Malaysia, Malta, Mauritius, Mexico, Moldova, Mongolia, Morocco, Mozambique, Nepal, Nicaragua, Nigeria, Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Romania, Saint Lucia, Senegal, Serbia, Sierra Leone, Singapore, Slovenia, South Africa, Sri Lanka, Swaziland, Tanzania, Thailand, Tonga, Trinidad & Tobago, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine, UAE, Uruguay, Uzbekistan, Venezuela, Vietnam, and Yemen.

OPIC and Other Investment Insurance Agreements

OPIC does not operate in the UK. U.S. Export-Import Bank (EXIM Bank) financing is available to support major investment projects in the UK. A Memorandum of Understanding between EXIM Bank and its UK equivalent, the Export Credits Guarantee Department (ECGD), enables bilateral U.S.-UK consortia intending to invest in third countries, to seek investment funding from the country of the larger partner. This removes the need for each party to seek financing from its respective credit guarantee organization.

Labor

The UK’s labor force (workers aged 16 to 64) is the second largest in the EU, at just over 40 million. Seventy percent of this population (29 million people) were employed as of October 2011, while unemployment stood at 8.3% -- lower than the EU average of 9.7%. Employment by sector is 27% in education, health, and public administration; 22% hospitality; 21% finance and business services; and 8% manufacturing.

The most serious issue facing British employers is a skills gap derived from a high-skill, high-tech economy outpacing the educational system's ability to deliver work-ready graduates. The government has placed a strong emphasis on improving the British educational system in terms of greater emphasis on science, research and development, and entrepreneurship skills. The UK's skills base is just above the OECD average, but is improving.

About 20 percent of full time UK employees belong to a union, a low proportion by UK historical standards, but still quite high relative to U.S. levels. Sixty percent of public sector workers are union members while the private sector is about 15 percent. Manufacturing, transport, and distribution trades are highly unionized. Unionization of the workforce in the UK is prohibited only in the armed forces, public-sector security services, and police forces. Union membership has been relatively stable although trending slightly downward over the past decade.

Once-common militant unionism is less frequent, but occasional bouts of industrial action, or threatened industrial action, can still be expected. Recent strike action has become more frequent as the Coalition Government’s deficit reduction program impacts highly unionized sectors. According to the Office of National Statistics, in the 12 months to September 2011 there were 130 official labor disputes resulting in the loss of 419,000 working days. Most British unions have adapted to the reality of a globalized economy in which jobs are contingent on the competitiveness of their employers. Privatization of traditional government entities has accelerated such thinking. The Trades Union Congress (TUC), the British AFL-CIO equivalent, encourages union-management cooperation as do most of the unions likely to be encountered by a U.S. investor.

As of October 2011, the minimum wage is GBP 6.08 (USD 9.54) for adults (those 21 and over); GBP 4.98 (USD 7.82) for young people (18-20); and GBP 3.68 (USD 5.78) for workers aged 16 and 17.

Much of the employment legislation currently affecting the UK labor market is based on EU regulations and directives. EU regulations affect working patterns, wage structures, and employee protection rights. For example, the European Working Time Directive creates an entitlement to minimum daily and weekly rest periods, an average work-week limit of 48 hours, and restrictions on night work. It also entitles workers who meet the qualifying criteria, including part-time and seasonal workers, to a minimum of 28 working days annual paid vacation. The universal application of labor regulations across respective EU borders undermines British competitiveness to the extent that the UK has made its historically more flexible labor market a major selling point to investors. As it has implemented EU directives, however, the UK government has been proactive in maintaining its flexibility and competitiveness. For example, it negotiated a special provision under the Working Time Directive that allows employees to opt out of the work week limitations and has favored changes to the rules on temporary workers.

The 2006 Employment Equality (Age) Regulations make it unlawful to discriminate against workers, employees, job seekers and trainees because of age. The regulations cover recruitment, terms and conditions, promotions, transfers, dismissals and training. They do not cover the provision of goods and services.

The regulations also removed the upper age limits on unfair dismissal and redundancy. It sets a national default retirement age of 65, making compulsory retirement below that age unlawful unless objectively justified. Employees have the right to request working beyond retirement age and the employer has a duty to consider such requests.

Foreign Trade Zones/Free Ports

The cargo ports and freight transhipment points at Liverpool, Prestwick, Sheerness, Southampton, and Tilbury that are used for cargo storage and consolidation are designated as Free Trade Zones (FTZs). No activities that add value to the commodities are permitted within the FTZs, which are reserved for bonded storage, cargo consolidation, and reconfiguration of non-EU goods. The FTZs offer little benefit to U.S. exporters or investors, or any other non-EU exporters or investors.

Foreign Direct Investment Statistics

The UK was the world's seventh largest recipient of foreign direct investment (FDI) in 2011, slipping from fifth position in 2012, receiving USD 53.9 billion, according to the UNCTAD. Despite the drop in ranking, however, inflows increased 7 percent over 2011. The UK attracted 17 percent of all EU FDI inflows, the highest percentage for a single EU country, but this position is being challenged, with Germany’s share of FDI rising for the fifth year in a row to reach 15 percent.

The United States remains the primary source of FDI into the UK. In FY 2011-2012, the United States contributed 24% of all inward investment projects to the UK and over 30% of all inward investment-generated jobs. In 2011, the United States contributed FDI inflows of USD 227 billion, an increase of 15% from 2010.



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