When expanding your business into the UK, one of the first decisions you’ll face is whether to establish a local legal entity or hire employees using an Employer of Record (EOR). While setting up a legal entity gives you full control over your operations in the UK, it comes with significant upfront costs, time delays, and legal complexities. On the other hand, an EOR offers a simpler, faster way to hire employees without needing to create a UK entity.
In this article, we’ll break down the key differences between using an EOR and setting up a UK legal entity, focusing on costs, time, and compliance, so you can make an informed decision for your business.
What is an Employer of Record (EOR)?
An Employer of Record (EOR) is a third-party service provider that acts as the official employer for employees working in the UK, while your company maintains control over day-to-day work and performance. Essentially, the EOR assumes the legal responsibilities of being an employer, including compliance with local tax laws, payroll, benefits, and employee contracts.
For international businesses, an EOR is a practical solution to hire in the UK without needing to establish a local legal entity, saving time and ensuring compliance with UK employment regulations.
Setting Up a UK Legal Entity: Costs and Challenges
While establishing a UK legal entity (also known as a “branch” or “subsidiary”) provides direct control over your operations, it comes with significant costs and administrative burdens. Here’s a look at what’s involved in setting up a legal entity:
- Cost of Incorporation:
Incorporating a UK company typically costs between £12 and £100 for basic registration with Companies House. However, this is just the initial fee. You’ll also need to cover legal and accounting fees, which can range from £500 to £2,000, depending on the complexity of the business structure. - Ongoing Compliance Costs:
Running a UK entity means adhering to strict regulations, including annual filing with Companies House, tax returns to HMRC, and VAT registration (if applicable). This requires ongoing legal and accounting services, typically costing £1,000 to £5,000 per year. - Employee-Related Costs:
Once your entity is set up, you’ll need to hire employees and manage payroll yourself. This includes paying salaries, handling National Insurance contributions, pension schemes, and other employee benefits. There are also significant compliance requirements, such as reporting PAYE (Pay As You Earn) to HMRC in real time. - Time and Administrative Burden:
The process of setting up a UK entity and becoming compliant with UK regulations can take several months. This involves finding local legal representation, securing office space, registering with authorities, and dealing with employee legal requirements.
Using an EOR: Costs, Time, and Simplicity
An EOR provides a more flexible and streamlined alternative to setting up a UK entity. With an EOR, you don’t need to go through the process of establishing a business presence in the UK, but still gain the ability to hire employees and operate locally. Here’s how it compares:
- Cost Efficiency:
The cost of using an EOR is typically lower than setting up a legal entity in the UK. EOR fees generally include payroll processing, tax filings, compliance management, and employee benefits. Fees vary based on the provider, but they are generally a fixed monthly charge per employee, making it predictable and easier to budget. - Speed and Flexibility:
Setting up a UK legal entity can take several months, while an EOR can have you hiring employees in the UK within a matter of weeks. The EOR handles all the legal requirements and administrative tasks, allowing you to focus on business operations and employee performance. - Compliance Management:
An EOR ensures that your business complies with UK tax laws, employment regulations, and benefits requirements. This includes PAYE reporting to HMRC, processing National Insurance contributions, and ensuring compliance with statutory benefits such as maternity leave, pensions, and holiday pay. - Scalability and Global Expansion:
If you’re hiring employees in multiple countries, an EOR makes it easy to scale your business globally. EOR providers can hire employees on your behalf in multiple jurisdictions, saving you the hassle of setting up multiple local entities. This is especially valuable if you’re testing new markets or expanding rapidly.
Key Differences Between EOR and Setting Up a Legal Entity
| Factor | Setting Up a Legal Entity | Using an EOR |
|---|---|---|
| Cost | £1,000 – £7,000+ per year | £500 – £2,500+ per employee per year |
| Time | 3-6 months to establish | 2-4 weeks to start hiring |
| Control | Full control over operations | Limited to managing work performance |
| Compliance | Must comply with all UK laws | EOR handles compliance for you |
| Administrative Burden | High (filing taxes, managing payroll) | Low (EOR manages everything) |
| Scalability | Requires a separate entity in each country | Global hiring without new entities |
When Should You Set Up a UK Legal Entity?
While an EOR offers significant advantages, there are situations where setting up a UK legal entity may be the better choice:
- Long-term Presence in the UK:
If you plan to have a permanent, substantial operation in the UK with multiple employees, setting up a legal entity could make sense in the long run. - Direct Control Over Operations:
If your business requires total control over employee management, office space, and operations, a legal entity may be more suitable. - High-Volume Hiring:
If you intend to hire a large number of employees in the UK, having your own entity could provide cost efficiencies in the long term.
When Should You Use an EOR?
An EOR is ideal for businesses that need to hire employees in the UK without the administrative burden or cost of setting up a legal entity. Some ideal scenarios include:
- Entering a New Market:
If you’re testing the UK market or hiring a small team to start, an EOR offers flexibility without the long-term commitment of a UK entity. - Global Expansion:
For businesses that need to hire employees across multiple countries, an EOR simplifies international expansion by managing local employment laws and payroll in different regions. - Fast Hiring:
If you need to quickly hire employees in the UK but don’t want to wait months to set up an entity, an EOR lets you start hiring within weeks.
Conclusion: Which Option Is Right for Your Business?
Deciding between using an EOR or setting up a UK legal entity depends on your business goals, budget, and timeline.
- If you want to enter the UK market quickly and without the burden of setting up a business entity, an EOR offers a simple, compliant, and cost-effective solution.
- If you’re looking to establish a long-term presence in the UK and have the resources to manage the complexities of setting up a local entity, going through the process of incorporation might be the right choice.
In either case, both options provide pathways for international businesses to legally employ talent in the UK. Carefully weigh the costs, time requirements, and administrative burdens of each option to choose the best solution for your needs.
