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COVID-19: Pragmatic approach to corporate residence

14 April 2020: Businesses based outside the UK, but forced to take decisions here due to travel restrictions shouldn’t become resident according to ICAEW’s Tax Faculty, after HMRC issues further guidance.

HMRC has updated its guidance on permanent establishment (PE) and corporate residence in light of the coronavirus pandemic and the resulting disruption to international travel and business operations. With directors, employees and other individuals finding themselves trapped outside their normal location, questions have been raised around whether non-UK resident companies could become resident in the UK (for example, if decisions were taken from the UK or board meetings held here). Similarly, whether a UK PE could be established if contracts were suddenly routinely concluded in the UK?

What is clear is that HMRC consider that the existing legislation and guidance in relation to company residence and PE already provides the flexibility to deal with the fallout from the COVID-19 pandemic. As such, there is no new law and they retain the right to make their determination based on the facts in each case.

The updated guidance shows that HMRC is sympathetic to the plight of non-UK business, according to Angela Clegg, technical manager, SME business tax.

“HMRC wants to reassure directors that a company will not necessarily become resident in the UK because a few board meetings are held here or because some decisions are taken in the UK over a short period, she says..

“It has stressed that the existing guidance makes it clear that it will take a holistic view of the facts and circumstances of each case.”

The new guidance also discusses whether a foreign company could acquire a UK PE if a director is confined here. If so, this would expose the foreign company to UK corporation tax on profits attributed to the UK base. However, HMRC offers some reassurance indicating that:

  • a non-resident company will not have a UK fixed place of business after "a short period of time" because a degree of permanence is required
  • it will be "a matter of fact and degree" as to whether a company's contracts have been "habitually" concluded in the UK
  • even if a UK PE were created, it would not necessarily follow that any significant proportion of the company's profits would be subject to UK corporation tax.

The Tax Faculty concludes that this guidance, when taken with that from the OECD, gives a strong indication that companies should not be penalised where they are carrying out their business in the most practical manner possible during the COVID-19 pandemic.

HMRC guidance

The international tax manual has been updated at INTM120185 for corporate residence and at INTM261010 for PE to reflect HMRC’s approach to these matters and provides more detail.