Subsequent to our alert on the possible impact of COVID-19 on UK corporate tax residence and substance, on 8 April 2020 the UK tax authority, HM Revenue & Customs, (“HMRC”) published guidance on its approach to corporate tax residence and permanent establishments (“PE”) in light of the COVID-19 pandemic (the “Guidance”) (see INTM120185 / INTM261010).
In the Guidance HMRC specifically recognises the significant disruption to international travel and business operations (including the location of directors, employees and other individuals) as a result of the COVID-19 pandemic and states that it is “very sympathetic” to that disruption. HMRC notes that it considers the existing legislation and guidance on corporate tax residence and PEs to be sufficiently flexible to address changes to business operations necessitated by COVID-19.
Specifically the Guidance notes, among other things, that:
- UK corporate tax residence. HMRC does not consider that a company will necessarily become UK tax resident on the basis that (i) a few board meetings are held in the UK or individuals participate in a few board meetings from the UK, or (ii) some decisions are taken in the UK over a short period of time. In this regard, HMRC refers to its existing guidance which provides that HMRC will take a holistic view of the facts and circumstances of each case. Further, HMRC notes that even if a company is centrally managed and controlled from the UK that does not necessarily mean that the company will be UK tax resident as relief may be available under a residence “tie-breaker” provision in an applicable double tax treaty.
- UK PEs. HMRC considers that a non-UK company will not automatically have a taxable presence by way of UK PE after a short period of time as a degree of permanence is required for the non-UK company to be treated as carrying on a trade in the UK through a fixed place of business. Similarly, whilst the habitual conclusion of contracts in the UK may also create a taxable presence in the UK, HMRC notes that it is a matter of fact and degree as to whether that habitual condition is met. Finally, HMRC notes that the existence of a UK PE does not in and of itself mean that a significant element of the profits of the non-UK tax resident company would become subject to UK corporation tax in that the attribution of profits to a UK PE depends on the level of UK activity and relative value of that UK activity.
The Guidance provides welcome clarification from HMRC. Although the Guidance emphasises that whether a non-UK company becomes UK tax resident or develops a UK PE is a matter of fact and so careful consideration will need to be given to these points, it is helpful that the Guidance recognises the severe disruption being caused to business operations as a result of the COVID-19 pandemic and that HMRC appears to be taking a pragmatic approach in addressing the resulting tax consequences.
That said, notwithstanding the helpful and sympathetic approach that HMRC appears to be willing to take, advice should always be sought prior to departing from established protocols for managing risks regarding residence and PEs. It is noteworthy that HMRC has not gone as far as relaxing the rules on residence and PEs, or providing some form of temporary residence or PE “amnesty”, while the pandemic is ongoing and instead has said that the current rules already contain sufficient flexibility to deal with emergencies. In addition, the degree to which companies may feel comfortable relying on the Guidance will depend on the circumstances, for example non-UK companies that are taking particularly key decisions or that are newly established and holding a first board meeting may want to take extra care if there are any UK directors on the board or if any directors are present in the UK rather than relying on UK based decision making being the exception.