What’s the risk?
Non-UK companies can become:
- UK tax resident (subject to UK corporation tax on worldwide profits and gains) if their place of central management and control (“CMC”) is in the UK or
- subject to UK corporation tax on profits from trading in the UK through a permanent establishment (“PE”) such as a branch or agent
Due to the COVID-19 lockdown, directors or employees may have become stranded in the UK and be obliged to work from there, causing their companies to meet the tests for tax residence or a UK PE.
What is HMRC’s view on the issue?
HMRC is awake to the point and has issued guidance explaining its approach. Its view is that existing legislation and guidance on company residence and PEs provides flexibility to deal with changes in business activities due to COVID-19. However, the assurances are high level and may not be enforceable in a dispute (which would likely arise after the current situation has passed).
What’s the risk of becoming UK tax resident when directors are in the UK?
HMRC note that the test is a holistic, factual one of where the central management and control of a company lies. HMRC restates existing guidance that a company won’t necessarily become UK resident because a few board meetings are held in the UK, or some decisions are taken in the UK over a short period of time. One of the more helpful pages linked is here. HMRC gives few specific pointers on what COVID-related changes would cause UK tax residence, beyond noting that each case turns on its own facts and that the site of board meetings is important but not determinative.
What does that mean for UK PEs?
The tax at stake for trading through a UK PE is lower than for a change in tax residence, since the UK would only tax profits and gains made from a trade through that PE. However, the threshold is also lower: directors or employees’ presence in the UK may give rise to a UK PE even where they do not cause UK tax residence.
A non-UK resident company will not automatically trade through a UK PE if some employees have to operate there for short period as one of the requirements for a PE is (as the name suggests) “a degree of permanence”. However, there is a greater risk if contracts are "habitually" concluded in the UK – so if a company is concluding a number of related contracts in the UK due to employees’ lockdown, that could give rise to UK tax on the profits.
What about the non-UK tax my company already pays?
If HMRC does think that there is a potential UK tax due to COVID-19, its view will need to be reconciled with any other countries which claim the right to tax the same income. That will come down to the UK’s double tax treaty (DTT) with the other country. Broadly, for residence then the UK’s DTTs have specific “tie-breakers” based on the place of effective management (which can only be in one place) or on agreement by the countries’ authorities.
However, where there are reduced staff in a particular country as a result of the crisis, it may affect whether a company is treated as having enough economic substance there for the purposes of applying DTTs. The OECD has published an analysis of the impact of COVID-19 on international taxing rights which will help to coordinate which tax net a company falls within – see here.
What other tax risks should I be aware of?
UK payroll taxation
- Employees who perform duties from the UK may be subject to UK employment taxation, with accompanying obligations on the employer to deduct UK tax from payroll and account for it to HMRC.
- HMRC has not yet published guidance on the approach it will take to payroll obligations.
- Individuals who are trapped in the UK might also become resident in the UK for the purposes of their personal taxation. There are carve outs from this treatment for up to 60 days in “exceptional circumstances”, but not all details of how this will be applied have been clearly spelled out. However, time spent in the UK from March to May 2020 by those working on specified activities to combat COVID-19 (the Government has given the examples of anaesthetists and of engineers manufacturing ventilators) – will not count towards the statutory residence test.
- If COVID-19 causes your business to undertake an increased amount of supplies in or from the UK, it may exceed the £85,000 p.a. rolling threshold obliging it to register for UK VAT.
- Registration would oblige it to charge VAT to recipients of supplies and account for this to HMRC.
- For international supplies, the rules for where the supply takes place for VAT purposes can be complex and may require investigation.
The above gives a high level guide to the issues you’ll need to consider. For anything more complex, our team of tax specialists can help.