The increase in the number of employees working from home during the coronavirus pandemic could lead to a risk of creating unintended permanent establishments in the UK and in other countries. This will be relevant where the employee is located in a different country to their employer and will be of particular concern where the employee has a senior role and / or enters into contracts on behalf of the non-resident employer.
In the UK, if a non-resident company is treated as trading through a UK permanent establishment (PE), all of its income and gains from the PE would be brought within the charge to UK corporation tax. In addition, the UK resident individual would likely be treated as the UK representative of the non-resident company and the corporation tax liabilities of the non-resident company could be recovered from the UK individual.
CTA 2010, ss 969, 970
The relevant definition of permanent establishment is often found in the double tax treaty that exists between two countries. Most of the UK’s double tax treaties follow the Organisation for Economic Co-operation and Development (OECD) model tax treaty.
Under Article 5 of the OECD model treaty, an overseas company will have a PE if:
- there is a fixed place of business through which its business is carried on, or
- an agent habitually exercises authority to do business on its behalf
With regard to the first point, it should be possible to raise a number of arguments to resist any claim that a PE is created from the employee working from home, particularly if the employee has a junior role in the business. It should be possible to argue that the individual’s home is not ‘at the disposal’ of the employer company and therefore cannot be a fixed place of business through which its business is carried on. Alternatively, if such a place of business is held to exist, it could be argued that it is by definition temporary, and only arises as a result of the coronavirus crisis. HMRC guidance at INTM264430 makes clear that a degree of permanence is required before a PE is formed.
The second way in which a PE can be created could prove to be more problematic, particularly where the employee occupies a more senior role in the business and regularly enter into contracts on behalf of the company. In such cases, companies may wish to consider changing their internal guidelines and practices to restrict the authority of such employees to negotiate or conclude contracts during the duration of the pandemic.
The risk of a PE will depend on the facts of each circumstance and may need to be reviewed on a case by case basis, particularly where the employee occupies a senior role in the business.
Both the OECD and HMRC have published guidance on this, confirming that it is unlikely that the coronavirus situation will create any changes to a PE determination. Specifically, HMRC states that a non-resident company will not have a UK fixed place of business PE after a short period of time as a degree of permanence is required, and that it is a matter of fact and degree as to whether that habitual condition is met.
For more information generally on the operation of the PE rules, see the Permanent establishment guidance note and Simon’s Taxes D4.116.