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INTM264020 | Non-residents trading in the UK: domestic law permanent establishment/branch or agency

From HM Revenue & Customs · International Manual

Importance of the concept of permanent establishment/branch or agency to effective taxation of non-residents

This part of the guidance on non-residents covers the concept that a non-resident must have some level of representation within the UK through which its trade is carried out before it can come within the UK domestic charge to tax.

The UK domestic charging provisions in respect of non-resident persons, whether to income tax or corporation tax, are predicated upon the non-resident trading in the UK (INTM263000):

    • ITTOIA05/S6(2) - The profits of a trade (or profession, or vocation) carried on in the UK by a non-resident are chargeable to Income Tax. If the trade is partly carried on in the UK and partly elsewhere only the profits from the part carried on in the UK is chargeable to tax. (Prior to 2005/6 ICTA88/S18(1)(a)(iii) income tax was chargeable on any person, whether a commonwealth citizen or not, although not resident in the UK from any property whatever in the UK or from any trade, profession or vocation exercised within the UK.)

  • ICTA88/S11(1) - A company not resident in the UK is within the charge to corporation tax if, and only if, it carries on a trade in the UK through a permanent establishment in the UK (for accounting periods beginning before 1 January 2003 through a branch or agency in the UK, see INTM264090).

You will observe that the corporation tax charging legislation requires the non-resident’s trade to have been carried out through an UK permanent establish mentor, for periods beginning before 1 January 2003, through a UK branch or agency. You should always be aware that where the non-resident is a resident of a country with which the UK has a double tax treaty it will also be necessary for you to consider whether that treaty, which always takes precedence over UK legislation virtue of ICTA88/S788(3), affects the extent of the UK charge to tax. More guidance on treaties and their affect on the UK charge to tax are at INTM265000.

In contrast to the CT provisions, the IT charging provisions are silent regarding permanent establishment / branch or agency. However the permanent establishment / branch or agency concept is important whether considering CT or IT for two reasons:

  1. Even in an income tax case, any applicable double tax treaty is likely to require that there be a permanent establishment in the UK before income tax can be charged on the non-resident, and

  2. Because of the lateral issue of the machinery of physically collecting tax liabilities from non-residents. The mechanics for the assessment and collection process (often referred to as the ‘machinery provisions’) are described in more detail at INTM268000 but broadly they attach the non-resident’s liabilities and obligations to the UK permanent establishment (for corporation tax) and branch or agency (for income tax).

For this reason, despite the terms ‘branch or agency’ being mentioned only inthe CT charging provisions for the period 1965 to 2003 and at no time in the IT charging provisions from 1865 to date, branch or agency is an important concept to both the CT and IT charge on non- residents. With effect from accounting periods beginning on or after 1 January 2003, for companies only, the term ‘branch or agency’ was replaced by the term ‘permanent establishment’. Guidance follows at INTM264050on how that term is defined. For individuals the machinery provisions continue using the term ‘branch or agency’.

In the unusual case where the non-resident, individual or corporate, trades in the UK but not through a permanent establishment / branch or agency, the charge to tax will be to income tax. This might occur, say, if a non-resident trader was active in the UK for a short time with no intention of more than a short duration and/or carried on an itinerant trade with no fixed place of business. There would in such situations be no permanent establishment /branch or agency. If you are considering a non-resident trading in the UK with no apparent permanent establishment / branch or agency, you should keep in mind the practical difficulty that the absence of access to the machinery provisions for assessment and collection of the tax from the UK permanent establishment / branch or agency would cause. Bear in mind that most double taxation agreements limit taxing rights to where there is a permanent establishment.

The question of whether the non-resident falls within the charge to corporation tax or the charge to income tax is illustrated in the diagram at INTM264030.

In many cases it will be obvious that the non-resident enterprise has a permanent establishment / branch or agency in the UK. In cases of difficulty you should ascertain the full facts by reference to contracts and actual behaviour of the parties before referring the case in line with SCS122/02 to CSTD Business, Assets & International.