The COVID-19 pandemic has resulted in significant disruption to international travel and business operations, including a restriction of movement for company directors, employees and other individuals.
HMRC has issued guidance on the implications of the COVID-19 outbreak for businesses in terms of tax residency and permanent establishment (PE). HMRC believes its guidance is consistent with the guidance, also recently published by the OECD Secretariat.
HMRC guidance – Residence
HMRC considers that the existing UK tax legislation and guidance in relation to company residence already provides flexibility to deal with changes in business activities necessitated by the response to the COVID-19 pandemic and that no legislative changes will be needed.
The key point made in the guidance is that HMRC does not consider that a company will 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 of time. HMRC emphasize that the facts and circumstances of each case will be reviewed individually. Likewise, HMRC does not believe that a company will necessarily become non-UK resident for UK tax purposes because a few board meetings are held, or some decisions are taken, outside the UK for a short period of time.
Notwithstanding this guidance, businesses should exercise a degree of caution. It may be helpful if proper records are kept detailing, in the board minutes, the reasons for the meetings being held remotely due to restrictions being placed on travel.
For a company which does not want to become UK taxresident, documentation should be contemporaneous and complete. If senior people happen to be locked down in the UK during this period, documentation should substantiate the reasons for attending or holding meetings in the UK. Companies may also explore options of restructuring their boards to include more local, non-UK based, directors.
Conversely, for businesses seeking to protect their UK tax resident status where directors are stuck in foreign jurisdictions that have similar rules as the UK’s central management and control test, businesses may look to appoint additional UK directors or delegate powers to UK-based personnel to ensure that the balance of central management and control does not shift elsewhere. Such businesses may also consider restricting voting rights to those that are physically present in the UK whilst giving those directors that are stuck abroad a status of an ‘observer’. Alternatively, it may be appropriate to consider delaying Board meetings where possible (or at least those where major strategic decisions are to be made) until directors are able to travel as normal and attend the meetings.
HMRC guidance – Permanent Establishment (PE)
A permanent establishment (PE) is a fixed place of business which generally gives rise to income or value-added tax liability in a particular jurisdiction. The term is defined in nearly all of the UK’s double taxation avoidance treaties.
HMRC has stated that existing guidance and legislation in this area provides it with sufficient flexibility to deal with changes in business activities necessitated by the response to the COVID-19 pandemic.
HMRC has stated that it does not consider that a non-resident company will automatically have a taxable presence by way of a PE in the UK after a short period of time. Whilst the habitual conclusion of contracts in the UK could also create a taxable presence in the UK, this largely depends on the facts and circumstances of each case and whether the ‘habitual’ condition is met, more generally.
For those countries with which the UK has a double tax treaty, the OECD guidance as well as the planned approach by HMRC are helpful. However, the longer the travel restrictions remain in place, the greater the risk is likely to be in this area. Therefore, businesses should continue to monitor the situation and consider whether any operational changes are required at a group and entity level if the lockdown globally were to continue in the longer term.
Businesses should identify where they have potential risks on these issues, assess those risks and determine whether there are any mitigation strategies that can be put in place – including short-term operational change. Businesses should continue to monitor the situation carefully and maintain contemporaneous documentation of their position.
For those countries with which the UK does not have a double tax treaty (mainly low tax/haven jurisdictions), the risk of foreign companies having a taxable presence in the UK due to the presence of personnel in the UK is significantly higher: this requires a swift analysis of the surrounding facts and circumstances.
SRC-Time are one of the South East’s leading accountancy firms in advising individuals and businesses in all aspects of their accounting and tax affairs and we are able to assist in any issue raised above.
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