Company Residence and COVID-19
Restrictions imposed in light of the coronavirus pandemic have resulted in widespread disruption to travel and business operations. Due to individuals being unable to leave the UK to carry out certain business duties, overseas companies could inadvertently find themselves taxable in the UK.
To provide some clarity, HMRC has provided new guidance on how the residence and taxable presence rules will apply to companies with a specific focus on the impact of COVID-19.
When is a Company UK-Resident?
As discussed in our blog Home or Away? Company Residence and CMC (23 October 2019), a company will be resident in the UK if either of these conditions are met:
- The company was incorporated in the UK; or
- The central management and control (CMC) of the company vests in the UK.
Whilst the place of incorporation cannot be changed, a change in the location of CMC could result in the company becoming tax resident in the UK.
When determining where a company’s CMC resides, the following factors will be considered:
- Where do board meetings take place?
- Who attends to the running of affairs? Where are they based?
- Where are decisions about strategic policy and the direction of the company made?
- Where are the directors resident
With restrictions being placed on travel, UK resident individuals who would normally have directors’ meetings and make decisions overseas are being forced to undertake this work in the UK. Therefore, there is a risk that the CMC of the company will shift to the UK which in turn will impact the tax treatment of the company’s profits.
What has HMRC said?
In its guidance (INTM120185), HMRC states that in their view the existing 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.
HMRC goes on to say that whilst each case will be determined on its own facts, where a few board minutes are held in the UK, or where some business decisions are taken in the UK over a short time period, that this will not necessarily mean that a company’s CMC will be deemed to be in the UK.
A non-UK resident company trading in the UK through a UK permanent establishment (PE) will be subject to corporation tax on profits attributable to that PE. A PE is defined as:
- A fixed place of business through which a company’s business is wholly or partly carried on; or
- An agent acting on behalf of the company, having and habitually exercising authority to do business on behalf of the company.
Therefore, restrictions to travel and business operations may result in a company unintentionally creating a permanent establishment in the UK.
As with Company Residence above, HMRC has provided guidance (INTM261010) setting out its response to the PE challenges posed by COVID-19. Their response is similar to that of company residence, confirming that a non-resident company will not automatically have a taxable presence by way of PE after a short period of time. It is a question of fact whether an agent acting on behalf of the company habitually exercises authority to carry out the company’s business in the UK.
Home or Away? Company Residence and CMC (23 October 2019)
Coronavirus & The Statutory Residence Test (1 April 2020).