More employees are working from home than ever before, so it is increasingly important to assess whether the presence in the UK of a worker might constitute a permanent establishment (PE) for a non-resident enterprise. Of course, knowing whether a business has a PE in a jurisdiction is vital in establishing whether that enterprise has tax obligations in that country, both under domestic law and the operation of tax treaties.
What creates a PE in the UK?
Technically, a PE can arise in two circumstances:
- Where there is a fixed place of business in the UK through which the business is operated; and
- Where there is an agent acting on behalf of the enterprise which habitually concludes contracts in the name of the enterprise.
For there to be a fixed place of business, the following three features must all be present:
- There must be a geographical place of business
- That place must be fixed
- The non-resident’s business must be carried on through that place.
Individual treaties may specifically include or exclude types of business premises from the PE definition – examples from the OECD model Articles include places of management, branches, offices, factories, workshops, mines/quarries, building sites or construction/installation projects. These examples are reflected in UK domestic legislation, and HMRC states that interpretation should follow the OECD commentary on PE.
The presence of an employee in the UK, carrying out the ordinary everyday duties of their employment from their home, would not usually be sufficient to constitute a PE. This is because the activities of such an employee are likely only to be peripheral to the trade and not in themselves sufficient to constitute a UK trade.
However, if senior management are making strategic decisions, or routinely negotiating contracts from the UK, that may be sufficient to constitute a trade. While each situation will need to be judged on the facts, HMRC has recently clarified its guidance in this area in its International Manual at INTM261010 to confirm that the rules allow sufficient flexibility to deal with short-term changes in business activities necessitated by the response to the COVID-19 pandemic.
In contrast, where a non-resident individual carries out activities of their self-employment physically from a UK home, that UK home is likely to constitute a PE on the basis that it has both a permanence and the activities carried out from there are likely to be substantive enough to constitute a trade.
On the other hand, if the UK home is merely a base with trading activities carried out elsewhere, it maybe that the home is not a PE, and it is necessary to consider if those other locations may constitute a UK PE. HMRC’s manuals include an example where a painter entered into a single contract to paint a multi-occupied estate as being a PE, but note that if he contracted individually with unrelated occupants, his activities should be considered separately and each premises may not in itself constitute a PE.
Whether a partner of an overseas firm may create a UK PE if they work from their UK home will depend on the precise nature of the work they do. For larger partnerships, where work may be carried out in conjunction with overseas staff, the UK activities may not be sufficient to constitute a trade in isolation, so there may be no PE. However, for smaller partnerships it is more likely that the partner is carrying out activities in isolation of the overseas firm, and therefore is seen as carrying out a trade. Of course, if the partner is signing engagement letters and contracts from the UK, that in itself may be sufficient to create a PE.
While HMRC is currently taking a fairly flexible approach to these issues, if there is a longer-term trend to more homeworking, there may be higher risks to non-resident businesses. The Danish Tax Board ruled in a recent case that a German company had a PE in Denmark as a result of a homeworker. In due course, we might expect the UK and other tax jurisdictions to take a similar approach for long-term homeworkers, and companies should be wary of such issues when agreeing contractual terms with overseas workers.