Remaining in your residence: HMRC’s approach to corporate residence and permanent establishments during COVID-19

The swift and significant reduction in business travel as a result of the global COVID-19 outbreak has had a huge impact on the way businesses operate, at least in the short term. Many businesses are, for example, having to change how they communicate, something which has been commented on extensively in the press. Although less remarked upon, some businesses will also need to consider the potential implications of this decline in travel for their tax profile.

There is a risk that directors and employees having to undertake activities from their homes, in many cases not being in the same country as where they ordinarily work or undertake their duties, may create a taxable presence for businesses in those home countries.

On 8 April 2020, HMRC published its approach to UK corporate tax residence and the creation of permanent establishments (“PEs”) during the COVID-19 outbreak. HMRC states that while it is "very sympathetic" to the disruption the outbreak is causing it will not be implementing any special rules for assessing corporate tax residence or PEs. Rather, HMRC highlights that it already takes a "holistic view" in assessing corporate tax residence and the creation of PEs.

The OECD has also published its analysis of the impact of the COVID-19 crisis on tax residence. The key takeaway from this is that, in the OECD’s view, the temporary dislocation of employees and directors is “force majeure not an enterprise’s requirement” and accordingly the impact of alternative working arrangements during COVID-19 on the tax residence and PE of a business should be limited.

Corporate residence

In line with the government's general position that the COVID-19 outbreak is a temporary disruption, HMRC has stated that it will 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."

This should give businesses comfort that holding board meetings of non-UK tax resident companies in the UK during the COVID-19 outbreak should not necessarily prejudice the tax residence of such companies. However, the HMRC publication emphasises a holistic view and whether or not additional UK board meetings held during the COVID-19 outbreak may prejudice a company’s non-UK tax residence will need to be considered in the context of the location pattern of key decision making (whether at board meetings or outside those) over a longer period including also the COVID-19 outbreak. If overall there may be a concern regarding corporate tax residence, due to pre-COVID-19 board meetings also having been occasionally held in the UK then some mitigating steps may need to be considered. These might include:

• delaying board decisions until after travel restrictions are lifted
• UK board members not participating or delegating powers to non-UK board members
• additional non-UK board members being appointed.

We would recommend that the board minutes for any non-UK tax resident companies that are held in the UK as a result of the COVID-19 outbreak clearly record the bona fide reason for holding the meeting outside of the jurisdiction in which the company is resident.

Permanent establishments

In relation to the creation of PEs, HMRC refers to its existing guidance. Businesses having a presence in the UK for a “short period of time”, as may be the case at present, should not have the degree of permanence required to create a PE. A dependent agent can create a PE for a business if they habitually conclude contracts for that business in a particular jurisdiction. If an agent ordinarily travels but is restricted to the UK as a result of the COVID-19 outbreak, we consider that this should be capable of being regarded as a temporary change in behaviour in response to external circumstances.

This is supported by the OECD’s view that the COVID-19 outbreak is unlikely to create any changes to PE determination due to the dislocation of employees and directors being an “exceptional and temporary change”.

We recommend that companies keep contemporaneous records of the arrangements they agree with their personnel to enable them to work during the COVID-19 outbreak. So in the future they will have evidence that the arrangements were made to respond to circumstances outside of the control of the company and are temporary in nature. In addition, in certain circumstances it may be advisable to consider limiting a UK agent’s contracting authority for the period of the COVID-19 outbreak.

The future

HMRC and OECD assume in their approach that the impact of COVID-19 will be short-lived, as we all hope it will be. As time progresses we anticipate that HMRC and the OECD will revise their approach if this expectation proves to be unfounded.

For information on the tax and liquidity measures made available by the Government, please read our summary.