Corporation Tax: Change to the definition of permanent establishment
Published 29 October 2018
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Who is likely to be affected
This change could impact overseas companies that have business operations in the UK. It is most likely to affect non-resident manufacturing and distribution businesses that structure their UK operations to minimise their UK tax footprint.
General description of the measure
A non-resident company is liable to UK corporation tax only if it has a permanent establishment here.
Certain preparatory or auxiliary activities, which are normally low value, such as storing the company’s own products, purchasing goods, or collecting information for the non-resident company, are classed as exempt activities and do not create a permanent establishment.
The measure ensures that foreign businesses operating in the UK cannot take advantage of those exemptions by splitting up their activities between different locations and related companies.
Policy objective
The UK is committed to tackling tax avoidance by multinational groups. This measure denies exemption from permanent establishment when non-resident businesses artificially fragment their operations to take advantage of those exemptions and avoid creating a permanent establishment.
As well as helping to preserve the corporate tax base this measure helps to ensure a level playing field between foreign and UK businesses and tackles unfair tax competition.
Background to the measure
This measure was announced at Budget 2018.
The Organisation for Economic Co-operation and Development (OECD) and G20 programme to tackle base erosion and profit shifting (BEPS) resulted in the publication in 2015 of a number of action points.
One of the changes recommended was to deny access to the exempt activities provision in tax treaties when the business activity has been artificially fragmented to avoid creating a permanent establishment. As a result, in those situations the permanent establishment conditions would be met and the jurisdiction would have taxing rights over the profits of that permanent establishment.
The UK decided to adopt this change in its tax treaties. It has given effect to that change through the BEPS multilateral instrument which was signed in June 2017, and which entered into force for the UK on 1 October 2018.
HMRC now needs to replicate this change in UK domestic law to make the change to tax treaties effective.
Detailed proposal
Operative date
The measure will have effect for companies from 1 January 2019. Where an accounting period straddles that date the provision applies to that part of the company’s accounting period that falls after that date.
Current law
The current definition of permanent establishment is included in chapter 2 of part 24 Corporation Tax Act (CTA) 2010. The specific activities that are exempt from permanent establishment are listed in section 1143.
Proposed revisions
Legislation has been introduced in Finance Bill 2018-2019 to amend section 1143 CTA 2010, and so deny exemption from permanent establishment to a non-UK resident company for these activities if they are part of a fragmented business operation, for example if:
- that company, either alone or with related entities, whether foreign or UK, carries on a cohesive business operation, either at the same place, or at different places in the UK
- at least one of them has a permanent establishment where complementary functions are carried on
- the activities together would create a permanent establishment if they were in a single company.
Summary of impacts
Exchequer impact (£m)
| 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 |
|---|---|---|---|---|---|
| negligible | negligible | negligible | negligible | negligible | negligible |
This measure is expected to have a negligible impact on the Exchequer.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure has no impact on individuals as it only affects non-resident companies.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that there will be any impacts as the measure only affects non-resident companies.
Impact on business including civil society organisations
Large multinational companies will be impacted where they have entered into arrangements to erode their UK Corporation Tax base. There is no impact on civil society organisations.
Operational impact (£m) (HMRC or other)
The change in the permanent establishment definition will be an additional aspect to consider in the annual risk review for HMRC’s Large Business division, but is not expected to have a significant impact on resource.
The additional tax at risk is expected to be small, because the non-exempt activities will be low value-adding in most cases.
HMRC’s published guidance on permanent establishment will need to be updated.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, contact Mike Hogan on telephone: 03000 585 645 or email [email protected].