INTM262300 - Non-residents trading in the UK: Is there a charge under domestic legislation: Domestic charging provisions

Once it has been established that there is trading in the UK the next step is to identify the particular charging provisions that are applicable (see the flow chart at INTM262100).

Land transactions

The territorial restriction has been removed for UK land transactions. With effect from 5 July 2016 CTA09/S5 and ITTOIA05/S6 have been amended : non-resident companies, and non-resident non-corporates are now within the charge to corporation tax or income tax (as appropriate) on the full profit from carrying on a trade of dealing in or developing UK land.

It is not necessary for them to be trading through a permanent establishment in the UK or for them to be UK resident for the charge to apply.

This expansion of the territorial scope does not impact the treatment of rental income of non-resident landlords.

See BIM60510+ for further guidance.

Corporation Tax (‘CT’)

The CT charge applies to a non-resident company if it trades in the UK through a permanent establishment (CTA09/S5(2)) (see INTM264000 et. seq. for definition of PE).

The general scheme of corporation tax is stated at CTA09/S5 to S8 starting with the plain statement that a company shall be chargeable to CT on all its profits wherever arising. The initial test for a non-resident company with activities in the UK should be to consider whether the company is chargeable to Corporation Tax under CTA09/S19. Where the non-resident company is within the charge to CT there cannot also or alternatively be a charge to income tax under ITTOIA05/S6(2) (see below) because that is prevented by CTA09/S3(1)(b). But where a non-resident company, which carries on a trade in the UK, is not chargeable under CTA09/S5(2), possibly because unusually its activities in the UK are not conducted through a permanent establishment (see INTM264300 for further discussion of this concept), it will still be chargeable to income tax under ITTOIA05/S6(2). (But see below for requirement that the trade be carried on through a PE where a treaty is in place).

Profits chargeable to Corporation Tax

A non-resident company trading in the UK through a permanent establishment is chargeable to UK corporation tax on only the profits arising from the permanent establishment [CTA09/S5(2), S19(1)].

The chargeable profits are, subject to any exceptions provided for by the Corporation Tax Acts, all profits, wherever arising, that are attributable to the UK permanent establishment. In line with Corporation Tax generally, chargeable profits can include capital gains. The chargeable profits are:

  • trading income arising directly or indirectly through or from the permanent establishment.
  • income from property or rights used by, or held by or for, the permanent establishment, and
  • chargeable gains under TCGA92/S10B: assets used or held or acquired for the permanent establishment (TCGA92/S10) or the trade carried on through the permanent establishment.

Non-trading income chargeable to CT

The profits chargeable to CT for the non-resident’s UK permanent establishment can only include non-trading income where the CTA09/S5(2), S19(1) charge has already been triggered because the non-resident company has been trading in the UK through a permanent establishment. Where that is the case the chargeable profits include (under CTA09/S19(3)(b)) ‘income from property or rights used by, or held by or for, the permanent establishment ’. The first part of that phrase can be confusing as any rental income that the non-resident had from UK properties would be chargeable under the non-resident landlords scheme provisions (described in more detail at SALF703). The phrase would apply, for example, to interest, patent royalties or licence fees where the source was connected to the permanent establishment operations.

For example, a non-resident electronics design and manufacture company carries out its trade in part through a UK permanent establishment. Certain product lines were designed at the UK factory and these go on to be licensed to third parties who pay licence fees to the non-resident company. The UK chargeable profits would include the licence fees receivable in respect of rights granted over intellectual property developed by the UK permanent establishment.

Another example, this time involving an interest source: the UK permanent establishment operations of a foreign company manufacturing computer games have been commercially successful and have generated surplus trading funds. The UK manager invests the surplus funds in UK securities. The UK chargeable profits should include the interest source.

Income tax

The Income Tax charge applies to a non-resident person if they exercise a trade in the UK. ITTOIA05/S6(2) is the Income Tax charging provision. It applies to any person, whether individual, partner, or company (see above where it applies to companies).In contrast to the CT provisions, the IT charging provisions are silent regarding permanent establishment / branch or agency. However the permanent establishment / branch or agency concept is important whether considering CT or IT for two reasons:

  1. Even in an income tax case, any applicable double tax treaty is likely to require that there be a permanent establishment in the UK before income tax can be charged on the non-resident, and
  2. Because of the need to bear in mind of the machinery of physically collecting tax liabilities from non-residents. The mechanics for the assessment and collection process (often referred to as the ‘machinery provisions’) are described in more detail at INTM268000 but broadly they attach the non-resident’s liabilities and obligations to the UK permanent establishment (for corporation tax) or to the UK representative, branch or agency (for income tax).