When setting up in the UK, it is often assumed that the US parent company can simply sign a new office or building lease. But many are not aware of the issues this can cause.
If the US parent company signs a UK lease:
- the parent company is then fully liable for the lease itself;
- the UK entity can then not reclaim the 20 per cent VAT suffered on any ongoing monthly rental charges - the parent company would have to file an annual return in order to reclaim the 20 per cent VAT suffered in its name;
- the UK entity may not be able to prove to the banks that it is trading in the UK - when trying to set up a UK corporate bank account, a bank may request evidence of the UK lease signed by the UK entity. If signed by the parent company, this document may not be accepted by the bank as evidence; and
- the parent company may inadvertently create themselves a permanent establishment - under the UK/US double tax treaty, a permanent establishment is a fixed place of business through which the business of an enterprise is wholly or partly carried on. The definition of the term permanent establishment includes an office. This means there is a risk that the parent company could be deemed to have a permanent establishment in the UK, as an activity which is not preparatory or auxiliary to the business is being carried on in the UK from premises at their disposal.