UK corporate tax and coronavirus

13 August 2020

Most corporate groups are aware that overseas incorporated entities can be deemed UK resident for tax purposes if central management and control is exercised in the UK. The location of board meetings is often a key factor in this determination and companies often therefore aim to ensure that board meetings are always held in the country of incorporation. However, during the coronavirus outbreak, travelling to attend such meetings has not always been possible due to the travel restrictions that have been imposed globally. In addition, due to these restrictions, employees of overseas incorporated entities may currently be present in the UK and vice versa, which can lead to further UK and overseas corporate tax implications.


When it comes to central management and control, HMRC has produced guidance to state that it does not consider that a company will necessarily become resident in the UK because a few board meetings are held in the UK or because some decisions are taken in the UK over a short period of time. HMRC does, however, consider that the existing legislation and guidance already provides this flexibility and it will therefore continue to take a holistic view of the facts and circumstances of each case. The OECD has taken a similar approach in its guidance on  the determination of the place of effective management, which is usually the tie-breaker where a relevant double tax treaty applies to ascertain a single country of residence. It appears, therefore, that not much will change in the application of the principles that determine corporate residence due to the current circumstances and the usual risks are still present.   

The accidental employee

Overseas businesses need to consider the possibility that a UK permanent establishment (PE) may arise during these unprecedented times, as employees normally based overseas may be working in the UK. Similar considerations will apply for UK businesses with employees temporarily working overseas. HMRC and the OECD are taking a similar position to that highlighted above, confirming that a sufficient degree of permanence is still needed to constitute a PE, as well as a ‘habitual’ nature when it comes to the conclusion of contracts. Clearly this by no means suggests that PEs will not be deemed to arise during the coronavirus pandemic, with the consequent attribution of profits to the PE, but it may allow some temporary flexibility in arrangements.

What about profit attribution?

Where entities that are subject to UK corporation tax are part of a corporate group, transfer pricing will be a key consideration at this time, as profit attribution during the pandemic is likely to be a contentious issue for many businesses. As many groups are only too painfully aware, some parts of their supply chain have been badly affected by the crisis, which may have a major impact on their transfer pricing arrangements and policies.

For example, benchmarking studies previously performed on which transfer pricing policies are based, may be woefully inappropriate for the pandemic environment. A comparison with data from ‘the great recession’ of 2008/09 may provide an initial indication of how comparability analyses are potentially affected, but it may not be that simple. Many businesses have restructured their operations, to deal with the pandemic, which has often meant that the location and entity in which functions are performed and risks are controlled or taken may have changed. This will affect the functional analysis upon which the existing benchmarking is based. 

More holistically, common areas for consideration now include (to name a few): existing advance pricing agreements (APAs) and covenant arrangements; new funding guarantees provided by parent companies; how government grants should be dealt with; force majeure clauses in intercompany agreements; UK entities providing support services to group entities making third-party sales where those sales have dramatically declined; and, costs of R&D or manufacturing where financial support is suspended or factories closed.

What now?

There is clearly a lot for multinational groups and other international businesses to think about from a corporate tax perspective at this time, but whatever businesses have decided or may yet decide to do as a result of the pandemic, one of the most important actions in this regard is to document the decisions taken and the rationale for them. This will help to identify and manage risk areas and put the business on the front foot when justifying positions taken in relation to residence, taxable presence and transfer pricing to the relevant tax authorities.

For more information please get in touch with Suze McDonald

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