For international firms wishing to establish a UK presence, there are three possible types of legal entity: representative office, branch or subsidiary. In this blog, Daniel Reid, Partner at DRG Chartered Accountants, provides an overview of the complexity of the rules relating to representative offices, which can be applied very differently according to the nature of your business.
What is a representative office?
A representative office is where you have no corporate tax presence in the UK.
If you expect to only have a limited presence in the UK, an agency/representative office type of arrangement might be the most appropriate approach. Under HMRC rules, you can still employ UK sales staff operating from home, use UK banks and advisors and conduct market research. However, whilst you have established a UK tax presence – as you employ UK staff – you have not established a corporate tax presence as you have no corporate address.
You will have to register with both Companies House and HMRC but there should be no corporation tax or VAT filings required. However, whilst you will not be able to reclaim any VAT incurred in the usual way, there might be the possibility of reclaiming VAT annually. As a representative office, you will have to deal with payroll and your HR obligations for your UK employees.
When do I need a permanent establishment (branch) or a subsidiary?
However, once the need for a taxable presence in the UK has been established, or where the business is such that a legal entity in the UK is needed, the parent should consider whether to set up in the UK through a branch (also known for tax purposes as a permanent establishment), or a subsidiary. For further information, please read my blog “Setting up in the UK. Branch or a subsidiary?”
How can I unintentionally become a permanent establishment?
Beware, however you may acquire a UK permanent establishment without intending to do so by either establishing a fixed place of business or where an agent habitually exercises authority to do business on behalf of the overseas company:-
Fixed place of business
For example, where the business in the UK develops to the point that the company has a fixed place of business in the UK through which the business of the company is carried on, you will have a permanent establishment. This could be an office, factory or workshop that is used for at least six months. However, should the activities be limited to be order taking from UK clients, delivering goods to UK customers and purchasing goods from UK suppliers, it is unlikely that a permanent establishment will have been created.
Role of UK agent
The company may also acquire a UK permanent establishment where it has a UK agent who habitually exercises authority to do business on behalf of the company. To prevent a permanent establishment being created, an agent should not be allowed to negotiate or conclude contracts, which should be written into their employment contract. However, an exclusion exists if the agent is independent – both legally and economically.
And what about online retailers and ecommerce businesses?
Interestingly, HMRC and OECD treat ecommerce businesses differently. HMRC considers that a company which makes sales though their website does not have a permanent establishment even if the server on which is hosted is located in the UK. Whilst on the other hand, the OECD specifies that the location is the server can determine whether a there is a permanent establishment.
Seek professional guidance early
The rules are complex and their application does depend on context and the nature of the business. Care should be taken by overseas companies with operations in the UK, either directly, or through an agent, to ensure that those UK operations do not amount to a permanent establishment unless and until that is intended by the parent company. We strongly advice you to seek professional guidance before making any decisions.
If you would like to discuss setting in the UK, please feel free to get in touch with Daniel Reid, Partner at DRG Chartered Accountants, who specialises in international clients and inbound investment for foreign firms.
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.