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HMRC internal manual

Double Taxation Relief Manual

HM Revenue & Customs
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Non-residents: UK income: Expenses

In determining the profits of the permanent establishment, once it has been established that transactions between the enterprise and the permanent establishment are on an arm’s length basis, expenses which are incurred for the purposes of the permanent establishment can be deducted. These expenses do not necessarily have to be incurred only by the permanent establishment but can also include expenses incurred by the enterprise itself for the purposes of the permanent establishment. In addition there can be deducted a reasonable allocation of executive and administrative expenses incurred for the purposes of the enterprise as a whole. Such expenses can be incurred either in the United Kingdom or elsewhere.

Inspectors will need to know what the executive and administrative expenses are and any reasonable allocation to the United Kingdom permanent establishment can be accepted, for example a proportionate part based on the ratio that the permanent establishment’s turnover (or gross profits) bears to that of the enterprise as a whole. The expenditure to be apportioned should be the actual amounts incurred. It is not necessary for these expenses to have been reimbursed by the permanent establishment. There is no definition of expenses in agreements or in the Taxes Acts, but it is considered that the deductible expenses must be of a revenue nature and capital expenditure would not be deductible.