This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

International Manual

Non-residents trading in the UK: place of contract may not be decisive

Smidth v Greenwood

The 19th and early 20th century trades were typically of the merchanting variety being confined to the buying and selling of goods. These early trades were essentially less complex than the later industrialised manufacturing trades and also quite different to trades focussed upon the provision of services. Whilst it was simple to determine whether merchanting trades had been carried out in the UK by reference to whether sales contracts had been made in the UK, the later industrialised trades comprised a wider range of business activities than just selling goods.

In line with commercial developments, the Courts began in later judgements to place less emphasis on the place of contract necessarily being the lone decisive factor as demonstrated in the seminal 1921 House of Lords decision in Smidth & Co v Greenwood [8TC193]. Although the Revenue lost the case and it was found that the non-resident was not trading in the UK, the case is valuable precedent because of the comments of Lord Atkin, with the final sentence being particularly pertinent, as follows:

`It (the place of contract) is obviously a very important element in the enquiry and if it is the only element the assessments are clearly bad. The contracts in this case were made abroad. But I am not prepared to hold that this test is decisive. I can imagine cases where a contract of resale is made abroad, and yet the manufacture of the goods, some negotiation of the terms, and complete execution of the contract take place here under such circumstances that the trade was in truth exercised here. I think that the question is, where do the operations take place from which the profits in substance arise?’

We have come to adopt the test in this final sentence as the principal criterion for determining whether there is `trading in’ the UK.

Slightly more recent (1957) validation of the ‘profits in substance’ test can be found in the House of Lords decision in Firestone Tyre & Rubber Co Ltd (as agents for Firestone Co of USA) v Lewellin [37TC111]. A UK company manufacturing tyres was the subsidiary of a US company. Under the agreement between the two, it fulfilled orders obtained by European agents of the parent company. The purchasers paid the UK company, which credited the parent company with the sale price less its own costs plus 5%. The House of Lords held that the UK subsidiary was correctly assessed as its agent. Of particular relevance are Lord Radcliffe’s comments, at page 142: “It follows, then, that the place of sale will not be the determining factor if there are other circumstances present that outweigh its importance or unless there are no other circumstances that can.”

Profits in substance - possibility of multiple locations

For the avoidance of doubt, the Smidth test of establishing where the profits in substance arise is equally applicable where the non-resident’s trade is merchanting. The decision in Smidth supports the conclusion that, where the activities are the buying and selling of goods at profit, the trade is normally exercised at the place where the contracts for sale are made - that is where the operations take place from which the profits in substance arise. But where there are other trade activities, apart from the making of sales contracts, you also need to consider where those operations are carried out. So a merchanting trade, in the same way as any other trade, could be carried on from more than one or even several locations or even countries.

Identifying the profit-making activities and where performed

Where contracts are made abroad, that fact is not conclusive against trading in the UK by the non-resident. The trade will be exercised in the UK if there is significant economic activity here contributing to the making of profits. In the case of selling goods in the UK, there is likely to be trading here if in substance the selling takes place here even if formal conclusion of contracts takes place abroad.

In deciding whether the non-resident is carrying out a trade in the UK, the important Smidth v Greenwood principle is to establish where the operations take place from which the profits in substance arise. In order to go about that practically it is important to identify the precise nature of the trade of the non-resident so that you can understand what the essential profit-making operations might be. Then you should establish precisely what is done in the UK (and elsewhere if you can) to gauge the extent to which the UK operations contribute to the profit producing part of the trade. It will often be necessary to obtain full details of the personnel in the UK and establish what they actually do. If for example they are involved in selling goods in the UK it will be relevant to establish the extent to which they have authority to negotiate and conclude contracts. In dealing with operations other than the sale of goods the place of contract is of less importance. For example where consultancy or services are provided or where construction work is performed in the UK the non- resident should be regarded as trading here wherever contracts are concluded. There is support for this in WH Muller & Co (London) Ltd v Lethem 13TC151.

The UK domestic charging provisions only permit profits arising to the non-resident through the UK activities to be subjected to tax. There is further guidance on functional analysis of a global trade in the pages on attribution of profits (INTM267050) and transfer pricing (INTM267040).

Place of contract and how contracts are made

There have been many references in this chapter to the making of a contract and to the place where a contract is made. If you have doubts about the place of contract that cannot be resolved by reference to the general guidance below you should contact the relevant specialist at CSTD Business, Assets & International. If the question of where a contract is made becomes contentious and a legal opinion is required, a submission should be made to CSTD Business, Assets & International.

In most cases you are likely to be within the scope of English contract law and that is the basis on which the following guidance is framed. Where it is asserted that some other system of contract law applies you should seek advice from CSTD Business, Assets & International.

Contract law is complex and it is not always easy to know where a contract is made. A contract consists of offer and acceptance. Contrary to what most people may assume, the offer is made by the buyer and the acceptance is made by the seller.

The place of contract is the same as the buyer’s location when they receive the seller’s acceptance. The place of contract will therefore be obvious where a transaction is agreed between the seller and buyer in person, whether by invoice, verbally or even by a handshake. All other forms of instantaneous communication such as acceptance by telephone, email or fax follow the same principle and the location of the buyer when they receive the acceptance from the seller is the place of contract.

Where acceptance is communicated by letter under UK law it is regarded as received at the place of posting rather than at the place of actual receipt. This is because, once a letter has been posted, the Post Office holds it on behalf of the addressee. Similarly, telegrams like letters are regarded as received when put into the hands of the Post Office.