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HMRC internal manual

International Manual

From
HM Revenue & Customs
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Non-residents trading in the UK: domestic law permanent establishment/branch or agency

Independent agents do not create a permanent establishment

FA03/S148(3) excludes from the definition of permanent establishment the situationwhere the UK agent is ‘of independent status acting in the ordinary course of hisbusiness’.

Whether an agent is of independent status is tested by reference to the legal, financialand commercial characteristics of the particular business relationship between thenon-resident and the agent. If the relationship between them is the same as a relationshipbetween independent businesses dealing with each other at arms length then the agent willbe ‘an independent agent’. For example, an agent who acted for other independentunconnected businesses on the same terms as those under which he acted for thenon-resident could be an ‘independent agent’ and it would be clear that theagent had been acting in the ordinary course of his business if his activities wererepeated for various unconnected customers. Dependent or independent status does not turnon the shareholding relationship between principal and agent. The fact that an agent is asubsidiary company does not necessarily make it a dependent agent. However, a subsidiarycompany will constitute a domestic law agency PE of its parent company in the same way asany other agent of the parent company if independence by reference to the factors detailedin the guidance that follows cannot be demonstrated.

Whether an agent acts in the ordinary course of their own business is something thatshould be considered by reference to the behavioral facts as opposed to intentions notfollowed through in business performance. Matters relevant would include (but notnecessarily be limited to) the number of unrelated principals that the agent acted for andthe extent of the business activities customarily carried out by independent agents in thespecific business sector concerned.

Assuming they did act in the ordinary course of their own business, in general, an agentwould be independent and would not constitute an agency PE of the foreign enterprise forwhich it acts where it is independent of the principal enterprise both legally andeconomically. The perspective of application of this test is with relevance to thebusiness conducted by the agent for the principal rather than, for example, anyshareholding relationship between the principal and agent. Other relevant factors ofindependence may include:

  • the extent of the obligations which the agent has vis a vis the non-resident;
  • whether the agent is subject to detailed instructions or comprehensive control;
  • whether the agent bears the entrepreneurial risk for the business that the agent carries out for the non-resident;
  • the degree of reliance on the agent’s special skill and knowledge by the principal in the business done, and
  • Whether there is reference by the agent to the principal for approval of the manner in which the business is to be conducted.

There will undoubtedly be circumstances where, whether deliberately or not, therelationship between a non resident and a UK agent is obscure or even where the declaredterms of that relationship are very different from the actual terms. In such cases thereis no substitute for detailed enquiry into the relationship to see whether it falls withinthe category of dependent or independent agent.