Non-residents trading in the UK: profits of the PE: Domestic provisions on quantifying chargeable profits - Income Tax and Corporation Tax
A non-resident carrying on a trade in the UK is chargeable to UK tax on the profits arising from the UK activities. The charge could be to income tax or corporation tax. The guidance at INTM262000 covers the domestic charging provisions in more detail and this section only concerns how the chargeable profits are quantified. Although the CT charging provisions are more explicit on quantification of chargeable profits than the IT charging provisions, in either instance the overall profits and gains chargeable to UK tax in respect of the non-resident should be substantially the same in the majority of cases.
In more detail the domestic charging provisions specify the following extent of charge over a non-resident:
ITTOIA05/S6(2) - the profits from a trade carried on wholly in the UK, or from that part of the trade carried on in the UK when it is a trade carried on there and elsewhere.
ITTOIA05/S7(1) charges the full amount of the profits of the tax year.
Any chargeable capital gains under TCGA92/S10 and S10B (INTM267170) are additionally quantified and separately charged.
CTA09/S19(2) and (3) (formerly ICTA88/S11(2A)) - the profits attributable to a permanent establishment for the purposes of corporation tax are:
- trading income arising directly or indirectly through or from the establishment,
- income from property or rights used by, or held by or for, the establishment, and
- chargeable gains (INTM267170) falling within section 10B of the 1992 Act -
- by virtue of assets being used in or for the purposes of the trade carried on by the company through the establishment, or
- by virtue of assets being used or held for the purposes of the establishment or being acquired for use by or for the purposes of the establishment.
Since FA03, with effect for accounting periods beginning on or after 1 January 2003, the CT provisions then continue with CTA09/SS20-32 (formerly ICTA88/S11AA and Sch A1) which go into detail about how the chargeable profits should be determined under the ‘separate entity principle’ (INTM267040). This attributes profits to the PE in the amount that it would have made if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions dealing wholly independently with the non-resident company of which it is a PE. This includes the assumption that the PE would have such equity and loan capital attributed to it as it would reasonably be expected to have if it were a separate entity. See the guidance on PE capital attribution at INTM267120 to INTM267150.
In the majority of cases the IT and CT provisions would result in the same quantum of chargeable profits and gains from the UK operations. There are two possible differences however:
- For a company chargeable to CT - non-UK source interest and royalties income connected with the PE arising from outside of the UK could potentially come within chargeable profits (CTA09/S19(3)(b)), subject to the precise wording of any applicable double tax treaty whereas only UK source interest and royalties income of a non-resident IT taxpayer can come within the PE business profits.
- There are no capital attribution rules (INTM267120 to INTM267150) for non-resident IT taxpayers.