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HMRC internal manual

International Manual

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HM Revenue & Customs
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The attribution of capital to foreign banking permanent establishments in the UK: The use of UK Generally Accepted Accounting Practice

Questions have been raised as to whether in computing the profits of a UK permanent establishment (PE) of an overseas bank for UK tax purposes, the use of UK GAAP is mandatory. The short answer is yes. This was the case even before the enactment of section FA02/S103, which was enacted for the avoidance of doubt.

Under CTA09/S19 the UK may impose corporation tax on profits attributable to a PE. That is in line with the position under the UK’s double tax agreements (DTA’s). However, the DTA’s are concerned only with profit attribution, not with accounting methods or subsequent computation of the tax due. ITTOIA05/S(7)(1) provides that tax will be charged on the full amount of the trade profits for the year. Case law has established that the full amount of the profits is to be established by reference to the profits computed in accordance with the normal principles of commercial accountancy, subject to any specific provisions of the Taxes Acts.

It is important to note that there is no statutory or case law link between the actual accounts prepared by a taxpayer and the trade profit. The first step as laid down by the courts is not to look at the accounts but to ask what an accountant would have done. In this context, that must mean an accountant working within the constraints of UK law and practice. So, whatever the accountancy principles under which accounts may actually be drawn up, the tax computation of a UK PE should always reflect UK GAAP.

This view that UK accountancy standards apply regardless of the accountancy standards used in actually drawing up the accounts was bolstered by the provisions of CTA10/S1127 (previously FA98/S42), which require that profits be computed on an accounting basis which gives a true and fair view. A true and fair view is provided when profits are calculated according to UK GAAP.

If PE accounts are drawn up using the local home country accounting standards, then any differences between those standards and UK standards must be considered and computational adjustments made to produce the same tax profit or loss as a computation based on UK GAAP.