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When a non-UK company operates a permanent establishment (PE) in the UK, it is subject to UK corporation tax on the profits generated by that PE. But what happens when the company decides to close its UK operations? Terminating such trading activities has specific tax implications under UK law.
Understanding Permanent Establishments and Taxation
A permanent establishment refers to a fixed place of business in the UK, such as an office, branch, or factory. Profits attributed to this PE are taxable under UK corporation tax rules. The taxation is limited to income directly connected to the activities of the UK establishment.
If the non-UK company decides to cease operations and close the PE, HMRC may treat this as a “migration” of the business from the UK. This triggers an exit charge under UK tax legislation.
What Is an Exit Charge?
An exit charge ensures that any economic value created in the UK is taxed before the business leaves. It applies to the profits and gains that would otherwise escape UK taxation due to the cessation of the PE.
Key aspects of the exit charge include:
- Taxable Gains: HMRC may assess unrealised gains on assets linked to the UK PE, such as property, equipment, or intellectual property.
- Balancing Charges: If an asset is no longer used for UK trading, a balancing charge may arise for capital allowances claimed on it.
- Stock Valuation: Inventory held by the PE may be treated as sold at market value, with the resulting profit taxed.
The rules are designed to ensure that all taxable income and gains connected to the UK are accounted for before the business terminates.
Steps to Take When Ceasing UK Trading
- Notify HMRC: Inform HMRC about the cessation of the PE. This is required to close the tax records and settle any outstanding liabilities.
- Prepare a Final Corporation Tax Return: The company must submit a corporation tax return up to the cessation date. This includes declaring all taxable profits, gains, and exit charges.
- Valuation of Assets: Ensure that all assets related to the PE, including stocks, equipment, and intangible assets, are accurately valued.
- Pay Any Outstanding Tax: Corporation tax, including any exit charges, must be paid by the usual deadlines.
Reliefs and Considerations
While the exit charge ensures fair taxation, companies may benefit from certain reliefs:
- Double Tax Treaties: If the company’s home country has a tax treaty with the UK, relief may be available to avoid double taxation.
- Capital Losses: Losses arising from the PE’s activities may offset gains, reducing the overall tax liability.
- Transfer Pricing Rules: Ensure compliance with transfer pricing regulations, as transactions between the PE and the parent company may also be scrutinised.
Ceasing operations can be complex due to exit charges and asset valuations, making advance planning essential to minimise tax impact. When a non-UK company closes its UK permanent establishment, it must navigate tax consequences carefully. The exit charge ensures taxation of UK-generated profits and gains before ceasing operations. Proactive compliance with HMRC and exploring reliefs can help reduce the tax burden. With careful planning and expert advice, a company can exit the UK market smoothly while meeting its tax obligations.