The UK government faces an unprecedented task in implementing measures to help individuals and businesses deal with the impact of the coronavirus.  A number of general measures aimed at providing tax assistance to the UK’s economy, and guidance on how tax legislation works at this exceptional time, have already been introduced and are discussed below.

However, as there remain many aspects of the UK tax regime that are likely to be challenging for taxpayers, further assistance and guidance by the Government and HM Revenue & Customs (HMRC) is possible as this year progresses.

Company tax residence

For UK tax purposes, a company that is not incorporated in the UK can be treated as being tax resident in the UK if it is “centrally managed and controlled” in the UK.  The “centrally managed and controlled” test is based on case law, not UK tax statutes, and is focused on the geographical location where the highest level of control and central management of a company is exerted, as distinct from the place where everyday decisions might be taken.  Case law has identified that the highest level of control and central management can frequently be identified as being exerted where the meetings of the board of directors of the company are held, in accordance with that company’s articles of association.

The inability of directors to travel during the pandemic has raised a number of questions regarding the test of residence for non-UK incorporated companies:

• where directors of a non-UK incorporated company are currently unable to leave the UK, will this result in that company becoming UK tax resident?
• where a non-UK incorporated company has been treated as being UK tax resident (perhaps to take advantage of the UK’s low rate of corporation tax or network of double tax treaties), if directors are stranded outside the UK, might their temporary location result in that company being treated as resident abroad, outside the UK?

HMRC published an addition to its International Taxation guidance manual in early April in an attempt to allay a number of these concerns (HMRC International Tax Manual INTM120185).  HMRC noted that: “We do not consider that a company will necessarily become resident in the UK because a few board meetings are held here, or because some decisions are taken in the UK over a short period of time.  The existing HMRC guidance makes it clear that we will take a holistic view of the facts and circumstances of each case.”  Following the new guidance, where “occasional” board meetings are located in the UK, or where participation in such meetings is from a location within the UK, this should not necessarily, by itself, result in an otherwise non-UK resident company being treated as resident in the UK.  By extension, the inability of directors to return to the UK – owing to a widespread travel ban – should not, by itself, result in non-UK incorporated companies being unable to demonstrate UK tax residence in contradiction of an otherwise coherent history of UK-located board meetings.

HMRC’s focus appears to be, without expressly stating it, that coronavirus-related travel disruption should not, by itself, be sufficient to adversely impact correctly arranged tax residence protections that companies may have in place.  What HMRC do take pains to spell out in the April guidance, however, is that HMRC’s view will depend on the facts in particular circumstances.  The HMRC guidance does not, therefore, suggest a change in current practice, as much as a common sense interpretation of well-known case law parameters.

It is also worthwhile noting that HMRC’s revised guidance confirms that even where a non-UK incorporated company is “centrally managed and controlled” in the UK, this does not necessarily mean that the company will be UK resident.  Where that company is considered to be resident of another territory with which the UK has a double taxation treaty, the corporate residence tie-breaker provisions of the treaty (focusing on the “place of effective management” or a competent authority test) may result in the company being treated as non-UK resident in any event.

Permanent establishments

Where directors and employees are "working from home" in a UK location, one question that will arise is whether a non-UK company employing such individuals might have created a permanent establishment in the UK.  Under the OECD Model Tax Convention on Income and Capital, a permanent establishment is identifiable where a company has a "fixed place of business through which the business of an enterprise is wholly or partly carried on" (Article 5(1)).

HMRC’s recent guidance in its International Manual addresses this question, noting that temporary working from home in a UK location should not result in the creation of a UK fixed permanent establishment, owing to “a degree of permanence” being required in respect of the arrangements before a permanent establishment is identifiable.

In this regard, HMRC appears to be viewing the current requirement of individuals to work from home as being temporary, and not by itself resulting in the identification of a fixed, physical permanent establishment.  HMRC go even further, stating helpfully that even if a UK permanent establishment was to be identified, that identification would not in itself mean that a significant element of the profits of the non-resident company would be taxable in the UK.

Trading losses

Significant breaks in trade can result in companies being treated for UK tax purposes as having ceased their trade, which can lead to tax consequences such as restrictions on the utilization of trading losses.  As was seen in the financial crisis of 2008-2010, companies and groups used trading losses to ease cash-flow difficulties and help preserve treasury functions and solvency; those techniques will, no doubt, be equally important and valid in 2020-2021.

But will current business dislocation, and significant periods of business shut-downs as a result of coronavirus prevention measures, have an adverse impact on a company’s tax losses?

HMRC’s current guidance in its Business Income Manual notes that a period of trading activity may be followed by a period in which little or no activity takes place, which is then followed by further trading activity.  In this situation, the relevant question is whether the later trade is the same trade as the former trade – a question that is, in this context, particularly relevant to the availability of losses carried forward or back across a break in business operations.  Following some case law authorities, it is possible for a new activity (after the break in business continuity) to be so different in scale and nature from the old one that it cannot be treated as being the same trade, and must therefore represent the commencement of a new trade.  However, this outcome would probably be very unusual in the coronavirus-related context.

As long as the business activity after a coronavirus-related trading break is similar in scale and nature to the old activity before any business suspension took place, it would be relevant to look at all the circumstances in which the break occurred, including the length of the break and the intentions of the business proprietors (as shown by their actions) at the time the earlier activity ceased (HMRC Business Income Manual BIM80580).  Where directors and owners are keen to return to normality after a trading break occasioned only by COVID-19, there would be very strong grounds to argue that the trading suspension has no adverse impact on the utilization of tax losses within the company or group.

Real estate sector

One of the impacts of COVID-19 on the real estate sector will relate to real estate investments which are subject to particular statutory regimes.  In particular, the new UK non-resident capital gains tax regime requires a "transparency election" to be made by certain collective investment schemes formed before April 6, 2019.  HMRC has confirmed that the timing for making a "transparency election" for these purposes has been extended from April 2020 to October 2020.

Deferral of payment of tax liabilities

The government’s COVID-19 response also includes measures for the deferral of the payment of certain general tax liabilities.  For example, VAT payments due before June 30, 2020 will be automatically deferred, and taxpayers will have until March 31, 2021 to pay accumulated liabilities.  HMRC have confirmed that businesses that normally make VAT payments by direct debit will need to cancel their direct debits in order to defer their VAT payments.

Self-assessment payments due on July 31, 2020 will also be deferred until January 31, 2021.

HMRC have a specific telephone helpline for taxpayers concerned about not being able to pay their tax due to COVID-19.  HMRC are able to discuss installment agreements, suspending debt collection payments and cancelling penalties and interest. Taxpayers seeking “Time to Pay” arrangements should try to ensure that tax returns are up to date, have financial forecasts and statements of assets and liabilities available, and be expected to make the best offer possible with a view to settling their tax liabilities.  HMRC are also expected to be more willing to agree extensions to pay income and corporation tax rather than VAT, PAYE and national insurance contributions.

Incoming measures

While the ability to defer payment of certain tax liabilities is intended to help business and individuals manage the cash-flow challenges that may be faced in the short-term, attention also needs to be turned to new measures that were intended to take effect at the beginning of the new tax year (being April 1 for companies and April 6 for individuals).  The government has confirmed the deferral of the introduction of previously announced tax measures such as the off-payroll working rules (known as the IR35 rules), which will be deferred for one year until April 6, 2021.

However, other measures that have not yet been deferred include the EU Mandatory Disclosure Directive relating to cross-border arrangements (known as DAC6), the regulations for which are due to come into effect on July 1, 2020.  While this deadline is still some time away given the rapid pace at which the government is being expected to respond, the DAC6 regulations would be another measure that could helpfully be deferred and that would assist many taxpayers facing other, non-taxation, challenges.