Introduction: Permanent Establishment and the Company You Brought With You
A permanent establishment is the point at which your American company stops being purely American and starts owing tax in Britain. Furthermore, most owners cross that line without noticing, because nothing visible happens on the day it occurs. No letter arrives, and no registration is triggered automatically.
The exposure is real and it compounds quietly. HMRC can assess corporation tax on profits attributable to the UK, add interest, and charge penalties for the registrations you never made. Meanwhile, the IRS continues taxing the same profits in full.
At TaxYork we prepare returns for Americans who run US companies from London, Edinburgh and Manchester. In our experience, the owners most at risk are the confident ones. Specifically, they read a reassuring article about a fifty per cent threshold and concluded, wrongly, that it protected them.
This guide sets out both statutory routes into a UK permanent establishment, the two changes that landed in 2026, and the filings that follow on each side of the Atlantic. Additionally, it explains how to correct years already missed.
What a Permanent Establishment Is Under the Treaty
Article 5 of the US-UK double taxation convention defines a permanent establishment as a fixed place of business through which the business of an enterprise is wholly or partly carried on. The definition expressly includes an office, a branch and a place of management. The IRS publishes the treaty text on its income tax treaties page.
Article 7 supplies the consequence. Where such an establishment exists, Britain may tax the business profits attributable to it. Where it does not, Britain may tax nothing at all, however much revenue the company earns from UK customers.
That is the whole architecture. Consequently, the permanent establishment question alone decides whether your company files a UK corporation tax return or ignores Britain entirely. There is no middle position and no de minimis turnover figure.
Why 2026 Made This Question Urgent
Two developments changed the landscape this year. Finance Act 2026 rewrote the domestic dependent agent test with effect for chargeable periods beginning on or after 1 January 2026. Separately, the OECD updated its commentary on remote working.
Most published guidance has not caught up. Indeed, several pages ranking prominently for this topic still quote the old statutory wording, which Parliament replaced. Therefore, treat any article that describes an agent who "habitually exercises authority to conclude contracts" as out of date.
The Two Routes Into a UK Permanent Establishment
British law offers two independent doors into a permanent establishment. You need pass through only one, and many American owners walk through both simultaneously without realising it.
The Fixed Place of Business Test
The first route to a permanent establishment requires a fixed place of business in the United Kingdom with sufficient permanence. Notably, the place need not be owned or leased by the company. A spare bedroom qualifies if the business is genuinely carried on there.
HMRC's own examples are usefully concrete. In manual INTM264435, forty calendar days in the UK fails the permanence test, whereas a fixed three-month period each year meets it. Importantly, recurring annual presence accumulates rather than resetting.
The identity of the person present does not matter either. Where different staff rotate through the same UK location, HMRC treats the company's presence as continuous. Accordingly, rotating your team does not solve the problem.
The Dependent Agent Test Finance Act 2026 Rewrote
The second route catches companies with no UK premises at all, and Parliament widened it this year. Under the old test, a permanent establishment arose where an agent habitually exercised authority to conclude contracts in the company's name. That wording has gone.
Schedule 7 of Finance Act 2026 replaced it. The new test in section 1141 of the Corporation Tax Act 2010 catches a person who habitually concludes contracts, or who habitually plays the principal role leading to contracts that the company then routinely concludes without material modification.
The widening is substantial. Previously, keeping formal signature authority in Delaware defeated the test. Now it does not, because negotiating the deal from London is enough where head office merely rubber-stamps the paperwork.
Schedule 7 also tightened the independent agent escape route. A closely related person cannot qualify as independent where they act exclusively, or almost exclusively, for the company. Consequently, appointing your own UK subsidiary as a sales agent no longer works.
The Preparatory and Auxiliary Exemption
One genuine exemption survives. Activities of a purely preparatory or auxiliary character do not create a permanent establishment, even at a fixed UK location. Storage, display, purchasing and information gathering all fall within it.
The exemption is narrower than owners hope. It fails wherever the UK activity forms an essential and significant part of the business. Therefore, a marketing function is auxiliary for a manufacturer but core for a marketing consultancy.
Test the exemption against your actual business, not against a generic list. Furthermore, document the reasoning contemporaneously, because HMRC will examine the position years after the facts have faded.
Does Your London Home Office Create One?
Every American owner asks this, and the popular answer is dangerously incomplete. The OECD offers a two-part framework, and both parts must be understood together.
The OECD Fifty Per Cent Indicator
Under the updated commentary, working from home for less than half of total working hours across a twelve-month period is a strong indicator that no fixed place of business exists. Crucially, the measure looks at actual conduct rather than contractual terms.
Meeting the threshold is not decisive either way. The OECD explicitly states that exceeding fifty per cent does not create a permanent establishment automatically. The OECD discusses the framework in its analysis of remote working and taxable presence.
Note also that this is commentary, not statute. HMRC applies domestic law first, then the treaty. Consequently, the indicator informs the analysis without settling it.
The Commercial Reason Test
The second limb asks why the person is in that country at all. Where the business has a commercial reason for their presence — serving UK clients, developing UK suppliers, accessing the UK market — the home office looks far more like a place of business.
Where the reason is purely personal, the analysis softens considerably. Take an American who moved to London for a partner's job and serves only US clients. That case is materially weaker for HMRC than a move made to build a British customer base.
Document the reason honestly at the outset. Additionally, keep the evidence, because a reconstruction assembled during an enquiry carries far less weight than a contemporaneous record.
Why Sole Owners Lose the Safe Harbour
Here is the point that the fifty per cent headline conceals, and it applies to most readers of this guide. Where the individual is the only person carrying on the company's business in that country, the OECD accepts that their home office generally does constitute a place of business.
Read that again if you own the company outright. A sole founder running a Delaware corporation from a London flat is not protected by the threshold. After all, no other location exists from which the business operates. Therefore, the fifty per cent comparison has nothing to compare against.
This is precisely the fact pattern we see most often. Consequently, the reassuring articles are reassuring to exactly the wrong audience.
Permanent Establishment Is Not the Same as UK Tax Residence
Most guidance conflates two entirely separate exposures. The distinction matters enormously, because one is far worse than the other.
Central Management and Control
A company incorporated abroad becomes UK tax resident if its central management and control sits in Britain. HMRC explains the principle in manual CTM34210. The test looks at where the highest level of strategic decision-making actually happens.
The consequence dwarfs a permanent establishment. A UK-resident company pays corporation tax on its worldwide profits, not merely on profits attributable to a British branch. For a sole director living in London, this risk is acute and frequently overlooked.
Board minutes signed in Delaware do not fix it. Rather, HMRC examines where decisions are genuinely made, and a paper trail contradicted by reality helps nobody.
The Treaty Tie-Breaker That Can Strip All Benefits
Where both countries claim residence, the treaty must break the tie. The US-UK convention does not use a mechanical test for companies. Instead, the competent authorities must reach agreement.
If they reach none, the company may be denied treaty benefits altogether. That outcome is severe, because it removes the very relief the treaty exists to provide. Accordingly, dual residence is a position to avoid rather than to argue.
Manage the risk structurally. Hold genuine board meetings where the directors actually are, allocate strategic authority deliberately, and take advice before the first accounting period closes.
What You Must File Once a Permanent Establishment Exists
Once a permanent establishment exists, obligations follow in both jurisdictions immediately. Furthermore, they begin on the date the establishment arose, not the date you discovered it.
Companies House and the Overseas Company Registration
A fixed place of business is a UK establishment for company law purposes. Consequently, the overseas company must register with Companies House, file accounts and keep the register current. A dependent agent establishment, by contrast, does not trigger this duty.
That distinction surprises people, and it produces the most common compliance gap we see. Many owners register with HMRC while ignoring Companies House entirely. Penalties for the omission are separate from any tax at stake.
HMRC Registration and the CT600
The company must also notify HMRC and register for corporation tax, following the guidance for non-UK incorporated companies. Notification of coming within the charge is due within three months of the accounting period beginning.
Thereafter, the company files a CT600 with the supplementary pages for a non-resident. UK corporation tax runs at 25 per cent on profits above £250,000, with the small profits rate of 19 per cent below £50,000, as set out in the corporation tax rates guidance.
Late notification carries penalties geared to the tax unpaid. Therefore, register even where you expect the attributable profit to be modest.
Attributing Profits Under Article 7
Only profits attributable to the establishment fall into the UK charge. The attribution follows the functions performed, assets used and risks assumed in Britain, treating the establishment as a separate enterprise dealing at arm's length. HMRC introduces the framework in manual INTM261020.
For a founder-led business the attribution is usually high, because the founder performs the functions that generate the profit. Consequently, arguing for a small attribution rarely succeeds where the owner works exclusively from London.
Prepare the analysis properly and keep it. Additionally, expect HMRC to test it, since attribution is where most enquiries concentrate.
The US Side: Credits, Forms and the Entity Trap
A UK permanent establishment changes nothing about your American obligations. Fortunately, relief exists, provided you claim it correctly and on time.
Form 1118 and the Corporate Foreign Tax Credit
A US corporation claims credit for UK corporation tax on Form 1118, subject to the usual limitation. The credit cannot exceed US tax on the foreign-source portion of income. Additionally, the IRS foreign tax credit guidance explains the limitation mechanics.
The arithmetic bites hard here. UK corporation tax at 25 per cent exceeds the 21 per cent federal rate, so a fully attributed profit generates excess credit that cannot be used currently. Excess amounts carry back one year and forward ten.
Model this before the UK accounts are finalised. Otherwise, you discover the stranded credit only after both returns have been filed.
Form 8833 and the Treaty Position
Where you rely on the treaty to limit UK or US taxation, disclose the position. Form 8833 reports a treaty-based return position, and omitting it carries a penalty independent of any tax.
Disclosure is not an admission of weakness. On the contrary, a clearly stated position starts the assessment clock and demonstrates good faith. Consequently, we file it whenever the treaty does genuine work.
The LLC and S Corporation Mismatch
If your American entity is an LLC or an S corporation, the analysis becomes harder before it becomes easier. HMRC generally treats a US LLC as opaque, as set out in manual INTM180050, while the IRS usually treats it as transparent.
The mismatch is expensive. America taxes the profits as they arise, then Britain taxes the distributions, and the credit relief does not align. The government's own consultation cites effective rates in excess of 75 per cent, with practitioners reporting outcomes above 60 per cent.
Relief may be coming. A consultation on reforming the taxation of UK-resident members of reverse hybrids opened on 10 June 2026 and closed on 31 July 2026. It proposes transparent treatment for individual members, though not for corporate ones, and no commencement date is yet fixed.
Reducing a Permanent Establishment Exposure Before It Hardens
Prevention costs a fraction of correction. Furthermore, several structures genuinely work, provided you adopt them before the facts are set rather than afterwards.
Incorporate a UK Company Instead
The cleanest answer is often to stop resisting. Forming a UK company, employing yourself through it, and charging the US parent an arm's length service fee converts a contested permanent establishment into an ordinary intercompany arrangement.
The UK entity pays corporation tax on its margin, which is far easier to compute and defend than an Article 7 attribution. Additionally, the arrangement removes the Companies House exposure and the central management and control argument at the same time.
Transfer pricing rules then apply to the service fee. Therefore, document the margin properly, because HMRC scrutinises intercompany pricing closely once a UK subsidiary exists.
Move the Functions, Not Just the Paperwork
Where you prefer to keep a single entity, the only reliable defence is factual. Hire genuine US staff who perform the functions, negotiate the contracts and carry the risk. A permanent establishment follows substance, so moving substance is the only route that survives an enquiry.
Cosmetic fixes fail. Signing in Delaware, holding nominal board calls and describing your London role as advisory will not withstand the new section 1141 test. Consequently, we discourage clients from relying on them.
Accept It and File Properly
Sometimes the establishment is simply unavoidable, and that is an acceptable outcome. A registered, correctly attributed permanent establishment with a filed CT600 and a claimed Form 1118 credit produces a manageable effective rate.
The unmanageable outcome is the undeclared one. Penalties, interest and a contested attribution across six open years cost far more than the tax itself. Accordingly, we frequently advise clients to register voluntarily rather than to keep arguing.
Case Study: An American Founder Running a Delaware Company From London
Consider a client we will call Alex, an American who moved to London in 2024 and owns a Delaware C corporation outright. The company earned $1.8 million of revenue and $600,000 of profit in 2026. Alex works from a Hampstead flat and negotiates every client contract personally.
Both routes applied. Alex was the only person carrying on the business in Britain, so the home office constituted a fixed place of business. Additionally, Alex played the principal role leading to contracts that Delaware signed without modification, which satisfies the new section 1141 test.
Attribution was unavoidable. Alex performed every profit-generating function in London, so we attributed 85 per cent of profits to the UK permanent establishment. That came to $510,000, roughly £387,000. UK corporation tax at 25 per cent came to about £96,750, or approximately $127,500.
The US position then tightened. Federal tax on $600,000 at 21 per cent is $126,000. However, the Form 1118 limitation capped the credit at 21 per cent of the foreign-source $510,000, which is $107,100. Consequently, $18,900 of residual US tax remained and $20,400 of credit was stranded as carryforward.
The combined charge reached roughly $146,400, an effective rate of 24.4 per cent against 21 per cent had no establishment existed. Separately, Alex owed penalties for failing to register with Companies House and for late notification to HMRC.
We also identified a larger risk that Alex had never considered. As sole director managing strategy from London, the company faced a credible argument for UK tax residence on worldwide profits. Restructuring the board resolved it prospectively, and we documented the position for the open years.
Missed Filings: Catching Up on Both Sides
Discovering a permanent establishment after several years is common rather than exceptional. Fortunately, structured routes exist in both countries.
Streamlined Foreign Offshore Procedures
Where personal US filings were missed without wilfulness, the IRS Streamlined Filing Compliance Procedures remove the offshore penalty for qualifying non-residents. You file three years of returns, six years of FBARs and a certification explaining the failure.
A misunderstood permanent establishment supports a genuine non-wilful narrative. After all, the question is technical, the guidance is contradictory, and Parliament changed the test this year. Our IRS Streamlined Filing service builds that certification from the underlying records.
Form 5471 and the Company You Never Reported
Do not overlook the information returns that sit alongside the permanent establishment question. A US person controlling a foreign corporation files Form 5471, and the penalty starts at $10,000 per form per year regardless of tax owed.
The trap runs in both directions. Americans in Britain frequently forget the UK subsidiary they formed, while treating the US parent as obviously compliant. Consequently, we map the whole structure before filing anything, often alongside our FBAR and FATCA reporting service.
How TaxYork Can Help
We prepare US and UK returns for company owners who operate across both systems. Therefore, we can assess a permanent establishment exposure and file the resulting returns without handing you between two firms who each see half the problem.
Our work begins with the facts rather than the forms. We establish where functions are genuinely performed and test both statutory routes. Furthermore, we separate the permanent establishment question from the residence question, then quantify the attribution before anyone files. Additionally, we model the Form 1118 limitation so stranded credits surface early.
Where years have been missed, we handle the catch-up completely through our US tax return preparation service and, where the treaty carries the position, our tax treaty optimisation service. We follow the technical debate closely, including ICAEW tax news and the Chartered Institute of Taxation, so our positions rest on current law.
Conclusion
A permanent establishment is easier to create than most American owners believe and considerably harder to unwind afterwards. Furthermore, Finance Act 2026 widened the dependent agent test on 1 January, so arrangements that worked in 2025 may fail now.
Three points deserve particular attention. Sole owners do not benefit from the fifty per cent home-working indicator. Central management and control is a separate and larger exposure than the establishment question. Additionally, a fixed place of business triggers Companies House duties that a dependent agent does not.
Act while the position remains correctable. Ultimately, voluntary registration with a documented attribution costs far less than an HMRC enquiry reaching back six years. Additionally, the American credits that offset it expire on their own schedule.
Contact Us
Speak to a specialist who prepares both returns rather than one. To review whether your company has created a UK permanent establishment, or to catch up on filings already missed, book a consultation with our team today.
Email hello@taxyork.com or call 020 3488 8606. Furthermore, if you have been operating from Britain for more than a year, raise it now, because penalties are geared to delay as well as to tax.
Disclaimer
This article provides general information on UK and US tax rules current at August 2026. It does not constitute tax advice for any specific company or arrangement. Outcomes depend entirely on individual facts, corporate structure and residence status. Accordingly, you should obtain professional advice before acting. TaxYork accepts no liability for action taken solely in reliance on this content.