Taxation in the United Kingdom/Legislation/Section 11 of the Income and Corporation Taxes Act 1988

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Subsection (1) provides that a non-UK resident company is only within the charge to corporation tax if it carries on a trade in the United Kingdom through a permanent establishment in the United Kingdom. This does not necessarily mean that a non-UK resident company that is not carrying on a trade in the United Kingdom through a permanent establishment is not subject to UK taxation on its profits, as it may well fall within the charge to income tax. This is typically the case for non-UK resident companies that receive income from UK land, where income less expenses is charged to income tax at the basic rate (22% in 2005-06). The precise meaning of "non-UK resident", "carrying on a trade" "in" (the United Kingdom) and "permanent establishment" are all important in deciding whether a foreign company is within the charge to corporation tax, and if so, to what extent.

Subsection (2) provides that a non-UK resident company within the charge to corporation tax is charged to corporation tax only on its profits, wherever arising, that are attributable to the permanent establishment.

Subsection (2A) provides a list of which profits are attributable to a permanent establishment, namely:

  • 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 failing within Section 10B of TCGA (i) by virtue of assets being used or held for the purposes of the trade carried on by the company through the establishment, or (ii) 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.

In practice, deciding what this amounts to can be difficult, particularly in the financial services industry, where funds held overseas may be supporting business arising from a UK permanent establishment. This Subsection is therefore supplemented by Section 11AA and Schedule A1. Life insurance companies have their own rules set out in Sections 11A to 11C of ICTA (as deemed to be inserted by Schedule 19AC to ICTA).

Subsection (3) mimics the provision in Section 7 that applies to UK resident companies. It provides that where a non-UK resident company to which this Section applies has received income under deduction of income tax, and it brings that income into its corporation tax computation, the income tax suffered may be used to offset the corporation tax charge for the period in which that income is brought into the corporation tax computation.

Subsection (4) disapplies subsection (3) for a payment of loan interest to which Section 369 of ICTA applies. Section 369 deals with mortgage relief at source. As mortgage relief at source no longer applies, this subsection no longer has any practical effect. This Subsection mimics Section 7(3).