Most overseas companies making a first UK hire worry less about employment law than about tax. The specific fear is that one person working from a flat in Manchester quietly makes the whole group taxable in Britain. That fear is well placed, but it is usually pointed at the wrong thing, because what actually creates a UK permanent establishment is rarely what companies try to control.
What counts as a permanent establishment in the UK?
A UK permanent establishment exists where an overseas company either has a fixed place of business in Britain through which its business is carried on, or has a person here who habitually concludes contracts on its behalf. That is the domestic test in section 1141 of the Corporation Tax Act 2010. Cross either line and HMRC gets the right to tax the profits attributable to the UK activity, under section 5 of the Corporation Tax Act 2009, at the 25% main rate.
The two limbs behave very differently, and the second one is where most overseas employers get caught.
The fixed place of business limb
This asks whether there is a place in the UK, at your disposal, through which your business is wholly or partly carried on. Section 1141(2) lists the obvious candidates: a place of management, a branch, an office, a factory, a workshop. Historically that meant premises with your name on the door. The fight over the last five years has been about kitchen tables and spare bedrooms.
Section 1143 carves out activity that is only preparatory or auxiliary in character: storage, display, delivery, purchasing goods and collecting information. Since Finance Act 2019 that carve-out is narrowed by an anti-fragmentation rule, so you cannot slice one operation into several thin ones and claim each is auxiliary.
The dependent agent limb
This asks something else entirely: whether a person acting on your behalf habitually concludes contracts, or habitually plays the principal role leading to contracts that you then conclude without material modification. Read that wording carefully. It says a person. It does not say an employee, and it makes no reference at all to who runs the payroll.
It is the reference to a person, rather than to an employee, that catches out most overseas employers. Section 1142 excludes agents of independent status acting in the ordinary course of their own business, but an employee working to your targets, under your direction, selling your product is not an independent agent by any reading.
What changed on 1 January 2026?
Finance Act 2026 rewrote the dependent agent test in UK domestic law, and it took effect for chargeable periods beginning on or after 1 January 2026. If your UK tax planning was done before that date, it was done against a narrower rule.
The old wording asked whether an agent “has and habitually exercises there authority to do business on behalf of the company”. Schedule 7 of Finance Act 2026 replaced it with the 2017 OECD Model formulation, which reaches a person who “habitually plays the principal role leading to the conclusion of contracts, that are routinely concluded without material modification by the company”. The rubber stamp defence is gone. If your UK hire does the selling and head office signs whatever lands on the desk, the domestic test now catches that arrangement on its face.
Section 1142 was tightened at the same time. A person who is closely related to your company and acts exclusively or almost exclusively for your group can no longer claim independent agent status, whatever the contract calls them.
Domestic law can only tax what a treaty permits. Section 6 of the Taxation (International and Other Provisions) Act 2010 gives treaties precedence, and a treaty can narrow a UK charge even where domestic law would impose one.
Article 5(5) of the 2001 UK/US Double Taxation Convention still uses the older, narrower wording: an authority to conclude contracts that are binding on the enterprise. The United States never signed the OECD Multilateral Instrument, so that treaty was never modernised. A US-resident company can therefore still argue the narrower treaty test, and the wider domestic rule bites hardest on companies resident in jurisdictions whose treaties were updated by the MLI, or in no treaty jurisdiction at all.
That is a real protection. It is also a thinner one than it sounds, because both of the leading European cases in this area were decided under pre-BEPS treaty wording, and both went against the taxpayer.
The same Act made a second change worth knowing about. Diverted Profits Tax, introduced in 2015 at 25% and charged at 31% from April 2023, carried its own “avoided permanent establishment” limb. It was abolished for accounting periods beginning on or after 1 January 2026. It has been replaced by a charge on unassessed transfer pricing profits, inside corporation tax, at the corporation tax rate plus six percentage points. The new charge has no avoided-PE limb. HMRC no longer needs one, because it widened the permanent establishment definition instead.
Does a home office create a permanent establishment?
Usually not, if the person is there less than half the time and the reason they work from home is convenience rather than commerce. The OECD published a substantial update to the Commentary on Article 5 on 19 November 2025, approved by the OECD Council the day before. It replaced two thin paragraphs on home offices with around twenty new ones and five worked examples, and for the first time it put a figure on the analysis.
The 50% starting point
Where an individual works from a location for less than half of their total working time for the enterprise over any twelve-month period, that location is generally not a place of business. Assessment is on actual conduct, not on what the employment contract says. Treat this as a starting point for the analysis rather than a safe harbour, because that is how the Commentary frames it and how HMRC will read it.
The commercial reason test
Above 50%, a permanent establishment arises only where the person’s physical presence in the UK itself helps the business get done: engaging local customers or suppliers, entering the market, delivering a service that depends on being in the time zone, accessing local expertise, or carrying out training or repair on site. One such reason is enough.
What the OECD says is not a commercial reason
- Attracting and retaining talent, including hiring where the skills happen to be
- Employee convenience or personal preference about where to live
- Saving money on office space
- The employer providing financial support for the home office setup
- The mere presence of customers or suppliers in the country, without more
- Occasional or incidental client visits
Those first three are the reasons most overseas companies actually hire remotely in Britain, and the OECD has now said in terms that they do not, on their own, create a taxable presence.
First, the one-person case runs the other way. Where an individual is the only or primary person conducting the business of an enterprise in a country and works mostly from home over an extended period, the Commentary says that home office does constitute a place of business. If your entire UK presence is one person, the 50% analysis does not rescue you, and on the OECD’s reading it points the other way.
Second, and more important, the 2025 guidance deals with fixed place of business and the preparatory or auxiliary exclusion only. It says nothing about the dependent agent test, a gap several commentators flagged immediately. A salesperson who works from home two days a week is untouched by the 50% figure if they are the one negotiating your deals.
One caveat on how this lands in the UK. HMRC treats the OECD Commentary as an aid to interpreting a treaty, and the UK courts have said the same. Whether a 2025 Commentary can be read into a treaty signed in 2001 is the ambulatory interpretation question, and the UK has published no formal position on it. The point is genuinely contested. Take advice rather than assuming the new paragraphs apply automatically to your treaty.
So what does an employer of record actually change?
An EOR UK arrangement puts a British company in the position of legal employer. That company runs PAYE, withholds income tax, pays the 15% employer National Insurance on earnings above the £5,000 secondary threshold, and carries UK employment law compliance. All of that is real, and it removes genuine exposure. It removes a different exposure from the one most people have in mind.
The reason is structural. Permanent establishment is a question about the activities of your enterprise in the UK. Section 1141(1)(a) asks what is being done and where. Section 1141(1)(b) asks who is doing the deal-making on your behalf. Neither limb contains a question about which entity issues the payslip. When the OECD says the analysis rests on actual conduct rather than formal contractual arrangement, that applies to an EOR contract as squarely as to any other.
- PAYE registration, operation and RTI filing
- Employer National Insurance and pension auto-enrolment
- UK-compliant contracts and the section 1 statement
- Statutory leave, sick pay and family leave administration
- Dismissal process and tribunal exposure as legal employer
- Companies House registration for a UK establishment
- Whether a fixed place of business exists under s.1141(1)(a)
- Whether anyone concludes or drives contracts under s.1141(1)(b)
- Attribution of profits to any UK establishment
- Notifying HMRC of chargeability within twelve months
- Transfer pricing on intra-group charges
- How the role is described publicly and to customers
There is a second point that gets missed, and it works in the UK’s favour compared with parts of Europe. Britain does not license employee leasing. Germany requires an EOR to hold a permit from the Bundesagentur für Arbeit under the Arbeitnehmerüberlassungsgesetz and caps assignments at eighteen months, and a missing licence can create an employment relationship directly between you and the worker by operation of law. The UK has no equivalent regime. An EOR here will typically operate as an employment business under the Conduct of Employment Agencies and Employment Businesses Regulations 2003, and gangmaster licensing is confined to agriculture, horticulture, shellfish gathering and food and drink processing.
What did change is the regulator. The Fair Work Agency went live on 7 April 2026 under the Employment Rights Act 2025, absorbing the Employment Agency Standards Inspectorate, the Gangmasters and Labour Abuse Authority and HMRC’s minimum wage enforcement, with powers running to enforcement undertakings and court-ordered labour market enforcement orders. Ask any prospective UK EOR how they are set up for it.
Which UK roles carry permanent establishment risk?
Roles that shape customer contracts carry it, and roles measured on output that never touches a contract generally do not. The practical question is therefore not whether an EOR is safe in the abstract, but what this particular person is going to do all day.
A useful way to frame it internally: if the role’s success is measured in signed customer contracts, it carries dependent agent risk. If it is measured in code shipped, tickets resolved or content published, it does not.
PE risk tracks the role, not the payroll arrangement
Relative likelihood that a single home-based worker creates a taxable UK presence for the overseas parent. The gradient tracks authority over customer contracts, not seniority, salary or headcount.
Agility EOR analysis. Risk rises with the authority to negotiate and conclude customer contracts under section 1141(1)(b) CTA 2010 and Article 5(5) of the OECD Model, not with the number of people on the ground.
Job titles carry more weight than companies expect, because tax authorities look at public-facing material as readily as at contracts. A LinkedIn profile that says “Country Manager, UK” for a business with no UK registration is an invitation. So is a localised email signature, a UK phone number on the contact page, or a website listing a London office you do not have. None of these facts decides anything on its own. All of them are evidence of operational control, and evidence is what an enquiry runs on.
Two European cases show how this plays out in practice. In Dell Products, decided by the Spanish Supreme Court on 20 June 2016, a commissionaire structure created a permanent establishment for the Irish principal even though the Spanish company contracted in its own name. In Conversant International, formerly ValueClick, the French Conseil d’État found a permanent establishment on 11 December 2020 where the French entity never signed anything: it made all the preparations and the real decisions, and the Irish affiliate ratified as a formality. Formal structure lost to functional reality in both. The UK has its own long-standing authority on the same theme in Firestone Tyre and Rubber v Lewellin, where a UK subsidiary acting for its US parent meant the parent was trading in Britain.
What does a UK permanent establishment finding cost?
The corporation tax is usually the smallest part. The damage comes from the length of the look-back, the penalty regime that applies where no return was ever filed, and the fact that an unresolved exposure sits on your balance sheet through a funding round or a sale.
The look-back is the number to understand first. Paragraph 46 of Schedule 18 to the Finance Act 1998 gives HMRC four years as standard and six where tax was lost through carelessness. It gives twenty years where there was a deliberate loss of tax or a failure to comply with the notification obligation in paragraph 2 of the same Schedule. A company that never told HMRC it was chargeable has, by definition, failed that obligation. It starts in the twenty-year band.
| Exposure | What it means in practice | Typical reach |
|---|---|---|
| Corporation tax on attributed profits | The main rate, currently 25%, on profits attributed to the UK establishment under section 19 CTA 2009, by reference to the functions actually performed here. Earlier years are taxed at the rate then in force | Every open year |
| Failure to notify penalties | Up to 30% of the tax where the failure was not deliberate, 70% where it was, and 100% where it was deliberate and concealed, under Schedule 41 Finance Act 2008 | Often rivals the tax |
| Extended assessment window | Four years as standard, six for carelessness, twenty where chargeability was never notified. Unregistered presences sit in the twenty-year band | 4 to 20 years |
| Interest | Simple interest under section 101 Finance Act 2009, running from the original due date on every year assessed | From first due date |
| PAYE and National Insurance | Withholding obligations and employer NIC, currently 15% above the £5,000 secondary threshold, which frequently crystallise before the corporation tax position does | From first payment |
| Companies House | A fine of up to £1,000 plus £100 a day for failing to register a UK establishment within one month of opening it | Until registered |
| Transaction risk | An unquantified UK tax position disclosed in diligence, then priced into an escrow or an indemnity | Until resolved |
Penalties can be reduced substantially, and the reduction depends heavily on whether disclosure was unprompted. A non-deliberate failure disclosed unprompted within twelve months can be reduced to nil. The same failure carries a minimum of 10% once HMRC has already come knocking, and 20% where more than twelve months have passed. That gap is a good argument for reviewing a UK arrangement before anyone asks you to.
Four UK tests that get confused with each other
Hiring one person in Britain triggers four separate questions with four separate answers. Finance teams routinely treat them as one, then reach a conclusion that is right about one test and wrong about the other three.
| Test | The question it asks | Source |
|---|---|---|
| Corporation tax permanent establishment | Is there a fixed place of business here, or a person habitually concluding or driving contracts? | CTA 2010 s.1141 |
| PAYE presence | Is there something in the UK similar to a branch, agency, office or establishment where HMRC can contact and enforce against the employer? | HMRC PAYE81610 |
| Employer National Insurance | Is the employer resident, present, or does it have a place of business in Great Britain? | Reg 145(1)(b) SSC Regs 2001 |
| Companies House UK establishment | Does the overseas company have a branch, or another place of business, that it actually operates from in the UK? | Overseas Companies Regs 2009 |
The asymmetries are the useful part. Simply having employees in Britain does not create a PAYE presence: HMRC’s own examples of what falls short include sales staff working from private residences. Where there is no presence and no UK entity the employee works for, the employee can operate a direct payment scheme and account for their own income tax and primary National Insurance. Where the employer has no place of business in Great Britain, it is not liable for secondary Class 1 contributions at all, which is a genuine 15% cost differential against employing through a UK EOR.
That arrangement is entirely legitimate, but it is also the pattern that draws attention, because the same facts that make it work are the ones that make an enquiry worth opening.
The Companies House point runs the other way and is worth stating plainly. Registering a UK establishment on form OS IN01 within one month, at a cost of £124, is a company law duty. It is not an admission of a tax permanent establishment, and HMRC does not treat it as one. You can have a permanent establishment with nothing obvious to register, because a home-based salesperson working alone has no branch or office. You can also have a registered establishment used only for storage and no permanent establishment at all.
How to use an employer of record properly: six controls
None of what follows is complicated. These are the points that, across the client arrangements we have had reviewed, tend to separate a structure that survives an HMRC enquiry from one that does not.
1. Scope the role before you scope the vendor
Write down what the person will and will not have authority to do. “May not negotiate price, terms or contract wording; may not sign; refers all commercial terms to the parent for decision” is a sentence worth having in writing before the first interview, not after the first enquiry letter.
2. Keep contracting authority outside the UK, in practice as well as on paper
This needs to hold as an operating reality rather than a drafting formality. If your head office routinely signs whatever the UK hire has already agreed, Conversant is your fact pattern, and since January 2026 so is section 1141(1)(b).
3. Match the job title to the substance
“Enterprise Account Executive, EMEA” reporting into a US commercial lead reads very differently from “Managing Director, UK”. Check LinkedIn, email signatures and the website, not just the contract.
4. Watch the 50% figure and the commercial reason
Where a role is genuinely remote for talent reasons, document that at the time, not in hindsight. Where the role exists to be near a specific UK customer base, treat it as a live permanent establishment question and take advice.
5. Ask the EOR the questions that matter in Britain
UK EOR selection is less about licensing than it is in Germany, so the diligence shifts. How are they set up for the Fair Work Agency regime that began on 7 April 2026? How do they handle the unfair dismissal qualifying period dropping from two years to six months for terminations on or after 1 January 2027? Do they hold the employment risk themselves or subcontract it to a third party in-country?
6. Review before every sales hire, and again at eighteen months
Permanent establishment risk is not settled at launch. It changes the day the role changes, and roles drift. The delivery hire who starts sitting in on pricing calls is the classic way a low-risk arrangement becomes a high-risk one without anybody deciding to change anything.
Used this way, an EOR does something more useful than eliminating permanent establishment risk. It lets you separate the risks and treat them individually. Employment law, PAYE and National Insurance move to a party that handles them for a living. The corporation tax question stays where it belongs, visible and governed, rather than buried inside a hiring decision nobody flagged to finance.
Frequently asked
Q01 Does using an employer of record eliminate permanent establishment risk in the UK?
Q02 Can one remote employee working from home create a UK permanent establishment?
Q03 What changed in the UK permanent establishment rules in 2026?
Q04 How far back can HMRC assess a UK permanent establishment?
Q05 Does registering a UK establishment at Companies House create a permanent establishment?
Q06 When should we stop using an employer of record and set up a UK entity?
Compliant UK employment, no entity required.
We employ people in Britain on behalf of overseas companies and work alongside your tax advisers so the employment arrangement and the corporation tax position line up rather than pull against each other. If you are weighing a first UK hire, or reviewing one you have already made, we are happy to talk it through.