One employee working from a spare room can tax your company

Figures relate to tax year 2025-26 (UK) · 2025 (US)

A company hires one person abroad. No office, no lease, no registration, no announcement.

That arrangement can still create a permanent establishment, which gives the other country the right to tax part of the profit.

So the question is rarely whether you meant to set up there. It is what the person actually does, and where they do it.

Key takeaways

• A permanent establishment gives the other country a claim on profit.
• A fixed place of business is the classic trigger.
• An agent who habitually concludes contracts can create one too.
• Preparatory and auxiliary activities are generally excluded.
• A home office can be a permanent establishment if the company requires it.
• Construction sites have their own duration threshold.
• Creating one brings filing, not necessarily a large tax bill.
• The risk is usually discovered late, during due diligence.

What is a permanent establishment?

A fixed place of business through which a company carries on its activities in another country. According to IRS guidance on the concept, it covers places of management, branches, offices, factories and workshops. Where one exists, the host country may tax the profits belonging to it rather than leaving everything to the home country.

The idea exists to stop a business trading heavily in a country while paying nothing there.

It is a threshold test. How much profit arises is a separate question.

What makes a place fixed?

Some permanence, and a place the business has at its disposal. A desk used for years counts, while a hotel room used for a fortnight generally does not. The test looks at continuity and control. Whether the company owns or leases anything does not matter.

Ownership is not needed. Plenty exist in premises the company never rented.

Regular use of the same space over time is what matters most in practice.

Can a home office create one?

It can, and this is the modern problem. Say an employee works from home because the company has no premises there, and it carries on for years. That home can count as being at the company's disposal. Working from home now and then, by choice, sits the other side of the line.

Our guide to working remotely for a US employer covers the employee's own position.

Whether the company required it is often the deciding fact.

What is the dependent agent rule?

A separate route that needs no premises at all. Say somebody habitually signs contracts in the company name, or does the real work leading to them. That alone can create a permanent establishment. A salesperson closing deals abroad is the standard example.

The rule now reaches people who do the deal even where somebody else signs.

So pushing signature back to head office no longer solves the problem by itself.

What about an independent agent?

An agent acting in the normal course of their own business is usually outside it. A real distributor or broker with several clients does not create one for each of them. That falls away where the agent works almost wholly for one related company.

Our guide to UK contractors with US clients covers the contractor side.

Exclusivity is what turns an independent agent into a dependent one.

What are the preparatory exclusions?

A list of things that create no permanent establishment, even in a fixed place. Storage, display, buying and gathering information all qualify where they are truly side activities. These narrowed in recent years, so old advice on warehouses is often out of date.

Work that forms part of the core business rarely qualifies, whatever you call it.

A warehouse for an online retailer looks very different from one for a manufacturer.

A worked example

Take an illustrative example. An American software company hires one engineer in Manchester and lets her work from home.

For two years she writes code, which no customer sees and which is arguably a side activity.

Then she starts running client demonstrations and negotiating renewals with British customers.

That moves her from back office work to closing business. The company now has a British filing nobody budgeted for.

Two routes to the same result

Does a subsidiary create one automatically?

No, a subsidiary is a separate company and is taxed in its own right. The risk is the parent using the subsidiary premises or staff for its own business. So the danger lies in how the group behaves, not in the structure on paper.

Our guide to GILTI for UK company owners covers the parent company charge.

Clear agreements between the two keep the businesses properly separate.

What happens if you have one?

The host country can tax the profits belonging to it, and the company has to register and file there. Working out the profit is its own job. It often produces a small figure for a small operation. The paperwork often costs more than the tax.

Our guide to Form 8858 and foreign branches covers the American reporting that follows.

Registration, filing and local accounts all arrive together once it exists.

How is the profit worked out?

You treat it as a separate business dealing at arm's length. You identify the functions performed, the assets used and the risks assumed, then attribute a return to them. For a single engineer that usually means a cost plus margin, often 5% to 10% over costs for 2025-26, rather than a share of group profits.

The sums reward notes written at the time rather than built up later.

A sound method used every year beats a perfect one used once.

Does it affect payroll as well?

Almost always, and payroll usually arrives before the corporate question does. An employee working in another country usually creates payroll and social security duties there, whatever the permanent establishment answer. The two issues are linked but separate.

Our guide to shadow payroll between the US and UK covers the payroll mechanics.

Companies often fix the payroll and never look at the company risk behind it.

What about VAT and sales tax?

Different tests again, and an establishment for one tax does not settle the other. British VAT registration turns on supplies rather than profit, and American sales tax follows its own state rules. Three separate questions, and three possible answers.

Our guide to UK VAT registration for US sellers covers the British side.

Treating them as one question is a good way to miss a registration.

Does the treaty help?

Enormously. Without it, each country's own rules would catch far more. The treaty sets a higher bar than either country uses elsewhere, so many set-ups escape. That is why the treaty wording is the one that matters.

Our guide to the US UK tax treaty covers the wider structure.

Companies from countries with no treaty face a much lower bar.

How long does a construction site have?

Per the treaty, building sites and installation projects get their own period before they count. Run beyond it and the site counts from day one, not from the day you crossed the line. Splitting a contract to stay under the limit is specifically anticipated.

Related projects on one site usually get added together rather than counted apart.

Track the days from the first day on site, including mobilisation.

When does it usually come to light?

During a funding round or a sale, when a buyer's advisers finally look. By then several years may have passed, and the bill includes penalties and interest. Telling them first is almost always cheaper than letting them find it.

In our practice this is the single commonest cross-border surprise in a due diligence process.

Buyers price the doubt rather than the likely tax, which costs you more.

Can you avoid creating one?

Often, if you choose the structure on purpose rather than by accident. An employer of record works. So does keeping the work truly auxiliary, or forming a local company and pricing it properly. What fails is hoping an informal set-up stays invisible.

The right answer depends on how long the arrangement is expected to last.

A one year experiment deserves a different structure from a permanent team.

What about an employer of record?

It solves the payroll problem cleanly, and it helps with the company question without settling it. A third party employs the worker, which removes the direct presence, but what they actually do still matters.

Read the contract, then watch what happens in practice. The two drift apart quickly.

These set-ups cut the risk rather than remove it.

Does a short visit count?

Generally not, and business travel is not the concern here. Meetings, conferences and short projects sit well outside the limit in normal cases. The risk builds where visits form a pattern and the same space gets used again and again.

Our guide to US secondment tax covers longer assignments.

How often you go matters far more than how long any one trip lasts.

What records should you keep?

Contracts, a description of what each person actually does, travel records and any intercompany agreements. Those four answer what an enquiry or a buyer will ask. Writing it down while the facts are fresh beats any later rebuild.

Review it every year rather than when somebody finally asks.

Roles drift over time, and the answer has to drift with them.

Does it matter for a very small company?

The rules apply whatever the size, though the real exposure scales with you. One person abroad creates a filing duty and a small profit figure rather than a disaster. The cost sits in the paperwork rather than the tax.

Our business tax service covers the filings on both sides.

Small companies suffer most, because the cost of filing does not scale down.

Does a permanent establishment affect the employee?

Not directly, because their own tax position turns on where they live and work rather than on the company answer. What does change is the paperwork around them, since a company with a filing duty usually has to run local payroll properly. So the employee often notices the fix rather than the problem.

Our guide to apportioning UK employment income covers their side.

Employees are rarely worse off, though their payslip may change shape.

How long does the risk take to build?

Months rather than years in the agent cases, and longer where it rests on a fixed place. Somebody hired to close deals can create a permanent establishment almost immediately, while a back office role may take years to drift into one. So the clock depends on the work, not the calendar.

A sales hire deserves the analysis before the first day, not after the first year.

Engineering and support hires give you more time to get it right.

What does it cost to fix?

Registration and a local return each year, plus the professional time to attribute profit properly. For a single employee that is usually a few thousand pounds annually rather than anything dramatic. Fixing it late costs more, because back years come with penalties and interest attached.

Budget the ongoing compliance before deciding whether the arrangement is worth keeping.

Sometimes a local subsidiary costs little more and removes the argument entirely.

Does a permanent establishment ever help you?

Occasionally, which surprises people who treat it purely as a risk. Where the host country taxes profit at a lower rate, or where losses arise locally and can shelter future profit, having one declared properly can work in your favour. The point is to choose the position rather than stumble into it.

A declared establishment also removes the uncertainty a buyer would otherwise price against you.

Certainty is worth real money in any sale process, whichever way the tax falls.

What if you had one for several past years?

You deal with the back years deliberately rather than starting clean from today. Registering now and ignoring the past leaves the earlier exposure live and makes the disclosure look selective. Most tax authorities treat a full voluntary disclosure far more generously than a partial one they have to unpick.

Our guide to an HMRC enquiry for US filers covers what a British enquiry involves.

Quantify the back years before deciding how to approach either authority.

How to assess your own risk

1. List everybody working for the company in the other country.
2. Write down what each person actually does, not their job title.
3. Ask whether any of them concludes or negotiates contracts.
4. Check whether the company requires them to work from home.
5. Test whether the work is truly preparatory, or a permanent establishment risk.
6. Count days on any construction or installation site.
7. Deal with payroll and social security separately.
8. Document the conclusion and review it every year.

Mistakes and penalties we see with permanent establishment

The first is assuming that no office means no exposure, when the agent rule needs no premises at all.

The second is letting a back office role drift into client facing work without revisiting the analysis.

The third is relying on an employer of record to solve a question it does not actually address.

The fourth is discovering it during due diligence, when the buyer prices uncertainty rather than tax.

How US UK Tax Accountants helps

We look at what people actually do rather than at what the contracts say, because the analysis turns on activity and the two diverge within months of anybody being hired.

Then we structure it deliberately and document the reasoning. Our business tax work covers the company position.

If you have somebody working in the other country, get in touch before a buyer asks about it.

Last reviewed 24 October 2026. This article is general information and not personal tax advice, and these conclusions depend entirely on the facts.