One employee can be enough. A US company with a single UK hire has a UK permanent establishment if that person works from a fixed place through which the business is carried on, or habitually concludes the company's contracts. Corporation Tax follows that answer. PAYE and National Insurance follow different tests, so a company can owe payroll duties with no permanent establishment at all.
This post is for US founders hiring their first person in Britain before any UK entity exists, and it sorts the question by job. It adds a company-side view to our guide to US-UK tax for founders, fund managers and executives, and it sets out a change in UK law from 2026 that the treaty did not follow. The employee's own US return is a separate subject and is not covered here.
Can one UK employee create a permanent establishment for a US company
Yes, because the test looks at the activity and not the headcount. Article 5 of the treaty asks about a fixed place of business or a dependent agent, and neither limb has a minimum number of staff. Under Article 7, the UK may then tax only the profits attributable to that establishment.
The 2001 US-UK treaty (opens the official GOV.UK page in a new tab) gives the first limb in Article 5(1), a fixed place through which the business is wholly or partly carried on. The second is in Article 5(5), a person who has and habitually exercises authority to conclude contracts binding on the company. Article 5(4) then carves out activity of a preparatory or auxiliary character, and Article 5(6) protects independent agents, which is written for brokers and commission agents and rarely fits an employee.
UK domestic law asks a parallel question under section 1141 of the Corporation Tax Act 2010, summarised in HMRC's permanent establishment definition (opens the official HMRC page in a new tab). The company gets the treaty's protection only if it qualifies under Article 23, the limitation on benefits article, through a listed-shares, ownership and base erosion, or active trade or business route. A venture-backed startup with many non-US investors should confirm its route and not assume one.
What does each UK job do to permanent establishment
The job description matters less than what the person actually does each week. Sorting the role against the treaty's two limbs gives a first answer, which the table below sets out as we would on a call with a founder. Each line is a starting position that depends on the facts, and most roles change over time.
HMRC's decisive criterion on excluded activities (opens the official HMRC page in a new tab) is whether the work forms an essential and significant part of the enterprise as a whole. So the same task can fall on different sides for different companies. HMRC's own example is market research, which can be auxiliary for most businesses and is core for a market research company. A place that manages part of the enterprise cannot be auxiliary.
- Signs customer contracts or sets binding terms: treaty agent limb is likely met, and the role sits at the top of the risk order
- Leads negotiations while a US officer signs unchanged: UK law is likely met from 2026, and the treaty needs a close look at actual authority
- Generates leads and hands them over: promotion that does not directly result in contracts points away from the agent limb
- Market research, information gathering or advertising: usually preparatory or auxiliary, unless that is what the company sells
- Engineer or customer success lead from home: core work, so the question moves to whether the home is a fixed place of business
- Runs a European division from Britain: management points firmly towards a permanent establishment, and the auxiliary exclusion does not help
Did the UK permanent establishment test change in 2026
Yes, for chargeable periods beginning on or after 1 January 2026. UK law now catches a person who habitually plays the principal role leading to contracts that the company routinely concludes without material modification. The US-UK treaty still uses the older wording about authority to conclude contracts, and the treaty wording governs where a treaty applies.
The change is in Schedule 7 to the Finance Act 2026 (opens the official GOV.UK page in a new tab), which replaced the agent limb of section 1141. HMRC's dependent agent guidance (opens the official HMRC page in a new tab) treats a person as playing the principal role if they led the work and their actions in the UK directly resulted in the contract, or if their activities are most of those that did. Conclusions must recur, not arise in isolated cases.
This produces a split that older articles miss. A UK seller who negotiates every deal and sends it to Delaware for a signature may now meet the domestic test. The treaty question is narrower, though HMRC notes that a person able to negotiate all terms binding on the company can exercise authority in the UK even where someone else signs elsewhere. So signing in the US does not settle the matter. What settles it is who really decides price and terms, and the company's route through Article 23.
How does a home office count as a fixed place of business
HMRC's manual sets no special rule for a home. It applies the ordinary conditions: a place at the company's disposal, some permanence, and business carried on through it. Its one home-working example says such an arrangement is not automatically exempt from creating a permanent establishment, so the outcome turns on the facts of the arrangement.
HMRC's guidance on the place of business condition (opens the official HMRC page in a new tab) says a certain amount of space at the company's disposal can be enough, and that exclusive use is not required. Its examples on permanence (opens the official HMRC page in a new tab) treat a one-off stay of forty days as not permanent, and a fixed period every year under a continuing contract as meeting the test. A person employed full time from one address is unlikely to fail on permanence alone.
That leaves the question of disposal. The manual does not say what puts a home at an employer's disposal, so these are the questions we ask in practice, and none is decisive alone.
- Does the employment contract require the UK address, or merely allow it
- Does the company pay rent or a share of the household costs
- Do customers visit, or does the address appear on company materials
- Is company stock, equipment or paperwork kept there for business use
- Could the employee do the job from anywhere, or does the role need the UK
Does a US company need UK payroll without a permanent establishment
Often the duty to account for tax exists anyway, though who carries it varies. Work done in the UK is generally within UK income tax and National Insurance whatever the employer's position. PAYE depends on the employer having a UK tax presence, and employer National Insurance has its own test of residence, presence or a place of business.
HMRC's manual on employer presence (opens the official HMRC page in a new tab) treats a UK branch, agency or representative office as a tax presence, and says that having employees in the UK is not enough alone. An employer with no presence can operate PAYE (opens the official GOV.UK page in a new tab) voluntarily. If it does not, the employee may have to pay directly under the DPNI scheme (opens the official HMRC page in a new tab). A UK entity for which the employee works can also be made to operate PAYE under section 689 of the Income Tax (Earnings and Pensions) Act 2003. Once PAYE applies, an employer registers (opens the official GOV.UK page in a new tab) before the first payday.
For employer National Insurance (opens the official HMRC page in a new tab), place of business is undefined and decided on the evidence, such as premises, leases, UK bank accounts or a UK registered office. Social security is settled by the totalization agreement (opens the official IRS page in a new tab), and Publication 54 (opens the official IRS page in a new tab) says a worker is generally covered only where they work, with an exception for temporary assignments. Our payroll services page covers certificates of coverage for staff sent from the US.
When must a US company register for Corporation Tax and Companies House
Two clocks start once a taxable UK presence exists. A physical place of business must be registered at Companies House within one month of opening. Where the company trades through a dependent agent and has no physical UK establishment, it registers with HMRC within three months of becoming liable to Corporation Tax.
The overseas company registration (opens the official GOV.UK page in a new tab) route uses form OS IN01, and the guidance says Corporation Tax registration happens at the same time as a Companies House registration. The dependent agent route (opens the official HMRC page in a new tab) is a separate form sent to HMRC, with liability starting when the company begins trading through the agent. A company with no UK base does not register at Companies House, but may still need to register for Corporation Tax.
Corporation Tax (opens the official GOV.UK page in a new tab) on a non-resident company reaches only profits from its UK activities, at a main rate of 25% and a small profits rate of 19%. Article 7(2) measures those profits as if the establishment were a distinct and separate enterprise. On the US return, a corporation operating a foreign branch reviews Form 8858, and our post on UK branches and Form 8858 explains the branch tests.
Should a US startup hire directly or form a UK subsidiary first
A low-risk role with no UK premises can often start as a direct hire, with payroll settled first. Once the person sells, manages or brings in revenue, a subsidiary usually gives a cleaner answer, because a UK limited company has its own tax presence, runs its own payroll and files its own returns.
A US software company hires a first UK employee in Leeds, working from home with no UK office. For the first six months the employee only researches the market and books introductory calls for the US team, so we would expect no permanent establishment. In month seven the employee starts leading negotiations, and by month twelve every UK deal follows the terms the employee agreed, with head office signing unchanged. The domestic principal role test now looks met, the company tests the treaty's authority wording and its Article 23 route, and the board forms a subsidiary and moves the employment before the next financial year.
A subsidiary is not a complete answer. Article 5(7) says control does not by itself make one company a permanent establishment of the other, yet Schedule 7 stops a closely related company acting almost wholly for its group from counting as an independent agent. So the subsidiary should contract for itself or be paid under a written agreement priced at arm's length, as Article 9 of the US-UK tax treaty expects. The parent also takes on Form 5471 each year, and the subsidiary's profit falls within the net CFC tested income rules, amended by 2025 legislation for tax years beginning after 31 December 2025, where the high-tax exception is an option to review.
Our business incorporation and international tax services handle the two sides together, and our post on the reverse structure shows the mirror case. The wider filing picture is in our guide to US-UK tax for founders. To review a planned hire, contact us with the draft job description and sales process before the contract is signed.
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
