The government intends to tax receipts arising from intellectual property (IP) held offshore as part of its response to the challenges of taxing the digital economy.
HM Treasury started consulting after the 2017 Budget about a new tax charge on receipts in respect of intellectual property (IP) held offshore.
New tax charge
That charge will be introduced in Finance Act 2019 and will have an effective date of 6 April 2019, but with a targeted anti-avoidance rule (TAAR) will apply from 29 October 2018.
The announcements in the 2018 Budget were in respect of changes to the original proposals in 2017, to ensure the original policy objectives are met and to address some of the concerns raised in the consultation.
Who it applies to
The new legislation will impose an income tax charge on the overseas owner of IP, who receives a payment for the use of the IP (commonly a royalty) from another non-UK person and that receipt relates to sales generated in the UK by the IP.
The recipient of the payment must also be resident in a country that does not have a full UK double tax treaty.
Originally the charge only arose in situations where the owner of the IP and the payer of the royalty were related parties, but the charge will now also apply to payments between unrelated parties.
Company A and Company B are residents outside the UK. Neither has a taxable presence in the UK.
B owns IP in the form of music rights, which it licences to A ltd. A Ltd makes sales direct to UK resident customers based upon the licence it has over the IP.
A pays a royalty to B for the use of the IP.
A will obtain a tax deduction for the royalty payment, reducing its tax liability, and B will be in a low or no-tax jurisdiction.
If B is resident in a country that does not have a full double tax treaty with the UK, the new law will create a prima facie tax liability (subject to the exemptions). The liability will be based on the royalty income it has received from A that relates to A’s sales into the UK.
Not a withholding tax
The original proposals imposed a withholding tax requirement on the non-UK payer of the royalty. But this will now be a direct UK tax liability arising on the offshore owner of the IP. There will be joint and several liability provisions enabling enforcement on connected parties.
The Budget 2018 changes will also see the introduction of:
- An exemption for chargeable income that is taxed at not less than 50% of the tax charge that would otherwise arise under this legislation.
- A de-minimis UK sales threshold of £10m.
- An exemption for income in respect of IP that was not acquired from a connected party and where all, or substantially all, of the trading activities of that entity have always been undertaken in the low tax jurisdiction.
I really wonder how easy it will be for HMRC to enforce compliance with this new law.
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About David O'Keeffe
I am an independent specialist adviser on the taxation of innovation, advising companies and other advisers on R&D tax relief, Patent Box and Creative Industry reliefs.
I have been involved with the UK’s R&D tax relief regimes since the initial consultations on the introduction of the SME relief. In that time, I have developed an enviable level of knowledge of R&D tax relief both from a technical and a practical perspective. I established KPMG’s specialist R&D tax relief team and was a founder member of KPMG International’s Global R&D Tax Incentives Group and was a member of the Steering Group, with direct responsibility for the EMEA region.
I have provided input and consultation to many organisations and trade bodies. I was the only R&D tax specialist to have input to Sir James Dyson’s influential 2010 report "Ingenious Britain: Making the UK the leading high tech exporter in Europe" which is seen as the catalyst for reform of the UK’s R&D Tax Relief regimes. I have been a member of HMRC’s R&D Consultative Committee, a group with representatives from Government (HMRC, HMT and BIS) as well as industry, advisers and professional bodies, since its inception. I sit on CIOT’s CT technical Sub-Committee and chair the R&D Working Group of that sub-committee.
I was involved with the consultation process leading to the introduction in 2013 of the UK’s patent box regime. Since then I have helped his clients assess the merits of making a patent box election and then, where appropriate, to claim the benefit of the relief. More recently, I have actively contributed to the consultations around the design of the changes to the UK’s patent box to make it compliant with the OECD’s nexus requirements.
Formerly a Tax Partner with KPMG LLP (UK), I retired in 2011 to establish Aiglon Consulting.