The Government is consulting on the design of the extension of withholding tax to royalty payment connected with the exploitation of UK rights or property, see Royalties Withholding Tax: Consultation Document. The Government announced in the November 2017 Budget that it intended to widen the withholding tax rules with effect from April 2019 to cover royalties paid in connection with sales to UK customers and to a no or low tax jurisdiction, irrespective of whether the company paying the royalties has a presence in the UK.
In 2016, the Government introduced new rules to widen the scope of UK withholding taxes on payments of royalties by extending the definition of “royalties” for these purposes. See our previous article Extension of UK withholding tax on IP royalties. The 2016 changes also (a) extended the circumstances where royalties will have a UK source to cover payments by non-residents carrying on business in the UK and which are connected with that UK business and (b) introduced targeted anti-avoidance rules aimed at certain intra-group royalty payments.
In line with its announcement in the November 2017 Budget, the Government now intends to extend UK withholding tax provisions even further where there are connected party payments, regardless of whether a payer has a taxable presence in the UK. The new rules are intended to take effect from April 2019.
The consultation document seeks input into the design of these new rules. The aim of the measure is to extend the circumstances where there is a duty to deduct withholding tax by deeming that payments made for the exploitation of IP or certain other rights in the UK have a “source” in the UK. For example, a right to distribute specified goods or to provide specified services in the UK. In relation to this aspect, the Government’s preferred approach set out in the consultation document is to target the requirement to deduct at payments that are made for the exploitation of intellectual property and intangible assets of any description in the UK, rather than defining specific types of payment. The concern with producing a discrete statutory list of specific payments is that this would need to be regularly reviewed and kept up to date.
The new measure will only apply to payments between connected parties, such as members of the same group. Concerns over the insertion of unrelated parties within the arrangements are to be dealt with by anti-avoidance provisions, though the consultation does seek responses on the question whether the rules should also apply to any payments to unrelated parties. However, a liability will arise to deduct tax whether or not the payer has a taxable presence in the UK.
The Government’s announcement notes that the rules are intended to apply only where the payment is made to certain low or no tax jurisdictions. However, it seems that the legislation will apply to payments to all countries with whom the UK does not have a double tax treaty or does not have a double tax treaty that contains a non-discrimination article, without any specific tax threshold test. The Government asks for feedback in particular as to the impact of any double taxation issues where the royalty payments are either taxed in the recipient jurisdiction or subject to withholding tax in the jurisdiction where the payer is resident.
Where the relevant arrangements are broader than just the UK ,the rules will need to apportion payments between the UK and other jurisdictions covered by the agreement on a just and reasonable basis. The expectation is that this would normally be made by reference to the volume of sales in the jurisdictions concerned.
It is also proposed that the rules will include anti-avoidance provisions, including anti-forestalling provisions and rules designed to prevent payments being made through jurisdictions with which the UK has a double tax treaty (conduit arrangements).
Since the rules are intended to apply to non-resident companies with (potentially) no presence in the UK, this begs the question how HMRC will enforce payment of the withholding tax. Where the payer is a member of a group with a UK taxable presence, the rules will require the UK group members will be required to report the payments on a Form CT600H. HMRC will be able to levy penalties for failure to report relevant payments on a UK connected party. Payment of the tax will be required through the use of a CT61 Form. Again, the Government proposes to make UK group members jointly and severally liable for payment of any withholding tax due from a non-resident payer. In particular, the Government believes that any group that is within the scope of these rules will, in practice, have a UK presence and as such will have assets over which a charge may be made.
The consultation is open for responses until 23 February 2018, which should be sent to firstname.lastname@example.org
These changes should be seen in the context of the Government’s wider review of taxation of the digital economy as set out in its Corporate tax and the digital economy: position paper published on Budget Day. The Government is keen to engage with the European Union and the OECD on possible broader changes to the international tax rules, which may even seek to allow jurisdictions to tax activities where sales (particularly of a digital nature) are made to domestic customers but where the seller has no local presence. In the meantime, it is clear from the introduction of the Diverted Profits Tax and the extension of the withholding tax provisions that the Government will consider other domestic measures which it considers are necessary to protect the UK tax base.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.