INTM630410 - Royalty Withholding: UK Source: Overview

The charge to income tax on royalties is contained in ITTOIA05/PART5. Prior to FA16, the rules defining the territorial scope of charges under Part 5 were contained in ITTOIA05/S577. S577(2) provided that income arising to a non-UK resident is chargeable to UK income tax “only if it is from a source in the United Kingdom”.

A “source” in the UK is not defined in S577. Case law therefore defines when a payment has a source in the UK. There is no case law discussing UK source in relation to a royalty and therefore that pertaining to interest payments is applied by analogy. The key cases in this regard are Westminster Bank Executor and Trustee Company (Channel Islands) Ltd v The National Bank of Greece SA (46 TC 472) and more recently Ardmore Construction Ltd and other v CRC [2015] UKUT 633. See SAIM9090. These principles continue to apply.

FA16 introduced ITTOIA05/S577A. This section introduces to statute a particular circumstance where there is a UK source. This provides that the payment of a royalty by a non-UK resident will have a UK source when:

  • The payer is a non-UK resident carrying on a business in the UK through a permanent establishment (PE) in the UK; and
  • The payments (or part of them) are made in connection with the trade of the non-resident carried on through its PE in the UK.

This creates a liability to income tax. There may then be a duty to deduct income tax from such payments under ITA07/PART15.

Example

A non-UK resident trades in the UK through a dependent agent permanent establishment. The non-UK resident has a licencing agreement that allows the non-UK resident to exploit certain intellectual property (IP) in the UK. The non-UK resident uses this intellectual property in making sales to UK customers through its UK PE.

It may have been that, on the facts of the case, the royalty payments made under the licensing agreement did not have a UK source prior to FA16. As such, there was no income tax liability in the UK even though the royalty payments were for exploitation of IP in the UK.

Following FA16, the royalty payment has a source in the UK to the extent it is connected to the trade carried on by the UK PE. As such, the recipient will be liable to income tax and the payer may have a duty to deduct tax at source under ITA07/PART15. This is subject to UK Double Taxation Agreements and the Interest and Royalties Directive.

Permanent Establishment

ITTOIA05/S577A(5) determines that a PE is:

in relation to a company, to be read in accordance with CTA10/PART24/CH2,

in relation to any other persons, in accordance with the above, but as though references to a company are references to that person.

See INTM264050.