A royalty is paid to the originator of a work when someone other
than that person uses or exploits intellectual property.
It is possible for the originator of the work to assign their
rights to a work to some other person. A legally binding contract
will normally be drawn up to record this change of ownership.
When a royalty is paid to someone who is outside the UK,
ICTA88/S536 and S349 requires the person making the payment to
deduct tax at the same time that the payment is made.
Agreements for the avoidance of double taxation have been
negotiated between the UK and the governments of many other
countries that provide for residents of those other countries to
claim relief from UK tax. These agreements provide for relief to be
allowed either at a reduced rate of UK tax or for exemption from UK
tax to be allowed. The benefit of a double taxation agreement
cannot be assumed; the non-resident recipient of the royalty must
make a claim (but see below where, after 1 October 2002, the UK
payer may make payments with the relief available under the double
taxation agreement without a claim being submitted).
Royalties are defined in Article 12 of the OECD Model Double
Taxation Agreement as
"The term "royalties" as used in this Article means payments
of any kind received as a consideration for the use of, or the
right of use, any copyright of literary, artistic or scientific
work including cinematograph films, any patent, trademark, design
or model, plan, secret formula or process, or for information
concerning industrial, commercial or scientific experience."
The OECD Model double taxation agreement is used when
countries are negotiating a new bilateral treaty. However, the
standard text is only the starting point, used to inform
discussions. Both the UK and the country with which the agreement
is being negotiated will often have a preferred form of words that
it normally seeks to include in the text of DTAs that it enters
into. For this reason the final agreed text of double taxation
agreements often contain variations in their terms country by
country.
Royalties that are within the charge to UK tax are defined
more narrowly than the OECD definition. For the purposes of
ICTA88/S536 the term "copyright" includes copyright in any literary
work (including maps, charts, tables, computer programs and
compilations such as encyclopedias, dictionaries etc.) any dramatic
work (excluding cinematograph productions) any musical work
(including music intended to be used in a "talking film" any
artistic work (including works of painting, drawing, sculpture,
architectural works of art, engravings etc., but excluding
photographs intended to be used for cinematograph purposes) any
design registered under the Registered Designs Act 1949.
For any payments of royalties that are made on or after 1
October 2002, ICTA88/S349E allows the UK payer of the royalty if he
so wishes to pay royalties together with the relevant amount of
double taxation relief. The payer must "reasonably believe" that
the recipient of the royalty is entitled to relief from UK tax
under the terms of the relevant double taxation agreement. See
CT1812.
