EIM00736 - Employment income: general: payments for “image rights”: royalties: deduction of tax at source

Royalties and other income from intellectual property

Royalties and other income from intellectual property that have a source in the UK are liable to income tax under Part 5 of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”). Section 579(2) ITTOIA defines ‘intellectual property’ for these purposes. Some or all of the IPRs that make up the “image rights” assigned to an image rights company (“IRC”) are likely to meet the definition of intellectual property.

The person making a payment may be required to deduct a sum representing Income Tax at source under Part 15 of the Income Tax Act 2007 (“ITA”). Part 15 Chapter 6 ITA imposes the duty to deduct when the payment is within scope of section 579 ITTOIA and is also an annual payment. The individual circumstances of the arrangements will need to be given close consideration in determining whether the payments for use of image rights are annual payments.

Section 906 ITA also provides a duty to deduct tax at source when a payment for use of intellectual property is made to a non-UK resident. Section 907 ITA defines intellectual property. Sections 906 and 907 were amended by Finance Act 2016. In particular, the definition of intellectual property in section 907 was expanded to cover a wider range of payments. The revised definition follows the definition contained within the OECD model tax treaty. As such, the UK will consider the commentary to Article 12 of the OECD model tax treaty in determining whether a payment is one to which the duty to deduct tax applies by virtue of the amended sections 906 and 907. The revised sections apply to payments made on or after 28 June 2016.

The duty to deduct Income Tax at source is subject to sections 911 and 914 ITA. These provisions modify the obligation to deduct tax if the payer reasonably believes that the recipient of the payment is entitled to relief under a double taxation agreement (DTA) or section 758 ITTOIA (which enacts the provisions of the Interest and Royalties Directive (“IRD”) (2009/49/EC)). If a payment is made under deduction of tax and the recipient (for example the IRC) believes that treaty benefits are due, then a claim for treaty benefits or benefits under the IRD will need to be made in accordance with the provisions of the relevant DTA or the IRD.

The availability of treaty benefits is subject to section 917A ITA if the payer and payee are connected. Treaty benefits will be denied under this provision if a payment is made between connected parties and the payment is made under DTA tax avoidance arrangements. Anti-abuse provisions within a DTA will also need to be considered in determining whether treaty benefits are properly due.