INTM630420 - Royalty Withholding: UK Source: Commencement

ITTOIA05/S577A applies to royalties or other such sums in respect of intellectual property paid on or after 28 June 2016 (FA16/S42(3)). This includes payments made under arrangements already in place at that date (S42(4)).

Main purpose, or one of the main purposes, of avoiding a UK source

No regard is given to arrangements put in place with a main purpose of avoiding the effect of S577A(1) applying – see S577A(4). The circumstances and context that lead to any revised arrangements resulting in the reduction or removal of a UK source under S577A will be considered in determining whether the main, or one of the main, purposes of the change in arrangements was to avoid a UK source. Where the main purpose, or one of the main purposes, of the new arrangements is found to be avoiding the effect of S577A then a UK source continues to exist as though the previous arrangement were still in place.

FA16/S42(4) determines that it does not matter if these arrangements were already in place at 28 June 2016. If an existing arrangement was in place at that date and had a main purpose of avoiding a UK source (by virtue of ensuring the payments are not made in connection with a UK PE), then the effect of those arrangements is ignored. Income tax should continue to be deducted at source as though the arrangement designed to avoid the effect of S577A(1) had never been made. The effect of this rule is that arrangements entered into on or after 17 March 2016, when the measure was announced, are potentially within the rules. Arrangements entered into prior to that date will not be affected by this provision; there cannot be a main purpose of avoiding the application of S577A prior to the intention for such a rule being announced.

Example

A non-UK resident has arrangements in place that do not result in royalty payments made in connection with a UK PE having a UK source prior to the commencement of ITTOIA05/S577A. These arrangements would have resulted in a UK source for payments following ITTOIA05/S577A coming into force.

In June 2016, the non-UK resident amends its arrangements such that there will not be a UK source. If one of the main purposes of revising the arrangements was to avoid having a UK source for royalty payments, the rules will apply as though those revisions had not been made.

Payment dates

FA16/S42(5) dictates the treatment of a payment or payments that are made early with a main purpose of avoiding the application of S577A(1). Where a payment is made ahead of the due date to ensure they are made prior to 28 June 2016, the payment is treated as being made on the due date. In determining the due date, any arrangements put in place to accelerate the payment date are ignored under FA16/S42(6).

Example

Under the terms of the licencing agreement, royalty payments are due on 1 January, 1 April, 1 July and 1 October. Payments are made in arrears. Following the announcement made at Budget 2016, the licence is amended so that payments are made in advance annually on 1 June. This has the effect of bringing forward payments that would have been made after 28 June 2016 and thereby avoiding a UK source for those payments. If the purpose of amending the licence agreement was to avoid a UK source, the revised payment dates will be ignored and payments will be treated as if made under the terms of the original licence.