UK income tax on Offshore Receipts in respect of Intangible Property – amendments to the rules and draft guidance

UK income tax on Offshore Receipts in respect of Intangible Property – amendments to the rules and draft guidance

Thu 13 Jun 2019

Finance Act 2019 introduced income tax on income of non-UK residents that was generated from UK sales exceeding £10m annually, and which derive from intangible property. This new measure applies from 6 April 2019, though there are a number of exclusions.  A draft statutory instrument has been produced amending the rules, along with draft guidance on how these rules should be interpreted.

The legislation is potentially wide ranging and those potentially affected by the rules should be considering these amendments and whether any action is required. Notes on some of the proposed changes.

The Government has also confirmed that Jersey, Guernsey and the Isle of Man are not “states” and so the carve out from these rules for territories with full double tax treaties with the UK does not apply to them.

For further advice on how your business may be affected by these new rules, please get in touch with a member of the Mazars international tax team.

 Amending the territories to which the rules relate

As the rules are currently drafted, they do not apply to residents of territories that are “full treaty” territories (see ‘Application of the rules to the Crown Dependencies’ below for more details). From the date after the SI takes effect, the rules will also apply to persons who are residents of such territories but for whom relief is excluded under the provisions of the relevant treaty.

In addition, HMRC will have the power to add and remove specified territories from those to which the rules apply according to whether they pose a risk to the statutory purpose of the legislation, and the arrangements of which the business is a part do not have a main purpose of tax avoidance.

Modification of the definition of UK sales

In determining whether a sale is provided in the UK or to UK persons, online advertising sales will be UK sales if they involve advertising to or targeting UK customers.  There will be a carve-out from 6 April 2019 (the date the chapter came into force) for sales and purchases of goods and services which do not involve any change or modification (for example distributers or resellers). An exemption will also apply from the same date for sales where the intangible property makes an insignificant contribution to the UK sales.

Prevention of double taxation

The rules are being amended to prevent double taxation from the date after the amending regulations come into force such that partners will not be subject to tax on amounts where the partnership itself is taxed on the relevant income in a jurisdiction with which the UK has an appropriate double tax agreement.

Double taxation will also be prevented from 6 April 2019 to ensure that there is only one tax charge on the same income where it flows through two or more related entities.

Application of the rules to the Crown Dependencies

The rules do not apply to residents of full treaty territories. A “full treaty territory” is defined at s608E ITTOIA 2005 as one that has concluded a double tax treaty with the UK which contains a non-discrimination provision. Such a provision ensures that nationals of a state which is a party to the treaty are not subject in the other contracting state to any taxation which is more burdensome than that to which nationals of that other state are, or may be subjected to in the same circumstances.

Guernsey, Jersey and the Isle of Man have all now concluded double tax treaties with the UK that contain a non-discrimination article. However, these are all territories and not states. Therefore, they are not full treaty territories as defined at s608E. As such, the rules may apply to residents of these territories.