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Autumn Budget 2018: UK government taxes the use of offshore IP used to generate UK sales revenues

Posted on 05 December 2018 by John Skoulding & Niki Stephens. Source: EGR Magazine

Autumn Budget 2018: UK government taxes the use of offshore IP used to generate UK sales revenues

For many, this year's Autumn Budget was to be a holding exercise with the "main" budget likely to be announced post-Brexit. For the betting and gaming industry this could not be further from the truth. The obvious headline points were that, as of April 2019:

  1. remote gaming duty will increase from 15% to 21%; and
  2. the value of the stake that can be placed on fixed odds betting terminals (FOBTs) will decrease from £100 to £2.

Less obviously, there were provisions in the Budget that may impact on off-shore businesses that hold significant intellectual property (IP) outside the UK where that IP "enables, facilitates or promotes UK sales".

The new tax charge, effective 6 April 2019, is titled "off-shore receipts in respect of intangible property". The key features of the new charge are:

  • UK income tax applied to non-UK resident entities;
  • those entities must hold IP in low-tax jurisdictions;
  • the new charge will be applied to gross income realised by the off-shore entity by using IP or rights over IP;
  • the IP must be used to generate UK sales revenues for example: the provision of facilities for gambling to persons in Great Britain;
  • there must be a minimum £10m of UK sales per annum;
  • the rules will not apply if the entity is resident in the UK or a country that has a double tax treaty with the UK that includes a non-discrimination article;
  • the charge will not apply if the business carries on all, or substantially all, of its trading activities in the low tax jurisdiction in which the IP is held; and
  • there are anti-forestalling provisions targeting arrangements specifically designed solely to avoid the charge. 

This provision is clearly aimed at international groups with online sales platforms such as online operators. 

A twist in the tail comes when working out whether the off-shore IP holding entity is in a low tax jurisdiction.  The focus here is on the local tax amount which is paid in the local territory in respect of UK sales.  There are two aspects to this.  Firstly, it will be necessary to look at the effective rate paid rather than the headline statutory rate thereby catching jurisdictions which have, at first glance, a higher headline rate of tax which is then reduced so that a lower rate is paid if certain conditions or exemptions are met.  The guidance on this area will be particularly important given that jurisdictions such as Malta can generate lower corporate income tax rates if the profits are distributed out of the Maltese company. 

The second aspect is that the legislation introduces a concept of "designer tax provisions" which allows HMRC to disregard the effect of those countries which allow tax payers to negotiate or otherwise exercise some control over the amount of tax that they pay. 

Clearly these provisions are far reaching and will capture most structures where IP holding companies are situated within multi-national groups whether or not those groups have any presence in the UK.  This will be the case whether the IP holding company first licences the IP through an off-shore sales or procurement company, or works in conjunction with other entities in the same group. 

Current off-shore IP holding structures should be reviewed in light of the new tax charge, not least because HMRC clearly expects multi-national groups to self-assess to the new tax.  To back this up the draft legislation makes it clear that any UK entity in the group can effectively be jointly or severally liable for the income tax payable by an off-shore entity.

This article was originally published by EGR Magazine.

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