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Who is likely to be affected
Large multinational groups that hold intangible property in low tax jurisdictions, where the income which arises in relation to that intangible property is referable to the sale of goods or services in the UK. The measure will apply regardless of whether there is a UK taxable presence.
General description of the measure
This measure will apply a UK Income Tax charge to amounts received in a low tax jurisdiction in respect of intangible property, to the extent that those amounts are referable to the sale of goods or services in the UK. The measure will apply to income receivable from both related and unrelated parties and will be effective from 6 April 2019.
For example, where a non-UK entity receives income from the sale of goods or services in the UK, and that entity makes a payment to the holder of intangible property in a low tax jurisdiction, a charge will arise under this measure to the extent that the income receivable in the low tax jurisdiction is referable to the sale of goods or services in the UK.
On introduction, the measure will generally apply to entities that are located in jurisdictions with whom the UK does not have a full tax treaty (meaning a Double Tax Agreement which contains a non-discrimination provision).
The Income Tax charge will be on the gross income that is referable to the sale of goods or services in the UK and realised by the non-UK resident entity from the ownership, or rights over, relevant intangible property.
The charge will apply to the proportion of the foreign resident entity’s intangible property income that is referable to the sale of goods or services in the UK and made via both related and unrelated parties.
In the event of non-payment by the non-UK resident entity, joint and several provisions will enable collection of the debt from connected parties.
The measure will include a tax exemption which will exclude from charge, income where the tax payable by the foreign entity in relation to income that is referable to the sale of goods or services in the UK is at least 50% of the UK Income Tax charge that would otherwise arise under this measure.
There will also be a £10 million de minimis UK sales threshold.
The measure will include an exemption for income arising in entities that have not acquired their intangible property from related parties and where all, or substantially all, of the trading activities have always been undertaken in the low tax jurisdiction.
The measure will include a Targeted Anti-Abuse Rule, effective from 29 October 2018, which will protect against arrangements designed to avoid the charge, including arrangements which involve transferring the ownership of intangible property to another group entity resident in a full treaty jurisdiction.
The policy targets multinational groups that generate significant income from intangible property through UK sales, and have made arrangements such that the income is received in offshore jurisdictions where it is taxed at no or low effective rates.
By taxing the proportion of that income which is referable to the sale of goods or services in the UK, this measure will reduce the opportunities for large multinationals to gain an unfair competitive advantage by holding their intangible property in low tax offshore jurisdictions, levelling the playing field for businesses operating in UK markets.
Background to the measure
This measure was announced at Autumn Budget 2017 and a consultation ran from 1 December 2017 to 23 February 2018. A consultation response document is being issued alongside the draft legislation.
The measure will have effect from 6 April 2019.
Targeted anti-avoidance rules will have effect for arrangements entered into on or after 29 October 2018.
The measure will have effect from 6 April 2019. Targeted anti-avoidance rules will have effect for arrangements entered into on or after 29 October 2018.
Legislation will be introduced in Finance Bill 2018 to insert a new Chapter 2A into Income Tax (Trading and Other Income) Act 2005.
The main elements of the new rules will:
- impose a UK Income Tax charge on the owners of intangible property or those that are entitled to income that is referable to the sale of goods or services in the UK in relation to that intangible property and who are not resident in a full treaty territory.
- provide exemptions:
- for partnerships which are regarded as separate entities for tax purposes and resident in full treaty territories
- where the value of UK sales is less than £10m in a given tax year
- where all, or substantially all, of the business activity in relation to the intangible property has always taken place in the territory of residence
- which apply where the tax paid in relation to the relevant income is at least 50% of the UK Income Tax that would otherwise arise under this measure
- provide for joint and several liability in relation to an Income Tax charge under this measure, so that any person within the same control group during the relevant tax year will be jointly and severally liable for the tax due
- provide a specific anti-avoidance and anti-forestalling rule which will apply to any arrangements entered into on or after 29 October 2018, where one of the main purposes of the arrangement is to either avoid a charge under this measure, or to seek the benefit of a double taxation arrangement (tax treaty) where the benefit is contrary to the purpose of that tax treaty
Summary of impacts
Exchequer impact (£m)
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These figures are set out in Table 2.2 of Budget 2018 and have been certified by the Office for Budgetary Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2017.
The measure is not expected to have any significant macroeconomic impacts.
The costing allows for the possibility that affected corporations may seek to implement a number of behavioural responses in order to mitigate the impact of the changes.
Impact on individuals, households and families
This measure has no impact on individuals as it only affects businesses. The measure is not expected to impact on family formation, stability or breakdown.
It is not anticipated that this measure will have any impacts for groups sharing protected characteristics.
Impact on business including civil society organisations
The measure is expected to have an impact on large multinational groups by bringing into scope of UK Income Tax the proportion of their income that is realised in a low tax jurisdiction where the relevant intangible property is held and has a UK nexus by virtue of being referable to the sale of goods or services in the UK. The measure will apply to income received from both related and unrelated parties. The policy will be delivered through an Income Tax charge reported and collected under the existing Income Tax Self Assessment provisions.
One-off costs include familiarisation with the new rules. Ongoing costs will include keeping records of income referable to UK sales and calculating and paying the amount of tax due. Businesses in scope will use the SA700 ‘Tax return for a non-resident company liable to Income Tax’ to make their annual return of the tax due. Guidance will be published by April 2019 to support these changes.
Operational impact (£m) (HMRC or other)
This measure will require small alterations to existing IT processes to collect the Income Tax as well as further staff to monitor the compliance. These costs are estimated to be in the region of £4 million over the scorecard period.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through communication with affected taxpayers.
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