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HMRC internal manual

Company Taxation Manual

Residence: non-resident companies: ‘charges paid’ - relief for annual payments and patent royalties

A non UK-resident company may be within the charge to IT in respect of certain income (CTM34220) and what used to be called ‘charges’ (other than interest) which it pays out of such income will be dealt with under the revised regime following Tax Law Rewrite. This moved away from the concept (which dates back to 1803) of income alienation and relief in the hands of the payer by deducting and retaining income tax on payment (to the extent that it has income brought into income tax charge) so the recipient received taxed income. The complex mechanism reflected at ICTA88/S348 and S349 which distinguished between profits and gains which are and are not brought into charge was replaced by a system that treats most annual payments in line with the old ICTA88/S349 - with mandatory deduction at source and a separate provision for collection of the tax deducted from the payer. Rather than income alienation, there is a statutory deduction in calculating net income broadly available where the annual payment is made out of taxable profits or gains.

The main rules are now found at ITA07/S449, which deals with income tax relief for non-individuals on payments of annual payments and patent royalties, and ITA07/S899 (which defines qualifying annual payment) and ITA07/S901, which deals with deduction of income tax from annual payments made by non-individuals. Collection provisions are at ITA07/PART15/CHAPTER16.

If a non-resident company makes an annual payment on or after 1 October 2002, the obligation to deduct IT may be switched off by FA02/S94, now ITA07/S930 - see CTM35215.