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HMRC internal manual

Savings and Investment Manual

Deduction of tax: annual payments: royalties

Deduction of tax from patent royalties

Chapter 6 of Part 15 of ITA07 applies to patent royalties as well as to annual payments. ITA07/S903 requires the payer of royalties or other sums for the use of a patent to deduct basic rate tax from the payment. The payment must not be an annual payment and must arise in the UK. Chapter 7 extends this requirement to other payments connected with intellectual property, mainly copyright and design royalties, paid abroad. Most such payments will be made by companies and unincorporated traders. Chapter 8 contains additional rules relating to payments made under double taxation arrangements but these only apply to companies.

ITA07 changed the former rules on patent royalties by repealing ITTOIA05/S51, thus allowing patent royalties as a deduction in computing trading profits. In most cases such payments will be deducted as trade expenses rather than as an ‘other relief’ under Chapter 4 of Part 8 ITA07 (ITA07/S448 - see SAIM9060). Relief for patent royalty payments under ITA07/S448 and ITA07/S449 was withdrawn for payments made on or after 5 December 2012.

There is guidance in other manuals on the tax treatment of royalties. See BIM45965, CTM35270, CIRD10150 and CA70000 (SAIM20000)