The proposals, announced by the Chancellor Philip Hammond in the Budget 2017, seek to rectify tax leakage in the digital economy, specifically relating to multinational digital businesses which assign royalties for things such as intellectual property to jurisdictions where they are not taxed, noting that in some cases these related to UK sales.

The government expect the move will generate £285m in its first year, £225m in 2020-21 and £160m in 2021-22.

Under the current system, the UK requires the payer of the royalty to withhold tax from the payment and account for it to the tax authorities.

Rules were introduced in Finance Act 2016 (FA16) to reinforce this position by ensuring that all royalties arising in the UK are subject to the deduction of income tax at source unless the UK has explicitly given up its taxing rights under an international agreement.

At the Budget 2017, the government announced a further extension to the FA16 rules. Among the measures is one that will mean payments for the exploitation of certain property or rights in the UK that are made to connected parties in low or no tax jurisdictions will be subject to taxation.

The move is a targeted rule aimed at intra-group arrangements that achieve an artificially low effective rate that is distortive to competition in the markets they operate in, including the UK.

The consultation includes examples of how the government expects the rule to function.

The aim of the proposed measure is to extend the circumstances in which there is a liability to income tax, and a consequent duty to deduct tax at source. This will be achieved by ensuring that payments made for exploitation of intellectual property or certain other rights in the UK have a source in the UK for the purposes of withholding tax. The measure will only apply to payments between connected parties.

Part of the purposed of the consultation is to establish how to define when something is sourced in the UK.

It is proposed, too, that a liability will only arise if the payment is made to a jurisdiction with which the UK does not have a double taxation agreement.

There is a question over how broad the scope will be. One option is to apply the levy to any payment for rights over, or interests in, the exploitation of intellectual property and intangible assets of any description in the UK.

An alternative option would be to define the specific types of payments within scope of the measure, which would ensure the most common current types of payments would be within scope, but in order to be fully effective the statutory list would need to be comprehensive and kept up to date. Inclusion of some payments but not others could give rise to valuation difficulties, the government said.

The 21-page consultation closes for comment on 23 February 2018.

HMRC/Treasury Royalties withholding Tax consultation, was issued on 1 December 2017.

Report by Calum Fuller