The UK Spring Budget today included one change, relating to withholding tax (otherwise explained as “tax deducted at source”), which may have particular relevance for the worldwide music industry and connected creative sectors.
It will apply mainly to large multi-national companies, rather than SMEs, and the devil will be in the detail, but it is certainly worth highlighting.
This significant announcement, made by George Osborne, comes as a result of the recent tax furore surrounding the likes of Facebook, Google and others.
Naturally, we’re paraphrasing here and, most importantly, this is a first reading of the documents from the Treasury, so we are advising any company that thinks it may be affected to contact their business advisor and/or accountant, but here’s the gist:
Scenario 1
A company in UK has a connected company in another jurisdiction (country, kingdom, state, etc) that has a very favourable Corporation Tax Rate – let’s say, for the sake of argument, Ireland.
A series of transactions take place between the two companies involving royalties, where one of the main aims is to effectively transfer profit from the higher to the lower tax jurisdiction. If there is a double-tax treaty between the two countries (which is the case between the UK and the majority of countries around the world), the treaties allow tax to be withheld at reduced rates – often zero percent.
From Thursday, 17th April the law changes so that tax WILL NOW BE WITHHELD AT THE FULL RELEVANT UK TAX RATE if one of the main benefits of these transactions is deemed to be to reduce tax.
The reason for creating the double-tax treaties in the first place was not to allow companies to avoid tax, but simply to reduce the complexity of having to handle tax across two jurisdictions. The loophole this created is now being closed.
Scenario 2
A royalty agreement exists between a UK-based company and another, entirely un-connected, company which is registered elsewhere in the world but has a “permanent establishment in the UK” (in plain English, a person or office which carries out business and creates value in the UK).
Once the 2016 Budget becomes law (sometime around July 2016), if royalty payments are clearly and obviously made between the two UK businesses, even if the contract for the transactions is made between the UK-based and the overseas company, the payments will now fall under UK tax rules and be taxed at the appropriate UK rate.
There is one other Budget change relating to withholding tax, which is to widen the class of royalties that fall under the regulations.
This includes certain types of trade names and trademarks – broadly they will now be the same as those defined by the OECD (Organisation for Economic Co-operation and Development, to give it it’s full title). Again, this change will happen when the Budget becomes Law in the summer.
So what does this all add up to?
The most important message is for any music business of a significant size – where royalties, trade names or trademarks are involved – to be aware, and extremely clear as to why profits are being transferred between themselves and (connected or un-connected) companies based overseas.
A lack of transparency is almost certain to bring down the wrath of HMRC on both organisations.
Music Business Worldwide
