UK tax on offshore intangibles: 'serious' compliance issues

Out-Law News | 16 Jan 2019 | 9:04 am | 3 min. read

The new UK tax charge on multinationals using intangibles held in low tax jurisdictions to generate UK revenue could give rise to "serious" compliance issues for non-UK companies as well as their UK affiliates, according to Jason Collins , a tax disputes expert at Pinsent Masons, the law firm behind Out-law.com.

The new income tax charge on offshore receipts in respect of intangible property (ORIROIP) was announced in October's budget and is due to apply from 6 April 2019. It is designed to catch multinationals which generate significant income from intangible property through UK sales, but pay very little tax because their activities are structured so that the income is received in offshore jurisdictions where it is taxed at very low rates, if at all.

The 20% income tax charge will apply to gross income realised by a non-UK resident entity with intangible property that is used to generate UK sales revenues. It will only apply to entities resident in countries without a tax treaty with the UK or with a treaty which does not contain a non-discrimination article, such as Bermuda, the British Virgin Islands and the Cayman Islands.

A typical structure likely to be affected is where a company located in a tax haven holds trademarks and knowhow which it licenses to a connected entity located in a country such as Ireland, which then manufactures and sells goods to UK customers. The tax would potentially apply to the licence fee paid by the Irish company to the company in the tax haven.

The tax will be collected under the normal income tax self assessment regime. This means that a non-UK company which is caught by the new rules will need to notify HM Revenue & Customs (HMRC) of its chargeability to income tax and then complete a tax return.

"If HMRC discovers that a company is within the charge but has failed to register for tax, it can raise a tax assessment going back 20 years with no need to prove any misconduct," said Jason Collins. 

"If, on the other hand, the company is registered for tax and HMRC discovers an under-declaration, the offshore company will be caught by the controversial new 'no-fault' 12 year discovery window which applies to income tax, capital gains tax and inheritance tax," he said.

As with the rules for the new tax charge on offshore intangibles, the legislation introducing the new time limit is contained in the finance bill, which is currently passing through the parliamentary process. The 12 year time limit will apply to years of assessment from 2013-14 onwards, where there has been careless behaviour and from 2015/16 onwards in all other cases. It applies only in respect of income tax or capital gains tax which "involves an offshore matter". This is widely defined and covers tax charged on or by reference to assets situated or held in a territory outside the UK so should cover income tax on intangibles held offshore, Jason Collins said.

"As collecting tax from non-UK resident companies could be difficult, HMRC will have wide powers to collect the tax from any person within the same 'control group' as the offshore company. Although the power extends to people located anywhere in the world, it is most likely to be used against connected persons in the UK," Jason Collins said. 

Where HMRC has assessed a non-UK company (including using the new 12 year no fault window) and any part of the tax and interest remains unpaid after 6 months, it can issue a payment notice to any person within the control group, requiring payment of the outstanding tax within 30 days. That person cannot appeal against the assessment made on the non-resident and can only appeal the notice on the basis that is not within the control group.

Before non-UK companies get to the stage of submitting a tax return they will need to work out what their liability is. "This will be far from straightforward in many cases," Jason Collins said.

"The tax charge can apply even if there are unconnected third parties in the supply chain. This could make it very difficult to work out the extent to which the intangible represents part of the value attributable to UK sales. This could be particularly challenging if the intangible relates to a small part of the goods or services supplied to UK customers. There could also be situations where the non-UK company is not even aware that a third party is making supplies to UK customers," he said.

"It is worrying that the new measure is due to come into force in April 2019, even though there are so many uncertainties about how it will apply. The legislation is very widely drafted and is wider than HMRC's examples of what will be caught. It will be very unsatisfactory if businesses have to rely on HMRC guidance to limit its scope," said Collins.

"It is also disturbing that – probably in acknowledgement that the current legislation is defective - the Treasury will have incredibly wide powers to amend the provisions by statutory instrument. The government should delay the measure and not rush it through without proper consideration," he said.