Indie Dev’ Guide 13: Withholding Tax (WHT) on overseas income
- Indie Dev Guides Introduction
- Guide 1: Limited Companies
- Guide 2: Personal Tax
- Guide 3: VAT
- Guide 4: Payroll and Workplace Pensions (Auto Enrolment)
- Guide 5: Digital Tax Accounts and Software
- Guide 6: Funding your Prototype
- Guide 7: Corporation Tax
- Guide 8: R&D Tax Relief
- Guide 9: Video Games Tax Relief Claims
- Guide 10: Understanding your Accounts
- Guide 11: British Film Institute (BFI) certification
- Guide 12: Business Expenses
- Guide 13: Withholding Tax on overseas income
- Guide 14: Benefits of an Audit
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From a UK Games Developer perspective, Withholding Tax (WHT) is an amount of tax withheld from a payment by one business to another business or individual. Business transactions commonly resulting in WHT being applied, include salaries (income tax deducted through PAYE), payment for services and payment of interest & royalties.
Implications for UK Indie Developers
When a UK based business (e.g., sole trader or Limited company) provides a service or is due business income from an overseas entity, it can often result in WHT being applied against the income due to the UK business.
An example of this would be where a UK based Indie company has created a game, which has been listed on a popular US based platform for sale. The platform will be in receipt of all the games sales revenue and before transferring this revenue to the UK developer, it deducts its share of the revenue (to cover its own charges) and it deducts the appropriate level of WHT (Foreign tax), which generally for the US is 30% and pays this to the Internal Revenue Service (US equivalent for HM Revenue & Customs). The reason for this WHT being applied is to ensure that the recipient has paid sufficient tax on its income.
The consequence of incurring WHT is that the UK developer receives income net of WHT. This can have a severe impact on cash-flow. When calculating its profits, the UK developer would need to include the total income (inclusive of WHT). The UK developer will base its UK corporation tax liability on this profit and may well have a UK tax liability on top of the WHT suffered at source.
If WHT is applied, there is potentially a way of getting relief for this. Foreign tax suffered on a UK company’s profits can lower the UK corporation tax due on the same profits. This is known as Credit Relief. Where the foreign tax exceeds the UK corporation tax on the same profits, the unutilised foreign tax can potentially be carried back one year or carried forward. Foreign tax becomes an absolute cost where there is not enough UK corporation tax against which to offset (credit) the foreign tax.
Credit relief can only be claimed against the UK corporation tax on the same income on which the foreign tax is suffered. It is therefore necessary to determine how this income is measured, and how the tax is calculated. The income must be adjusted for any allowable deductions that would also be allowable in calculating the UK corporation tax on that same income.
DTR is only available if all reasonable steps have been taken to minimise the WHT. HM Revenue & Customs will not accept a claim for DTR if the business has not taken reasonable steps to make any relevant claims or elections for reliefs, deductions, reductions or allowances which would lower the WHT.
Options for mitigating WHT for a UK games company:
The key to minimising the impact of WHT is to ensure you get the right paperwork in place before you begin receiving income from a foreign entity.
For UK based companies trading with US businesses (e.g. publishers or platforms), you can usually request 0% WHT is applied to income receivable. Some US businesses have their own mechanism for enabling you to apply for this. Others will require the submission of form W8-BEN-E https://www.irs.gov/pub/irs-pdf/fw8bene.pdf.
For UK based companies trading with countries other than the US, providing a UK Certificate of Residence to the overseas business, should be sufficient. You can apply to HM Revenue & Customs for a certificate using form RES1 https://www.gov.uk/guidance/get-a-certificate-of-residence.
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