Royalty payments

[YAK]

Hi, we have a UK registered Limited Company (Company A) dealing with development of iPhone applications for customers. Recently, we picked up a work from Turkey. A publisher in Turkey (Company B) wants it magazines to be published through iPhone applications.

The commercial arrangement is as follows:

Company B which is a company registered in Turkey will send the magazine content to Company A on a regular basis and Company A will publish the content on the Iphone application and will generate sales income from individual customers via Apple's iTune in the UK. Company A will pay Royalty to Company B for use of their content. We plan to do the transaction as follows:

Our UK Company generates sales to the individual customers for example £100 which will be recorded as Sales revenue in Company A's books.
Company B issues an invoice to Company A for use of their content £100 which will be recorded as Royalty expense in Company A's books.
Company A (our company) issues an invoice to Company B of £50 as Sales Commission.

Resulting transaction for our Company (A) will be :

Application Sales Revenue £100
Sales Commission Revenue £50
Royalty Expense (£100)
Net income before tax £50

My question is, Is the Royalty expense above deductible for tax purposes? If the above transaction was the sole transaction for the company, would our tax base be £50, hence resulting a tax of £50 x CT rate? Is there anything else we should consider from a UK Tax perspective?

Thank you

[innovativetax]

Royalty payment is tax deductible provided is paid. The royalty payment may be subject to withholding tax and UK company have to account this to HMRC.

[Generix]

Royalty payment is tax deductible provided is paid. The royalty payment may be subject to withholding tax and UK company have to account this to HMRC.

Don't forget the VAT in all of this. If over the threshold then your business will only be getting £100 inclusive of VAT, and then being invoiced for royalties for £100 (exclusive of VAT I assume), so you'll be making a £16.7 loss in the example transaction. (Partly recovered by the £50 commission) but I assume you never worked VAT into the equation.

If you've thought of this then, no worries, if not then I'm happy to answer any other q's.