Intellectual property tax benefits

Specialist tax advice for matters relating to IP

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Intellectual property tax benefits

Intellectual property rights are a significant part of your company’s assets.  Intellectual property can be difficult to value and difficult to assess to tax.  The regulations are complex – this is where we provide solutions.

Tax on assignment of intellectual property

Whilst the government acknowledges that intellectual property companies are a growing sector of our economy, HM Revenue and Customs are increasingly vigilant. HMRC will scrutinise the creation and movement of intellectual property rights on a domestic level and internationally.

Ring fencing the IP

There are a variety of reasons why a business may want to transfer the ownership of IP.  A common reason is for “ring fencing” which means moving the IP to a safe harbour company where it would be protected from creditors in the event of a liquidation or insolvency.

An area of expertise is in how to ring fence assets effectively from creditors.

Creating a chargeable disposal for capital gains tax purposes

The transfer of intellectual property within a group of companies can be tax free.  However, an assignment of intellectual property to a person who is not a member of the group can trigger a disposal for capital gains tax purposes calculated on the value of the IP assigned.

In cases where the IP is assigned outside of a commercial arms length sale the question which arises is “what is the value of the IP that has been assigned?”  Obviously, HMRC will be looking to assess at a higher rate and that will increase the amount of capital gains tax payable on the assignment.

Valuation of intellectual property

Valuation of intellectual property is an art rather than a science.  Many factors influence the tax charge on assignment such as:

  • How much revenue will be generated by the person to whom the IP has been assigned;
  • Has any of the IP been unbundled – meaning it is the whole or part of the IP that has been assigned;
  • What is the shelf life of the IP;
  • How much development is required;
  • Synergy with other products combining to create new IP.

Exempt transfers of IP

In some cases the assignment of IP arises as part of a group re-organisation.  Usually the assignment of IP can be exempted from a charge of capital gains tax where the IP is assigned as part of a share for share swap.

Strategy for the assignment of IP

We review the value of IP assigned for tax purposes and provide a strategy. We draft licence agreements relating to the use of the assigned IP.  If a challenge from the HMRC is to be defended the ability to produce paperwork documenting the basis of the assignment will play an important role in the chances of success.

Taxation of royalty payments and dividends

Royalty payments and dividends usually represent one of the main ways in which IP is monetised. We deal with taxation of these aspects along with withholding and reporting responsibilities. We draft the documentation which sets out all of the commercial terms you need to garnish your income. When an intellectual property licence is exclusive, the holder can insist on greater royalty payments.

Often, we find that commercial terms do not consider the various methods of taxation, our specialist solicitors seek to ensure that the agreed terms reflect your chosen tax structure.

Selling IP businesses

IP transactions can be exciting – particularly for high growth tech start-ups embarking on the sales process. In innovative markets, large premiums can be obtained. We work with shareholders and plan for the sale of shares on terms which generate not only the most beneficial taxation charges but also the best commercial deal given the instructions received. Our expertise extends to drafting the share sale documentation and negotiation on your behalf.

The focus on the sale of an IP business will be the state of the intellectual property being sold.  Any buyer of shares or party entering into a joint venture will conduct due diligence around these aspects.  We guide on the due diligence process and deal with queries relating to intellectual property such as:

  • Are all the trade marks, logos, designs and other branding images registered and secured for the buyer?
  • Are the creators of the IP preventing from competing for a reasonable period of time?
  • If the IP relates to software, testing will be required and proof of ownership needed.
  • The enforceability of licences over intellectual property will be securitised especially where there is joint ownership.  A buyer will need to be certain that the licences can be assigned to the buyer and revenue continued.
  • Have tax reliefs on items such as research and development tax credits been properly claimed?

Tax advice for the sellers

The sale of shares in any business including an IP business will trigger a disposal for capital gains tax purposes. Over the years many of our clients have successfully claimed entrepreneurs’ relief and paid capital gains tax at 10% as opposed to the 20% higher rate charge – this makes the UK a tax haven for innovative start-up companies.

A capital gains tax charge will not arise if a subsidiary is sold off providing various qualifying conditions are met.  We tell you if there are any exemptions from tax on the sale of the IP business.

IP tax considerations with warranties and indemnities

The warranties required under a sale of intellectual property usually cover a range of matters including claims relating to infringement of IP and unexpected tax demands arising from claims to relief relating to the IP.   Sometimes the buyer will defer consideration payable to the sellers allow for a wait and see period during which claims may be made.

Schedule of rights owned

It is a risk for a seller to give warranties that it cannot comply with, such as the completeness and accuracy of the schedule of rights owned.  Failure to meet the warranties can result in tax consequences where the sellers are individuals if deferred consideration is reduced or delayed.  The sale agreement should contain a schedule of rights. If you are a software house or publisher, the schedule of rights is likely to be extensive, including warranties relating to material unregistered copyright works, which may be the highest valued asset.

We look at the risk of claims and tell you the actual position, with honest and cost-effective advice.

Recent cases

The range of clients we help is extensive.  The sectors in which they trade in is diverse.  We are able to provide solutions for a great many companies because our skill is in our teams experience in preparing the documentation to support the tax treatment desired.  We find that you will usually be in a stronger position if you consider the taxation implications in advance of any transaction.

  • Setting a wide variety of companies up for the investor incentive SEIS and EIS systems which confer generous tax savings for investors and obtaining clearance from HMRC for the same. We deal with the positioning of IP, the corporate structure and personal service companies involved in the businesses.
  • Preparing a detailed evaluation of an intellectual property asset’s amortisation where our client acquired IP rights from a competitor to enable our client to base relief on the amortisation of the asset at a fixed rate.
  • Setting up an IP holding company for a franchisor seeking to acquire licences from its subsidiary. The process involved the consultation of our corporate/commercial, tax and intellectual property teams to advise on the various implications of the deal.
  • Advising a successful entrepreneur on his claim to a 10% rate of CGT on the profits made on the disposal of his business. We dealt with the warranties the entrepreneur was required to give relating to ownership and registration of IP. We further advised on the taxation of earn out payments which were based on future profitability post-completion.
  • Working on a claim to patent box relief on behalf of a car airbag manufacturer during the initial stages of design. Our client was then able to use the savings to substantiate future development. Subsequently, we acted on the investment documentation once an investor had been found.