Tax when moving intellectual property intra-group

The transfer of intellectual property (IP) between group companies in the UK can give rise to varying tax results, depending on the nature of that IP and the features of the intra-group transaction.

This article broadly outlines the tax system as it applies to intellectual property and considers specific points concerning transferring IP within a corporate group. The nature and characteristics of IP mean that tax advice should be taken at an early stage, alongside advice on the legal, valuation and accounting treatment of the IP.

Intellectual property and taxation

The term IP can encompass a wide range of intangible assets, including patents, trademarks, copyrights, design rights and know-how. For companies, the taxation of IP is primarily governed by the intangible fixed assets (IFA) regime. This regime, applying to IP created or acquired on or after 1 April 2002, ensures that the inclusion of debits and credits in the computation of trading profits generally follow the accounting treatment. Assets not falling to be taxed under the IFA regime are treated as normal chargeable assets under the chargeable gains legislation.

However, IP taxation is considerably complex. It can interact with certain specific tax regimes, for example some research and development (R&D) activity (qualifying for R&D tax relief) can be composed of qualifying expenditure on certain IP development activities. Additionally, profits attributable to certain qualifying patents and similar IP may fall within the UK patent box regime and be subject to a lower corporation tax rate of 10% (as opposed to the 25% main rate).

The disposal or licensing of IP can also have VAT implications, with the supply of IP rights treated as a supply of services generally subject to VAT at the standard rate. However, there are several exceptions and detailed rules depending on the nature of the transaction and the parties involved.

Intra-group transfers

Where IP transactions are undertaken with third parties, the IFA regime generally captures the credit in the tax computation. Meanwhile, under the chargeable gains regime, one can expect a chargeable gain or loss to arise. There are, however, special rules dealing with corporate groups and transfers between UK entities within such groups.

In simple terms, the intra-group transfer of IP is tax-neutral under both the IFA and chargeable gains regimes, with the transferee inheriting the tax written down value (or base cost) along with the tax history of the asset from the transferor. The transferor does not therefore generate a taxable credit or gain (as the case may be) on the transfer of IP to a UK group entity.

Whilst tax neutrality applies solely to transfers between group entities within the scope of UK corporation tax, there are options for the deferral of corporation tax where the transferee is resident in the EEA. There are additional complexities on the cross-border transfer of IP that should be considered but which are outside the scope of this article.

A potential pitfall to be aware of is the degrouping charges which can apply where there has been a prior tax neutral intra-group transfer and the transferee leaves the group, still holding the relevant IP, within six years of the transfer. There are slightly different provisions applying depending on whether the IP falls within the IFA regime or the chargeable gains legislation. They both effectively operate in the same way by treating the relevant asset as having been disposed of at market value and immediately reacquired. Where applicable, this may necessitate a valuation exercise to ascertain the market value of individual IP assets.

Valuing of IP

The valuation of IP is constantly evolving. A piece of software which solves a critical business issue can instantly have its value wiped by the emergence of a competitor’s product. Another common issue is valuing a trademarked brand or logo. One of the common ways of valuing IP is simply to base it on its cost, particularly internally generated software. More sophisticated methods could be to look at the income generated and prepare a discounted cash flow or find similar IP in the market.

Legal documents

It is critically important that an IP owner has suitable legal documents to protect its asset. IP must be registered correctly so that there is no dispute as to ownership, and to mitigate against infringement or abuse of the IP rights. The IP owner may wish to monetise their IP asset by licensing its use, selling it to a third party or transferring intra-group. All such activities require clearly drafted legal documents and experience of commercial negotiations.

Help from the experts

Here, we merely allude to the complexity and issues to consider regarding the tax treatment of IP. While the rules generally allow for tax-neutral transfers between UK group members, many issues need to be considered when structuring the holding and/or transfer of IP within a group.

Additionally, various elections, exceptions and nuances within the rules should be explored proactively. Seeking holistic professional tax advice, alongside possible legal, accountancy and valuations input at an early stage is advisable to ensure that all opportunities and options are investigated.

If you would like to discuss the transfer of intellectual property and its tax implications, please contact one of our experts.