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HMRC internal manual

Corporate Intangibles Research and Development Manual

Intangible assets: avoidance: new measures to be introduced in Finance (No.2) Bill 2017: related party licences

Draft Guidance in relation to clause 21


This draft guidance is published in relation to draft clause 21 of the Finance (No.2) Bill 2017.  This legislation has not yet been enacted, the guidance is not final and is subject to change.



New draft provisions at CTA09/S849AB - AD extend the market value rule in relation to transfers (CTA09/S845) to licences of intangible assets granted between related parties.    These provisions will ensure that related parties cannot convey the economic benefit of an intangible fixed asset and obtain a tax advantage by manipulating the price of a licence.  The licence price will now be compared to the market value of the licence.  This change is intended to be effective from 22 November 2017.

The expectation is that the TIOPA10/PART4 rules will apply to most related party licences where an adjustment to the price is required.  An adjustment under new CTA09/S849AB will only apply where an adjustment under the TIOPA10/PART4 rules is not required or is insufficient to bring in the market value (CTA09/S849AC). 


When the rule applies

CTA09/S849AB applies either:

  • to companies granting a licence in respect of an intangible fixed asset to a related party at less than market value (CTA09/S849AB(2)), or
  • to companies who have been granted a licence in respect of an intangible fixed asset by a related party at above market value (CTA09/S849AB(3)).

It is subject to new CTA09/S849AC (see CIRD48360 example 3).


New CT09/S849AD

The application of the market value rule is modified in relation to grants involving other taxes (CTA09/S849AD).  It does not apply to grants giving rise to a distribution or employment income charge on any person under CTA10/PART23 (distributions) or Part 3 of ITEPA (employment income).  This replicates the rule in CTA09/S847 for transfers (see CIRD45033).


Market Value

Market value is defined by CTA09/S849AB(12):

‘“Market value” means the price the licence or right might reasonably be expected to fetch on a sale in the open market’


Applying market value to a licence

New CTA09/S849AB addresses the risk that a tax advantage may arise where rights in respect of an intangible asset are granted between related parties other than at market value.  CTA09/S849AB does not, in general terms, require a licence granted in return for a royalty to be compared with a lump sum or upfront fee licence. 

What is however required is a comparison of the price actually payable under the terms of the licence with the price that the market would expect for that licence.  The ‘price’ is the payments due under the licence, or the undertaking to make such payments, and can include royalties, up-front or lump sum payments and any other amounts payable under the terms of the licence.  It is legitimate to consider whether a straightforward royalty licence should include an upfront fee, if that is what would be expected of that licence (on a sale in the open market). 

Licence agreements are complex contractual arrangements.  Commercial arrangements might expect royalties to be payable, or a lump sum payment, or a mixture of both.  When considering whether a licence granted between related parties is on arms-length or market value basis both the licensor’s and licensee’s commercial positions should be considered.

If it can be concluded that the licence was granted at market value no further adjustment will be due under CTA09/S849AB.  For example, if a licence is granted at a fixed 5% royalty, with no upfront fee payable, and that is the price which would be expected on a sale in the open market, no further adjustment will be required. 

A licence granted on terms different to those which would be expected on the open market might lead to the conclusion that all or any of the terms (such as royalty rate, steps in the royalties, up-front payment, contingent milestone payments etc.), require adjustment or imposition. 

Each case must be considered on its own facts by reference to a sale in the open market. 


Adjusting the price

An adjustment may be due under TIOPA2010/PART4 or CTA09/S849AB.  As CTA09/S849AB is subject to CTA09/S849AC it follows that adjustments required under the TIOPA10/PART4 rules must be considered before adjustments required under new CTA09/S849AB.  CTA09/S849AC provides that the greater adjustment is brought into account. 

For practical examples see CIRD48360.