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HMRC internal manual

International Manual

HM Revenue & Customs
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Transfer Pricing: Transactions and Structures: business structures: research and development

Ownership of R & D

The UK may have extensive research and development facilities, together with key R & D personnel. There may be attractions in arranging for the ownership of valuable intangibles such as R&D to arise outside the UK. Profits attributable to those intangibles that would have flowed to the UK company in the form of royalties would be earned outside the UK. There are also other potential benefits in having key intangibles owned outside of the UK. If the intangibles are sold, they will not be taxed as a trading receipt, as they would be if disposed of by the UK company.


However, physically moving the R & D function will be unattractive. There are the obvious problems of relocation, and of finding skilled personnel in a new location. The UK also offers incentives for R & D actually carried out in the UK. A possible solution is for the R & D to be carried out in the UK, but for the benefit of someone else. The work will be carried out under a contract, whereby the fruits of the R & D will belong to that other person. Obvious candidates for the offshore owners of valuable intangibles produced from this R & D are companies located in low tax regimes. However what is or is not contract R & D is open to question.


If R & D is carried out under a contract, this does not mean that the activity amounts to what might be considered “contract R & D” (low risk, low reward) from a commercial perspective. The full facts would need to be established and the level of reward an independent would receive to be considered.


  1. If the group is a UK multinational enterprise (‘MNE’), there will be CFC implications of having the intangibles owned by a subsidiary based in a low tax territory. To try to avoid these, this ownership will usually be placed with a subsidiary carrying out activities such as manufacturing in a low tax territory. The group will claim that the subsidiary continues to remain outside the CFC net, as its main business, manufacturing, is an exempt activity. Any such claim should be referred to CTIS Business International.
  2. R & D programmes are risky, generally long-term, ventures. Not every good idea will be capable of successful commercial exploitation. The commercial concern is to create enough successes to mitigate the failures and to make profits on top. Case teams should always review the facts to check that particular successful products are not being placed in group entities in ways that would not happen between independents.


Selection of key R & D programmes to finance from the low tax territory may be filtered by


  • All projects once they reach a certain stage are funded by the low tax territory, leaving the UK with the costs of the early stage R & D. Depending on the type of business, R & D programmes can have a higher risk of failure earlier on in their programme.
  • Key projects that are expected to produce very valuable and perhaps unique intangibles.


The UK may be rewarded using a cost plus method. This may be arm’s length in some cases. There are independent businesses in the UK who will carry out contract R & D for a fee; but generally they will be used to outsource particular parts of a project, rather than be used to discover and develop a new product from scratch, for example


  • In the pharmaceutical industry, an independent research company might be used to perform toxicology tests on test compounds, to see if they are likely to poison prospective patients.
  • In the software industry, an independent company might be used to provide solutions to a particular section of a new source code.
  • In the automotive industry, an independent company might be used to test prototype engines parts for stress and failure levels.


If a relatively small company discovers, and perhaps start to develop, valuable intangibles, their preferred option would probably be to go it alone and hopefully reap the benefits if ultimately the intangibles can be used to produce popular high margin products. However, they will probably lack the funds to fully develop the product, or lack the funds and infrastructure to properly market the final products. They may decide to sell the R & D, but they are much more likely to licence it or find someone willing to act as a partner.


If companies have a potential money-spinning project, they will want to retain the chance to share in the eventual spoils. They may accept lump sum payments during the course of the project, or they may have set costs refunded; but they will want to retain the right to receive a royalty in the event that any products using the intangibles eventually reach the market.


Any enquiry into cross-border payments for contract R & D will involve a detailed consideration of the R & D being carried out, and in particular, how it fits into the overall programme of R & D for the multinational enterprise. If the UK is carrying out innovative research, taking a concept from scratch or at a very early stage from someone else within the group consider carefully whether a cost plus method of setting the transfer price is appropriate. It might be appropriate to consider the use of a profit split method, or some hybrid whereby the UK recharges its expenditure at cost only, but also retains an entitlement to a (lower) royalty on any eventual sales may be appropriate to determine the value of a realistically available option and in pricing the transaction.