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HMRC internal manual

International Manual

HM Revenue & Customs
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Transfer pricing: risk assessment: transfer pricing risk indicators: ownership of intellectual property

Intellectual property

There are many different sorts of intellectual property (‘IP’) - see INTM440110 on the nature of intangibles - and companies can make use of IP in a number of different ways. Some companies will use other people’s IP in their business while other companies will own and use their own. Some companies will license out their IP and will be rewarded for doing so. Generally at arm’s length there is a charge for using an intangible which belongs to somebody else, where the most common form of payment is by way of an annual fee or royalty. This is distinct from buying a product for resale which incorporates an intangible - for example a brand of footwear. See INTM482100 for guidance about risk assessment where royalty payments may be an issue.

The absence of royalty or fee income in a company owning valuable IP, or the lack of significant profits, may be an indication that the transfer pricing of intra-group transactions is not on an arm’s length basis or that the payment for IP is included in the product pricing. A group of companies may own many different types of IP, spread among different members of the group. If a consideration of the facts shows that an independent entity would be charged to use IP then it is appropriate to consider whether an affiliated entity should be charged.

The following are indicators that a company may own valuable IP. There are many more which would become apparent from a full examination of the facts of a particular case.

  • Online searches on sites such as those of the UK and European Intellectual Property Offices should indicate ownership of certain types of assets such as trademarks and patents.
  • The company accounts show significant amounts spent on research & development. If the company does not receive any royalties then it may be that it does not own the IP that results from the R&D but instead works under contract for another party, in which case there should be some other form of income reward.
  • The company is making significant claims under the research & development allowance scheme. The R&D may lead to the creation of patents which the company can then exploit and, even if it does not, it may create other types of IP such as trade secrets or know-how. These assets are capable of exploitation at arm’s length.
  • The company routinely seconds highly-qualified or skilled employees to other group companies.
  • The very nature of the work carried out by the company produces valuable IP, such as a proprietary trading platform or system.
  • The company name or trademark or logo is prominently used by a website registered by a different company.