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HMRC internal manual

Venture Capital Schemes Manual

HM Revenue & Customs
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Excluded activities: receiving royalties or licence fees

ITA07/S192(1)(e); ITA07/S303(1)(e)

These sections exclude receiving royalties or licence fees.

The receipt of royalties or licence fees can arise in a trade through the exploitation of such assets as trademarks, patent rights, copyright and know-how. However, this exclusion is waived in certain cases (see below).

Licence fees can also arise in relation to the exploitation of rights over land. The operation of sports centres and leisure facilities are examples of trades that may in some cases involve the receipt of licence fees of this kind. This subject is dealt with in an article in Tax Bulletin 54 published in August 2001 (see VCM3200).

ITA07/S195; ITA07/S306

The general exclusion of an activity of receiving royalties or licence fees is waived in certain circumstances as shown below.

The waiver applies where the royalties or licence fees are attributable to the exploitation of certain assets described as ‘relevant intangible assets’. Where some of the royalties or licence fees are so attributable and some are not, the latter can be ignored if they do not amount to a substantial part of the total in terms of their value.

An ‘intangible asset’ for this purpose is anything that could be treated as such under normal UK accounting practice (which is set out in Financial Reporting Standards 10). This will cover all intellectual property as defined in the legislation, and also industrial information and techniques.

An asset is a relevant intangible asset if it, or the greater part of it in terms of value, has been created by the company which has issued the shares, or by a company which was a subsidiary of that company during the period it created it, or the greater part of it in terms of value. For this purpose, a new holding company which has been inserted under a scheme of reconstruction as covered by VCM16030 or VCM37030 is regarded as being the company which originally issued the shares.

So a company can acquire an asset at an early stage of development and providing the acquiring company (or another in the same group) develops the asset to the point where it has created the greater part, by value, of it, it will subsequently be a relevant intangible asset in relation to the acquiring company.

Where the asset is intellectual property, the right to exploit it can be vested in the company or in the company and other persons jointly. The latter provision covers the case where an invention results from a collaborative project, or where it results from work by a company employee and under the terms of the employment contract the company and the employee each have the right to be registered as joint owners of the patent.