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This guidance cannot cover every commercial scenario involving different types of licensing arrangements. The following examples show the circumstances when an adjustment arises under CTA09/S849AB in relation to licence arrangements between related parties.

Note that for the purpose of illustrating the new rule at CTA09/S849AB we will assume that no TIOPA10/PART4 adjustment is required for the first two examples. The third and fourth examples considers the interaction of TIOPA10/PART4 and CTA09/S849AB.

Example 1

Company A grants a licence to a related party in return for a lump sum payment of 拢1m. HMRC鈥檚 valuers establish the market value of the licence was 拢5m.

An adjustment of 拢4m is required to the consideration recognised by Company A by virtue of CTA09/S849AB(2) because the licence was granted for a sum lower than what the licence might reasonably be expected to fetch on a sale in the open market.

Example 2

Company B is granted a licence from a related party to use IP in their product in return for a lump sum payment of 拢5m and a 5% royalty of all product sales.

HMRC鈥檚 valuers agree with the royalty rate but consider the 拢5m lump sum payment is more than the licence would reasonably be expected to fetch on the open market. On the basis the market would only expect to pay 拢0.5m as an upfront payment in respect of a 5% royalty licence an adjustment of 拢4.5m is required to the cost recognised by Company B under CTA09/S849AB(3).

Example 3

Company C grants a licence to a related party for a 2% royalty and a lump sum payment of 拢1m. Following a Transfer Pricing enquiry, the royalty rate is increased to the agreed arms-length price of 5%. An adjustment is also required to the arms-length price of the consideration of 拢1m, increasing this figure to 拢10m. Both adjustments are made under TIOPA10/PART4.

Example 4

If in example 3 above the market value of the arms-length adjusted royalty licence was 拢12m, or no TIOPA10/PART 4 adjustment was made to the lump sum, the consideration would be adjusted to 拢12m under CTA09/S849AB(2). This because; the licence was granted for consideration in an amount lower that what might reasonably expected to fetch on a sale in the open market, and the adjustment under CTA09/S849AB is higher than the TIOPA10/PART4 amount (CTA09/S849AC(2)).

Notes

Example 3 is an example of a grant not at arm-length to which the exception at new CTA09/S849AC applies. No further adjustment would be required by virtue of CTA09/S849AC(3) if the price the licence might reasonably be expected to fetch on a sale in the open market is less than or equal to the TIOPA10/PART4 amount.

Example 4 shows what happens when the market value adjustment is higher than the TIOPA10/PART4 amount. The adjustment to the lump sum would be made under new CTA09/S849AB rather than under TIOPA10/PART4 as CTA09/S849AC(2) applies.

In each example above, there is no direct effect on the other party to the transaction. S849AB applies only to the company granting a licence at undervalue, or to the company granted a licence at overvalue (see CIRD48350).