Iliffe - the tax stuff

To follow up on Jeremy's post, the tax stuff on the Iliffe case has some useful points buried in it (but don't forget it's all obiter as the decision was actually that the assignments were void as they were assignments of unregistered trademarks in gross so the whole thing fell apart from the start):

Capital or revenue?
The decision confirms that the treatment of receipts from IP assets is not significantly different to that of receipts from other assets; where there is a significant reduction in value of an asset as a result of a transaction, that transaction is likely to be viewed as a capital transaction and any receipt will be a capital receipt.  In this case, the grant of a 5 year licence over the IP asset was held to constitute a significant reduction in value of that IP asset.

The capital/revenue distinction is less important for companies without capital losses as the tax rate is the same – it matters more to individuals, who pay different rates of tax on capital and revenue receipts.

One useful point that arises from the judgement is the confirmation that, simply because a payment arrangement is not typical for that type of transaction, it does not necessarily affect the tax treatment – HMRC had argued that trademark licensing arrangements are usually based on periodic payments, not a lump sum, and that the lump sum here simply relieved the subsidiaries of having to pay periodic payments. As such, they argued that the lump sum should be regarded as revenue. The judgment noted that this was not how the transaction was structured – the lump sum was not based on royalties, or any use of the IP assets, and the fact that this was atypical was not "of much significance".

Creating IP - licences and other implications
The tax rules for company IP assets depend on whether the asset was created or acquired before or on/after 1 April 2002 – the rules for post-1 April 2002 assets are more generous and so there are rules to stop related parties getting benefits by transferring IP assets between themselves. Basically, you can't turn a pre-1 April 2002 asset into a post-1 April 2002 asset by transferring it from one related party to another.

Unfortunately, the related parties rules don't really take licences into accounts – in this case, the parties tried to create post-1 April 2002 assets by creating licences from the trademarks. Licences are qualifying IP assets within the tax rules.

The judgement accepts that the licences of the trademarks were created after 1 April 2002 but finds that, in this case, there was no expenditure on the creation of the licences after 1 April 2002. The only expenditure in respect of the licences was on their acquisition. If there's no expenditure on creation of an IP asset after 1-April 2002 then it's not a post-1 April 2002 asset, under the tax rules. Even if it's actually created after that date.

As a result, the judgement finds that the licences can't fall within the corporate intangible tax rules because they are acquired from a related party – for the acquirer to get beneficial tax treatment, the IP asset must have been a post-1 April 2002 asset for the related party.

There was no discussion as to creation expenditure in respect of the licences and particularly the legal fees and the management time that are usually involved in the creation of the licenses. It seems unlikely that the licences sprang fully formed from the licensees and the licensor's only involvement was signature – particularly as it's clear from the background facts in the judgement that the licensor's directors were involved in discussions on the matter.

If time and legal fees incurred in creating licences don't count as post-1 April 2002 creation expenditure then there could be an argument that time spent by an author in creating a copyright work equally doesn't count as expenditure on creating an IP asset as copyright can be created without more identifiable expenditure. It's unlikely that HMRC would take the point, but it's arguably a logical conclusion from the judgement.

The decision was fairly clearly signalled by the point (in para 250-251) that there must be some limitation on licences counting as IP assets, otherwise all that would be needed to get around the related party rules would be to licence a pre-1 April 2002 asset, rather than transfer it. It's a pity that the judgement has to be a bit contorted in trying to get to this point – it's a point that should be properly dealt with in legislation.

It should be noted that the decision doesn't affect licences acquired from third parties – all that's required in such cases is that expenditure on acquiring the licence is incurred on/after 1 April 2002: the pre/post-1 April 2002 status of the licence with respect to the licensor doesn't matter.

IP mini-GAAR
There's a section in the IP tax rules for companies that effectively denies beneficial treatment if one of the main purposes of a transaction is to get a tax benefit (a mini-general anti abuse rule). The judgement findings here aren't specifically related to IP tax – they have wider implications for other mini-GAARs and the main GAAR that's anticipated in 2013. In particular, the judgement found that:

• it could take the tax adviser's intentions into account in deciding whether a tax advantage was a main purpose, as the taxpayer company directors didn't fully understand the structure
• it could compare the transaction to a hypothetical transaction that achieved the commercial objectives more effectively

Both these points are a bit of a departure from previous interpretation of mini-GAARs and have implications well outside the realms of IP tax law.

Overall
It's unlikely that there will be an appeal given that the defeat was on a basic point of IP law, so the IP tax points will stand as obiter dicta for the time being – the main points to note are:

• get the IP law right!
• make sure the taxpayer understands the structure
• trying to get around the rules will probably not be favourably looked upon by the Tribunal

Tax schemes and assignment of unregistered trade marks in gross

Iliffe News and Media Ltd & Ors v Revenue & Customs [2012] UKFTT 696 (TC), a United Kingdom First-Tier Tax Tribunal decision, bears all the hallmarks of the sort of ruling that you make a mental note to read one day, then spot that it's 335 paragraphs long and determine to leave the reading of it to a happy day when you are paid to read it for the sake of a client. This blogger hasn't read it in full -- and he's not sure that he'd want to even if he were paid to do it -- but he felt that readers of the IP Finance weblog should at least be aware of it.

Essentially, this First-tier Tribunal ruling concluded that purported assignments of local newspaper titles or "mastheads" as unregistered trade marks by subsidiary companies to a newspaper publishing group holding company were in gross -- which means that they were assigned without the businesses to which they were attached -- and were also void for mistake as to the assignability of the subject matter of the purported assignment. The titles had been assigned to the holding company and then licensed in exchange for consideration that came to more than £50 million. The Tribunal ventured back into the history of the common law rule against assignments of unregistered trade mark in gross. While the basic rule was that you couldn't do it, the Trade Marks Act 1938 section 22 allowed such an assignment -- so long as the assigned unregistered mark was used in the same business as a registered trade mark which had been assigned (i) at the same time and (ii) to the same person, (iii) in respect of goods used in that business for which the registered trade mark was assigned. The Trade Marks 1994, which repealed the 1938 Act, liberalised the assignment of registered trade marks, but provided that nothing in that Act should be construed as affecting the assignment of an unregistered trade mark as part of the goodwill of a business. In this case, the unregistered trade marks were not intended

Much of the decision is taken up with a discussion of what would have been the effect of the assignment, in tax terms, had it been valid.  But there's more there than this blogger can handle ...