ETASSUM52130 - Enterprise Management Incentives (EMI): Excluded activities: Receipt of royalties or licence fees

Paragraph 19, Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA)

Receiving royalties or licence fees is an excluded trade, but that exclusion is waived in certain circumstances as detailed below.

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.

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.

Receiving Royalties and Licence Fees
Royalties or licence fees will be received where property rights of certain kinds are exploited by granting permission to others to make use of that property. But there will be cases where, although the ‘sales’ are made under licence, the receipts are nevertheless consideration for the supply of goods - for example, the retailing of CDs.

Licence Fees Schedule
Licences may be granted as a means of exploiting an interest in land. But in some situations, the of the licence is merely incidental to an activity of supplying services. In such cases it is considered that Paragraph 16(e) Schedule 5 ITEPA is not in point; for example, what the proprietor of a cinema offers in return for payment for a ticket, is not just to admit the customer and provide a seat but to show a film.

This principle can be illustrated by looking at activities concerned with the provision of sports and leisure facilities. At one extreme, a simple activity of making sports facilities available to the general public, with no provision of services, would consist of little more than charging a fee in return for the right to use property. This would be an activity of receiving licence fees. But such a situation would be exceptional. A more commonly encountered activity might be operating a health club which provides a high level of services, including active supervision and advice from qualified staff. Here the licence to enter the premises and use the equipment would be merely incidental.

Waiver to the exclusion

The waiver to the exclusion 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 attributable to this 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 covers all intellectual property as defined in the legislation, and also industrial information and techniques.

The definition of ‘relevant intangible asset’ was widened with effect from 6 April 2007. It is now defined as an asset created by the company issuing the EMI options, or by a company that was a qualifying subsidiary of the company issuing EMI options for the whole of the period during which it created the asset. Prior to 6 April 2007, the legislation was more restrictive, with the unintended consequence that when a company transferred assets to a subsidiary, this could have been a disqualifying event (see ETASSUM57050). From 6 April 2007, assets can be transferred to a subsidiary which was not in the group at the time the assets were created without qualifying status being lost as a result.

Example

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.