Transfer pricing experts are used to grappling with some tricky valuation questions when it comes to intellectual property rights. After all, to quote (butcher?) the old Ronseal adverts, ‘hard to value intangibles’ do exactly what it says on the tin! But here’s a new one for them: following the Court of Appeal’s decision in Refinitiv Ltd v HMRC [2024] EWCA Civ 1412, how much value can you put on an advanced pricing agreement (APA) with HMRC which purports to agree the UK taxable profit attributable to UK activities carried out in relation to intellectual property (IP) owned overseas and which is later sold? The answer, at least unless and until the Supreme Court tells us otherwise, is not as much as you might hope.
From 2008 to 2018, Refinitiv Ltd (Refinitiv), a UK resident company in the Thompson Reuters group, provided services related to IP held by Thompson Reuters Global Resources (TRGR), a Swiss resident company and owner of the group’s main IP assets. Refinitiv and HMRC entered into an APA agreeing the arm’s length reward that Refinitiv should receive for services provided to TRGR through to the end of 2014 on a costs-plus basis. In 2018, TRGR sold the relevant IP to a third party, whereupon HMRC hit Refinitiv with a notice charging it to £167m of diverted profits tax (DPT). This was on the basis that, but for tax and acting at arm’s length, HMRC said Refinitiv would have received a share of the profits on selling the IP because the services it had provided to TRGR contributed significantly to the value of that IP.
At this point, Refinitiv cried ‘foul!’ To the extent that that value has been generated by services provided on or before 31 December 2014, Refinitiv argued that HMRC had already agreed – via the APA – that the appropriate arm’s length remuneration for those services was the costs-plus basis set out in the APA. By issuing the DPT notice, HMRC was effectively switching to a profit share method for those same services now, contrary to what had been agreed in the APA, and therefore unlawful in public law terms. So they brought a judicial review claim seeking to quash the DPT notice to the extent inconsistent with the APA.
That claim was dismissed by the Upper Tribunal, and the Court of Appeal recently dismissed Refinitiv’s appeal of that decision. The crux of the issue between Refinitiv and HMRC was whether or not the APA ‘related’ to the 2018 accounting period of Refinitiv or not. Sir Launcelot Henderson, delivering the unanimous judgment of the court, found the answer in the terms of the APA itself. On its face, the APA was expressed to have a five year term covering accounting periods of Refinitiv beginning on 1 January 2010 and terminating on 31 December 2014, plus a ‘roll back’ period from 1 October 2008 to 31 December 2009. As he put it: ‘Sometimes the simple and obvious answer to a question is the right one.’
In his judgment, neither party could reasonably have contemplated that if, as happened, the APA was not renewed, ‘the methodology used and applied for the years covered by the APA should have a continuing and constraining effect on HMRC’s approach to transfer pricing in future accounting periods from 1 January 2015 onwards’. As a cross-check he asked himself ‘whether Parliament could sensibly have intended that the APA should also “relate” to unspecified future chargeable periods, however remote in time, in which an issue settled by the APA for the chargeable periods specified therein might again become relevant in some way to the determination of [Refinitiv’s] future taxation liabilities’. His answer to that? ‘An unhesitating no’.
But is it really that clear cut? It does not seem at all unreasonable to me that the parties would have expected that, once they had agreed the arm’s length remuneration for the services provided through to the end of 2014 that would preclude HMRC seeking to tax more profit in the UK as a reward for those exact same services. Or what if the hypothetical question were recut as ‘whether Parliament could sensibly have intended that the APA should not prevent HMRC having a second bite at the cherry by using a different method to price services covered by the APA as long as they can come up with a method that produces a profit in a later accounting period?’
Let’s take an extreme example to illustrate where the tension lies. Say Refinitiv started providing services to TRGR in 2000. HMRC enter into an APA with Refinitiv agreeing that a costs-plus basis represents the appropriate arm’s length reward for the services provided. Let’s assume that APA is renewed every five years until 2100 when it expires. In 2101, TRGR sells the IP and HMRC once again decide that, in fact, Refinitiv should have been rewarded on a profit share basis all along and issue a DPT notice on that basis taxing it on that share of the profit in 2101. Is it really simple and obvious that, having spent a century agreeing that the costs-plus remuneration was arm’s length, HMRC should be free to change their minds at the last minute and tax Refinitiv on a share of profit attributable to its activities over the entire 101 year period instead?
I’m not sure it is. Given that, and given the ever-growing importance of transfer pricing services relating to IP, I do hope that, if Refinitiv apply to the Supreme Court for permission to appeal (which, given the amounts at stake, must be likely), the Supreme Court accepts (as it did in R v Wilkinson [2005] UKHL 30 on extra-statutory concessions) that the proper scope of HMRC’s powers is a matter of general public importance (and value to the UK as a whole) and so agrees to hear it.
Transfer pricing experts are used to grappling with some tricky valuation questions when it comes to intellectual property rights. After all, to quote (butcher?) the old Ronseal adverts, ‘hard to value intangibles’ do exactly what it says on the tin! But here’s a new one for them: following the Court of Appeal’s decision in Refinitiv Ltd v HMRC [2024] EWCA Civ 1412, how much value can you put on an advanced pricing agreement (APA) with HMRC which purports to agree the UK taxable profit attributable to UK activities carried out in relation to intellectual property (IP) owned overseas and which is later sold? The answer, at least unless and until the Supreme Court tells us otherwise, is not as much as you might hope.
From 2008 to 2018, Refinitiv Ltd (Refinitiv), a UK resident company in the Thompson Reuters group, provided services related to IP held by Thompson Reuters Global Resources (TRGR), a Swiss resident company and owner of the group’s main IP assets. Refinitiv and HMRC entered into an APA agreeing the arm’s length reward that Refinitiv should receive for services provided to TRGR through to the end of 2014 on a costs-plus basis. In 2018, TRGR sold the relevant IP to a third party, whereupon HMRC hit Refinitiv with a notice charging it to £167m of diverted profits tax (DPT). This was on the basis that, but for tax and acting at arm’s length, HMRC said Refinitiv would have received a share of the profits on selling the IP because the services it had provided to TRGR contributed significantly to the value of that IP.
At this point, Refinitiv cried ‘foul!’ To the extent that that value has been generated by services provided on or before 31 December 2014, Refinitiv argued that HMRC had already agreed – via the APA – that the appropriate arm’s length remuneration for those services was the costs-plus basis set out in the APA. By issuing the DPT notice, HMRC was effectively switching to a profit share method for those same services now, contrary to what had been agreed in the APA, and therefore unlawful in public law terms. So they brought a judicial review claim seeking to quash the DPT notice to the extent inconsistent with the APA.
That claim was dismissed by the Upper Tribunal, and the Court of Appeal recently dismissed Refinitiv’s appeal of that decision. The crux of the issue between Refinitiv and HMRC was whether or not the APA ‘related’ to the 2018 accounting period of Refinitiv or not. Sir Launcelot Henderson, delivering the unanimous judgment of the court, found the answer in the terms of the APA itself. On its face, the APA was expressed to have a five year term covering accounting periods of Refinitiv beginning on 1 January 2010 and terminating on 31 December 2014, plus a ‘roll back’ period from 1 October 2008 to 31 December 2009. As he put it: ‘Sometimes the simple and obvious answer to a question is the right one.’
In his judgment, neither party could reasonably have contemplated that if, as happened, the APA was not renewed, ‘the methodology used and applied for the years covered by the APA should have a continuing and constraining effect on HMRC’s approach to transfer pricing in future accounting periods from 1 January 2015 onwards’. As a cross-check he asked himself ‘whether Parliament could sensibly have intended that the APA should also “relate” to unspecified future chargeable periods, however remote in time, in which an issue settled by the APA for the chargeable periods specified therein might again become relevant in some way to the determination of [Refinitiv’s] future taxation liabilities’. His answer to that? ‘An unhesitating no’.
But is it really that clear cut? It does not seem at all unreasonable to me that the parties would have expected that, once they had agreed the arm’s length remuneration for the services provided through to the end of 2014 that would preclude HMRC seeking to tax more profit in the UK as a reward for those exact same services. Or what if the hypothetical question were recut as ‘whether Parliament could sensibly have intended that the APA should not prevent HMRC having a second bite at the cherry by using a different method to price services covered by the APA as long as they can come up with a method that produces a profit in a later accounting period?’
Let’s take an extreme example to illustrate where the tension lies. Say Refinitiv started providing services to TRGR in 2000. HMRC enter into an APA with Refinitiv agreeing that a costs-plus basis represents the appropriate arm’s length reward for the services provided. Let’s assume that APA is renewed every five years until 2100 when it expires. In 2101, TRGR sells the IP and HMRC once again decide that, in fact, Refinitiv should have been rewarded on a profit share basis all along and issue a DPT notice on that basis taxing it on that share of the profit in 2101. Is it really simple and obvious that, having spent a century agreeing that the costs-plus remuneration was arm’s length, HMRC should be free to change their minds at the last minute and tax Refinitiv on a share of profit attributable to its activities over the entire 101 year period instead?
I’m not sure it is. Given that, and given the ever-growing importance of transfer pricing services relating to IP, I do hope that, if Refinitiv apply to the Supreme Court for permission to appeal (which, given the amounts at stake, must be likely), the Supreme Court accepts (as it did in R v Wilkinson [2005] UKHL 30 on extra-statutory concessions) that the proper scope of HMRC’s powers is a matter of general public importance (and value to the UK as a whole) and so agrees to hear it.
