UK PCo has few employees and valuable patents. It contracts with 3rd party UK MCo to manufacture a product which uses its patents. PCo will own all IP and gets a say in how the manufacturing process is designed and how the resulting facility is managed.
A commercial deal is agreed which results in the majority of profits going to PCo as patent box income. HMRC believe that, had PCo/MCo been related parties applying OECD TP principles, more profit would have been allocated to MCo and taxed at 25%.
Could PCo’s say in MCo be enough for HMRC to argue indirect participation in the management under the new s.148A rule? Would the patent box mean no UK-UK exemption and trigger the effective tax mismatch outcome? Would the election also trigger the design condition?
Could HMRC therefore raise an assessment to the contract manufacturer under the UTPP rules and demand payment of tax at 31%? In deciding the case, would a tribunal have to ignore the commercially agreed price as it is now considered to be a controlled price?
