Upstaging her dresses, Vivienne Westwood’s tax affairs have recently featured in the press.
It has been reported that:
- In 2002, Ms. Westwood’s UK business sold the rights to her trademarks to a Luxembourg company, which she controls, for £840,000.
- HM Revenue & Customs did not accept this figure and it was agreed, after negotiation between the two sides, that the value of the trademarks had in fact been £2 million.
- The effect of this was to trigger an additional tax bill in the UK business of £348,463 plus interest of £144,112, which fell due in 2009.
- In 2002, at the same time that the trademarks were sold to Ms. Westwood’s Luxembourg company, a licensing arrangement was entered into allowing Ms. Westwood’s UK company to sell Ms. Westwood’s clothes to Japan.
- In breach of the licensing arrangement, Ms. Westwood’s UK company had in fact been selling Ms. Westwood’s clothes around the world.
- As a result of the breach, Ms. Westwood’s UK company agreed to make an exceptional payment of £3 million to its Luxembourg-based parent. We are not told whether this was the result of a transfer pricing enquiry by the tax authorities.
- The effect of the exceptional payment was to reduce the UK company’s corporation tax liabilities for 2010 by £840,000.
The important lessons for other fashion businesses are that:
- There may be tax consequences (particularly in a group context) if transactions are carried out other than for an arm’s length amount/market value.
- If trademarks or other intellectual property are being sold or transferred, or are being licensed (particularly within a group), businesses should carefully consider the tax considerations of the same.
- In particular, businesses should:
- obtain robust valuations of rights being sold or transferred or (as the case may be) of the correct amount of an arm’s length royalty,
- broadly (and subject to the appropriate tax consideration) ensure that rights are sold or transferred for market value and that an arm’s length royalty is paid for the use of intellectual property, and
- where possible, agree any valuations with the tax authorities.
This article was written by Emma Bailey, a partner in the Tax Department and a member of Fox Williams’ Fashion Law Group and Jaspal Pachu, an associate in the Tax Department.
