Trademarks – tax and accounting considerations
26 May 2023
Trademarks for food and drink – especially alcoholic drinks – have been around for decades. The first registered trademark in the UK is still in use and is nearly 150 years old, belonging to Bass & Co’s Pale Ale.
What is a trademark?
Trademarks are a form of intellectual asset that aim to prevent others from using the logo, branding, name or title associated with a business. They are often considered in the context of large multinational corporations, marking their powerful seal on products to prevent others from copying. However, trademarks are more commonly available and used these days, with the potential to protect or even add great value to a business that can differentiate itself effectively.
In June 2022, Sussex wine producers successfully obtained a Protected Designation of Origin (PDO) following a seven-year application process. The PDO has not only granted the winemakers of Sussex a similar legal protection to prestigious wine-growing regions as Champagne and Burgundy, but is also likely to increase the perception of the wine’s quality and value. This recognition of quality and differentiation to other wine producing areas reassures keen Sussex buyers that they are getting the standard of wine from the region that they expect, and may encourage consumers to buy based on the PDO status. Those Sussex wine producers with trademarked wines to their name are likely to have seen an increase in the value of their trademarks as a result of the PDO status being granted.
This is a relatively simple process, with an application made to the Intellectual Property Office (IPO) for as little as £170. A trademark can cover a word, logo, colour scheme or any combination of these, subject to some restrictions. Once granted, a trademark is renewed for a fee every 10 years. The IPO offer free advice regarding registering a trademark, including which trademark class to apply for.
Under FRS 102 (the Financial Reporting Standard applicable in the UK & Ireland), an intangible asset is a non-monetary asset without physical substance which is identifiable, separable and capable of being sold. As such, a trademark often meets the criteria for an intangible asset and can become a valuable part of a business. It is therefore generally capitalised as a fixed or non-current asset due to its long lifespan. The amount capitalised is restricted to directly attributable costs that have been incurred to create, produce and prepare the asset so that it is capable of operating in the manner intended by management. Therefore, only the fees directly associated with the registration of a new trademark are generally allowed to be capitalised, including registration and legal fees. A business cannot capitalise the costs related to the marketing or promotion of a trademark as this is considered part of its intended use.
Under FRS 102, a trademark cannot generally be held under the revaluation model unless it can be shown that the fair value of the asset can be determined through an active market for it, which isn’t usually the case for business specific trademarks. Therefore, businesses would need to consider the rate of amortisation and the trademark’s expected useful life in drawing up the financial statements. All intangible assets are considered to have a finite useful life under FRS 102, which usually follows the contractual rights of the asset, unless the expected period of use is shorter. In the case of a trademark, this will likely be the period until renewal, unless there is already evidence to support the entity’s intention and ability to renew, in which case it can sometimes extend to beyond the renewal date. Amortisation of the trademark can only commence at the point it becomes available for use.
Trademarks and tax
As a headline point, expenses incurred in obtaining the registration of a trademark, or costs of renewal of a trademark for the purposes of a trade, are generally allowable deductions for income tax or corporation tax purposes.
Where trademarks are bought or sold, the rules are more nuanced and complex. For example, there are special rules relating to the amortisation of registered trademarks which are created or acquired from an unrelated party on or after 1 April 2002. Tax advice should be sought in advance of a transaction relating to the acquisition or disposal of a trademark.
Registered trademarks can be a beneficial and accessible way of protecting goods that can be differentiated from those of competitors. They may provide a commercial advantage and benefits are starting to be seen by many businesses, including within the growing UK wine industry.
If you have any further queries on the points raised, please speak to your usual Saffery Champness contact, or get in touch with Lucy de Greeff.