Session 2010 - 12
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Finance (No. 4) Bill


Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010

144

 

subsection (3) or (5) for the period of 12 months so mentioned is to be

regarded as meeting that condition in relation to the right during that

period (as well as at any other time when the company meets the

condition).

357BD   

Meaning of “qualifying development”

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(1)   

A company carries out “qualifying development” in relation to a

right if—

(a)   

it creates, or significantly contributes to the creation of, the

invention, or

(b)   

it performs a significant amount of activity for the purposes

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of developing the invention or any item or process

incorporating the invention.

(2)   

The reference in subsection (1)(b) to developing the invention

includes developing ways in which the invention may be used or

applied.

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(3)   

For the purposes of section 357BC it does not matter whether the

qualifying development was carried out before or after—

(a)   

the company, or

(b)   

where the company is a member of a group, any member of

the group,

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became the holder of the right or (as the case may be) an exclusive

licence in respect of the right.

357BE   

The active ownership condition

(1)   

A company meets the active ownership condition for an accounting

period if all or almost all of the qualifying IP rights held by the

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company in that accounting period are rights in respect of which

condition A or B is met.

(2)   

Condition A is that during the accounting period the company

performs a significant amount of management activity in relation to

the rights.

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(3)   

In subsection (2) “management activity”, in relation to any qualifying

IP rights, means formulating plans and making decisions in relation

to the development or exploitation of the rights.

(4)   

Condition B is that the company meets the development condition in

relation to the rights by virtue of section 357BC(2) or (3).

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(5)   

Any reference in this section to a qualifying IP right held by the

company includes a reference to a qualifying IP right in respect of

which the company holds an exclusive licence.

 
 

Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010

145

 

Chapter 3

Relevant IP profits

Steps for calculating relevant IP profits of a trade

357C    

Relevant IP profits

(1)   

To determine the relevant IP profits of a trade of a company for an

5

accounting period—

   

Step 1

   

Calculate the total gross income of the trade for the accounting

period (see section 357CA).

   

Step 2

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Calculate the percentage (“X%”) given by the following formula—equation: cross[over[times[char[R],char[I],char[P],char[I]],times[char[T],char[I]]],num[100.0000000000000000,

"100"]]

   

where—

“RIPI” is so much of the total gross income of the trade for the

accounting period as is relevant IP income (see sections

357CC and 357CD), and

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“TI” is the total gross income of the trade for the accounting

period.

   

Step 3

   

Calculate X% of the profits of the trade for the accounting period.

   

If there are no such profits, calculate X% of the losses of the trade

20

(expressed as a negative figure) for the accounting period.

   

In calculating the profits of the trade for the purposes of this step,

make any adjustments required by section 357CG (and references in

this step to the profits or losses of the trade are to be read subject to

any such adjustments).

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Step 4

   

Deduct from the amount given by Step 3 the routine return figure

(see section 357CI).

   

The amount given by this step is the “qualifying residual profit”.

   

If the amount of the qualifying residual profit is not greater than nil,

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go to Step 7.

   

Step 5

   

If the company has elected for small claims treatment, calculate the

small claims amount in relation to the trade (see section 357CM).

   

If the company has not, go to Step 6.

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Step 6

   

Deduct from the qualifying residual profit the marketing assets

return figure (see section 357CN).

   

Step 7

   

If the company has made an election under section 357CQ (which

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provides in certain circumstances for profits arising before the grant

 
 

Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010

146

 

of a right to be treated as relevant IP profits), add to the amount

given by Step 5 or 6 (or, if the amount of the qualifying residual profit

was not greater than nil, Step 4) any amount determined in

accordance with subsection (3) of that section.

(2)   

If the amount given by subsection (1) is greater than nil, that amount

5

is the relevant IP profits of the trade for the accounting period.

(3)   

If the amount given by subsection (1) is less than nil, that amount is

the relevant IP losses of the trade for the accounting period (see

Chapter 5).

Total gross income of trade

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357CA   

Total gross income of a trade

(1)   

For the purposes of this Part the “total gross income” of a trade of a

company for an accounting period is the aggregate of the amounts

falling within the Heads set out in—

(a)   

subsection (3) (revenue),

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(b)   

subsection (5) (compensation),

(c)   

subsection (6) (adjustments),

(d)   

subsection (7) (proceeds from intangible fixed assets),

(e)   

subsection (8) (profits from patent rights).

(2)   

But the total gross income of the trade does not include any finance

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income (see section 357CB).

(3)   

Head 1 is any amounts which—

(a)   

in accordance with generally accepted accounting practice

(“GAAP”) are recognised as revenue in the company’s profit

and loss account or income statement for the accounting

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period, and

(b)   

are brought into account as credits in calculating the profits

of the trade for the accounting period.

(4)   

Where the company does not draw up accounts for an accounting

period in accordance with GAAP, the reference in subsection (3)(a)

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to any amounts which in accordance with GAAP are recognised as

revenue in the company’s profit and loss account or income

statement for the accounting period is to be read as a reference to any

amounts which would be so recognised if the company had drawn

up such accounts for that accounting period.

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(5)   

Head 2 is any amounts of damages, proceeds of insurance or other

compensation (so far as not falling within Head 1) which are brought

into account as credits in calculating the profits of the trade for the

accounting period.

(6)   

Head 3 is any amounts (so far as not falling within Head 1) which are

40

brought into account as receipts under section 181 of CTA 2009

(adjustment on change of basis) in calculating the profits of the trade

for the accounting period.

(7)   

Head 4 is any amounts (so far as not falling within Head 1) which are

brought into account as credits under Chapter 4 of Part 8 of CTA 2009

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Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010

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(realisation of intangible fixed assets) in calculating the profits of the

trade for the accounting period.

(8)   

Head 5 is any profits from the sale by the company of the whole or

part of any patent rights held for the purposes of the trade which are

taxed under section 912 of CTA 2009 in the accounting period.

5

357CB   

Finance income

(1)   

For the purposes of this Part “finance income”, in relation to a trade

of a company, means—

(a)   

any credits which are treated as receipts of the trade by virtue

of—

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(i)   

section 297 of CTA 2009 (credits in respect of loan

relationships), or

(ii)   

section 573 of CTA 2009 (credits in respect of

derivative contracts),

(b)   

any amount which in accordance with generally accepted

15

accounting practice falls to be recognised as arising from a

financial asset, and

(c)   

any return, in relation to an amount, which—

(i)   

is produced for the company by an arrangement to

which it is party, and

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(ii)   

is economically equivalent to interest.

(2)   

In subsection (1)—

“economically equivalent to interest” is to be construed in

accordance with section 486B(2) and (3) of CTA 2009, and

“financial asset” means a financial asset as defined for the

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purposes of generally accepted accounting practice.

(3)   

For the purposes of subsection (1)(c), the amount of a return is the

amount which by virtue of the return would, in calculating the

company’s chargeable profits, be treated under section 486B of CTA

2009 (disguised interest to be regarded as profit from loan

30

relationship) as a profit arising to the company from a loan

relationship.

   

But, in calculating that profit for the purposes of this subsection,

sections 486B(7) and 486C to 486E of that Act are to be ignored.

Relevant IP income

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357CC   

Relevant IP income

(1)   

For the purposes of this Part “relevant IP income” means income

falling within any of the Heads set out in—

(a)   

subsection (2) (sales income),

(b)   

subsection (6) (licence fees),

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(c)   

subsection (7) (proceeds of sale etc),

(d)   

subsection (8) (damages for infringement),

(e)   

subsection (9) (other compensation).

   

This is subject to section 357CE (excluded income).

(2)   

Head 1 is income arising from the sale by the company of any of the

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following items—

 
 

Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010

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(a)   

items in respect of which a qualifying IP right held by the

company has been granted (“qualifying items”);

(b)   

items incorporating one or more qualifying items;

(c)   

items that are wholly or mainly designed to be incorporated

into items within paragraph (a) or (b).

5

(3)   

For the purposes of this Part an item and its packaging are not to be

treated as a single item, unless the packaging performs a function

that is essential for the use of the item for the purposes for which it is

intended to be used.

(4)   

In subsection (3) “packaging”, in relation to an item, means any form

10

of container or other packaging used for the containment, protection,

handling, delivery or presentation of the item, including by way of

attaching the item to, or winding the item round, some other article.

(5)   

In a case where a qualifying item and an item that is designed to

incorporate that item (“the parent item”) are sold together as, or as

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part of, a single unit for a single price, the reference in subsection

(2)(b) to an item incorporating a qualifying item includes a reference

to the parent item.

(6)   

Head 2 is income consisting of any licence fee or royalty which the

company receives under an agreement granting another person any

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of the following rights only—

(a)   

a right in respect of any qualifying IP right held by the

company,

(b)   

any other right in respect of a qualifying item or process, and

(c)   

in the case of an agreement granting any right within

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paragraph (a) or (b), a right granted for the same purposes as

those for which that right was granted.

   

In this subsection “qualifying process” means a process in respect of

which a qualifying IP right held by the company has been granted.

(7)   

Head 3 is any income arising from the sale or other disposal of a

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qualifying IP right or an exclusive licence in respect of such a right.

(8)   

Head 4 is any amount received by the company in respect of an

infringement, or alleged infringement, of a qualifying IP right held

by the company at the time of the infringement or alleged

infringement.

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(9)   

Head 5 is any amount of damages, proceeds of insurance or other

compensation, other than an amount in respect of an infringement or

alleged infringement of a qualifying IP right, which is received by the

company in respect of an event and—

(a)   

is paid in respect of any items that fell within subsection (2)

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at the time of that event, or

(b)   

represents a loss of income which would, if received by the

company at the time of that event, have been relevant IP

income.

(10)   

But income is not relevant IP income by virtue of subsection (8) or (9)

45

unless the event in respect of which the income is received, or any

part of that event, occurred at a time when—

(a)   

the company was a qualifying company, and

 
 

Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010

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(b)   

an election under section 357A had effect in relation to it.

(11)   

In a case where the whole of that event does not occur at such a time,

subsection (8) or (9) (as the case may be) applies only to so much of

the amount received by the company in respect of the event as on a

just and reasonable apportionment is properly attributable to such a

5

time.

(12)   

Any reference in this section to a qualifying IP right held by the

company includes a reference to a qualifying IP right in respect of

which the company holds an exclusive licence.

357CD   

Notional royalty

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(1)   

This section applies where—

(a)   

a company, for the purposes of any trade of the company,

holds any rights mentioned in paragraph (a), (b) or (c) of

section 357BB(1) (rights to which this Part applies) or an

exclusive licence in respect of any such rights, and

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(b)   

the rights are relevant qualifying IP rights.

(2)   

For the purposes of this section a qualifying IP right is a “relevant

qualifying IP right” in relation to an accounting period if—

(a)   

the total gross income of the trade of the company for the

accounting period includes any income arising from things

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done by the company that involve the exploitation by the

company of that right, and

(b)   

that income is not relevant IP income or excluded income.

   

Such income is referred to in this section as “IP-derived income”.

(3)   

The company may elect that the notional royalty in respect of the

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trade for the accounting period is to be treated for the purposes of

this Part as if it were relevant IP income.

(4)   

The notional royalty in respect of a trade of a company for an

accounting period is the appropriate percentage of the IP-derived

income for that accounting period.

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(5)   

The “appropriate percentage” is the proportion of any IP-derived

income for an accounting period which the company would pay

another person (“P”) for the right to exploit the relevant qualifying IP

rights in that accounting period if the company were not otherwise

able to exploit them.

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(6)   

For the purposes of determining the appropriate percentage under

this section, assume that—

(a)   

the company and P are dealing at arm’s length,

(b)   

the company, or the company and persons authorised by it,

will have the right to exploit the relevant qualifying IP rights

40

to the exclusion of any other person (including P),

(c)   

the company will have the same rights in relation to the

relevant qualifying IP rights as it actually has,

(d)   

the relevant qualifying IP rights are conferred on the relevant

day,

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(e)   

the appropriate percentage for the accounting period is

determined at the beginning of the accounting period,

 
 

Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010

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(f)   

the appropriate percentage for the accounting period will

apply for each succeeding accounting period for which the

company will have the right to exploit the relevant qualifying

IP rights, and

(g)   

no income other than IP-derived income will arise from

5

anything done by the company that involves the exploitation

by the company of the relevant qualifying IP rights.

(7)   

In subsection (6)(d) “the relevant day”, in relation to a relevant

qualifying IP right or a licence in respect of such a right, means—

(a)   

the first day of the accounting period, or

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(b)   

if later, the day on which the company first began to hold the

right or licence.

(8)   

In determining the appropriate percentage, the company must act in

accordance with—

(a)   

Article 9 of the OECD Model Tax Convention, and

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(b)   

the OECD transfer pricing guidelines.

(9)   

In this section “excluded income” means any income falling within

any of the Heads in section 357CE.

357CE   

Excluded income

(1)   

For the purposes of this Part income falling within any of the Heads

20

set out in the following subsections is not relevant IP income—

(a)   

subsection (2) (ring fence income),

(b)   

subsection (3) (income attributable to non-exclusive licences).

(2)   

Head 1 is income arising from oil extraction activities or oil rights.

   

In this subsection “oil extraction activities” and “oil rights” have the

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same meaning as in Part 8 (see sections 272 and 273).

(3)   

Head 2 is income which on a just and reasonable apportionment is

properly attributable to a licence (a “non-exclusive licence”) held by

the company which—

(a)   

is a licence in respect of an item or process, but

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(b)   

is not an exclusive licence in respect of a qualifying IP right.

(4)   

In a case where—

(a)   

a company holds an exclusive licence in respect of a

qualifying IP right, and

(b)   

the licence also confers on the company (or on the company

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and persons authorised by it) any right in respect of the

invention otherwise than to the exclusion of all other persons,

   

the licence is to be treated for the purposes of this Part as if it were

two separate licences, one an exclusive licence that does not confer

any such rights, and the other a non-exclusive licence conferring

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those rights.

357CF   

Mixed sources of income

(1)   

This section applies to any income that—

(a)   

is mixed income, or

(b)   

is paid under a mixed agreement.

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