Finance (No. 4) Bill

Session 2010 - 12
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Other Bills before Parliament

Finance (No. 4) Bill

Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
151

(2)
“Mixed income” means the proceeds of sale in a case where an item
falling within subsection (2) of section 357CC and an item not falling
within that subsection are sold together as, or as part of, a single unit
for a single price.
(3)
A “mixed agreement” is an agreement providing for—
5
(a)
one or more of the matters in paragraphs (a) to (c) of
subsection (4), and
(b)
one or more of the matters in paragraphs (d) to (g) of that
subsection.
(4)
The matters are—
10
(a)
the sale of an item falling within section 357CC(2),
(b)
the grant of any right falling within paragraph (a), (b) or (c)
of section 357CC(6),
(c)
a sale or disposal falling within section 357CC(7),
(d)
the sale of any other item,
15
(e)
the grant of any other right,
(f)
any other sale or disposal,
(g)
the provision of any services.
(5)
So much of the income as on a just and reasonable apportionment is
properly attributable to—
20
(a)
the sale of an item falling within section 357CC(2),
(b)
the grant of any right falling within paragraph (a), (b) or (c)
of section 357CC(6), or
(c)
a sale or disposal falling within section 357CC(7),

is to be regarded for the purposes of this Part as relevant IP income.
25
(6)
But where the amount of income that on such an apportionment is
properly attributable to any of the matters in paragraphs (d) to (g) of
subsection (4) is a trivial proportion of the income to which this
section applies, all of that income is to be regarded for the purposes
of this Part as relevant IP income.
30
Calculating profits of trade
357CG
Adjustments in calculating profits of trade
(1)
This section applies for the purposes of determining the relevant IP
profits of a trade of a company for an accounting period.
(2)
In calculating the profits of the trade for the accounting period—
35
(a)
there are to be added the amounts in subsection (3), and
(b)
there are to be deducted the amounts in subsection (4).
(3)
The amounts to be added are—
(a)
the amount of any debits which are treated as expenses of the
trade by virtue of—
40
(i)
section 297 of CTA 2009 (debits in respect of loan
relationships), or
(ii)
section 573 of CTA 2009 (debits in respect of
derivative contracts), and

Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
152

(b)
the amount of any additional deduction for the accounting
period obtained by the company under Part 13 of CTA 2009
for expenditure on research and development in relation to
the trade.
(4)
The amounts to be deducted are any amounts of finance income
5
brought into account in calculating the profits of the trade for the
accounting period.

(For the meaning of “finance income”, see section 357CB.)
(5)
In a case where there is a shortfall in R&D expenditure in relation to
the trade for a relevant accounting period (see section 357CH), the
10
amount of R&D expenditure brought into account in calculating the
profits of the trade for that accounting period is to be increased by
the amount mentioned in section 357CH(2).
(6)
For the purposes of subsection (5)—
“R&D expenditure” means expenditure on research and
15
development in relation to the trade,
“relevant accounting period”, in relation to a company,
means—
(a)
the first accounting period for which—
(i)
the company is a qualifying company, and
20
(ii)
an election under section 357A has effect in
relation to it, and
(b)
each accounting period that begins before the end of
the period of 4 years beginning with that accounting
period, and
25
“research and development” means activities, other than oil and
gas exploration and appraisal, that fall to be treated as
research and development in accordance with generally
accepted accounting practice.
357CH
Shortfall in R&D expenditure
30
(1)
There is a shortfall in R&D expenditure in relation to a trade of a
company for a relevant accounting period if the actual R&D
expenditure of the trade for the accounting period (as adjusted under
subsections (8) to (11)) is less than 75% of the average amount of R&D
expenditure.
35
(2)
The amount that is to be added to the actual R&D expenditure for the
purposes of section 357CG(5) is an amount equal to the difference
between—
(a)
75% of the average amount of R&D expenditure, and
(b)
the actual R&D expenditure, as adjusted under subsections
40
(8) to (11).
(3)
In this section—
(a)
the “actual R&D expenditure” of a trade of a company for an
accounting period is the amount of R&D expenditure that
(ignoring section 357CG(5)) is brought into account in
45
calculating the profits of the trade for the accounting period,
and

Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
153

(b)
“R&D expenditure” and “relevant accounting period” have
the meaning given by section 357CG(6).
(4)
The average amount of R&D expenditure is—

where—
E is the amount of R&D expenditure that—
5
(a)
has been incurred by the company during the
relevant period, and
(b)
has been brought into account in calculating the
profits of the trade for any accounting period ending
before the first relevant accounting period, and
10
N is the number of days in the relevant period.
(5)
The relevant period is the shorter of—
(a)
the period of 4 years ending immediately before the first
relevant accounting period, and
(b)
the period beginning with the day on which the company
15
begins to carry on the trade and ending immediately before
the first relevant accounting period.
(6)
For a relevant accounting period of less than 12 months, the average
amount of R&D expenditure is proportionately reduced.
(7)
Subsections (8) to (11) apply for the purposes of determining—
20
(a)
whether there is a shortfall in R&D expenditure for a relevant
accounting period, and
(b)
if there is such a shortfall, the amount to be added by virtue
of subsection (2).
(8)
If the amount of the actual R&D expenditure for a relevant
25
accounting period is greater than the average amount of R&D
expenditure, the difference between the two amounts is to be added
to the actual R&D expenditure for the next relevant accounting
period.
(9)
If—
30
(a)
there is not a shortfall in R&D expenditure for a relevant
accounting period, but
(b)
in the absence of any additional amount, there would be a
shortfall in R&D expenditure for that accounting period,

the remaining portion of the additional amount is to be added to the
35
actual R&D expenditure for the next relevant accounting period.
(10)
For the purposes of this section—
“additional amount”, in relation to a relevant accounting
period, means any amount added to the actual R&D
expenditure for that accounting period by virtue of
40
subsection (8), (9) or (11), and
“the remaining portion” of an additional amount is so much of
that amount as exceeds the difference between—

Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
154

(a)
the actual R&D expenditure for the relevant
accounting period in the absence of the additional
amount, and
(b)
75% of the average amount of R&D expenditure.
(11)
If—
5
(a)
there is not a shortfall in R&D expenditure for a relevant
accounting period, and
(b)
there would not be a shortfall in R&D expenditure for that
accounting period in the absence of any additional amount,

the additional amount is to be added to the actual R&D expenditure
10
for the next relevant accounting period (in addition to any additional
amount so added by virtue of subsection (8)).
Routine return figure
357CI
Routine return figure
(1)
To determine the routine return figure in relation to a trade of a
15
company for an accounting period—

Step 1

Take the aggregate of any routine deductions made by the company
in calculating the profits of the trade for the accounting period.

For the meaning of “routine deductions”, see sections 357CJ and
20
357CK.

Step 2

Multiply that amount by 0.1.

Step 3

Calculate X% of the amount given by Step 2.
25

“X%” is the percentage given by Step 2 in section 357C(1).
(2)
In a case where—
(a)
the company (“C”) is a member of a group,
(b)
another member of the group incurs expenses on behalf of C,
(c)
had they been incurred by C, C would have made a
30
deduction in respect of the expenses in calculating the profits
of the trade for the accounting period, and
(d)
the deduction would have been a routine deduction,

C is to be treated for the purposes of subsection (1) as having made
such a routine deduction.
35
(3)
Where expenses are incurred by any member of the group on behalf
of C and any other member of the group, subsection (2) applies in
relation to so much of the amount of the expenses as on a just and
reasonable apportionment may properly be regarded as incurred on
behalf of C.
40
357CJ
Routine deductions
(1)
For the purposes of section 357CI “routine deductions” means
deductions falling within any of the Heads set out in—
(a)
subsection (2) (capital allowances),

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)
subsection (3) (costs of premises),
(c)
subsection (4) (personnel costs),
(d)
subsection (5) (plant and machinery costs),
(e)
subsection (6) (professional services),
(f)
subsection (7) (miscellaneous services).
5

This is subject to section 357CK (deductions that are not routine
deductions).
(2)
Head 1 is any allowances under CAA 2001.
(3)
Head 2 is any deductions made by the company in respect of any
premises occupied by the company.
10
(4)
Head 3 is any deductions made by the company in respect of—
(a)
any director or employee of the company, or
(b)
any externally provided workers.
(5)
Head 4 is any deductions made by the company in respect of any
plant or machinery used by the company.
15
(6)
Head 5 is any deductions made by the company in respect of any of
the following services—
(a)
legal services, other than IP-related services;
(b)
financial services, including—
(i)
insurance services, and
20
(ii)
valuation or actuarial services;
(c)
services provided in connection with the administration or
management of the company’s directors and employees;
(d)
any other consultancy services.
(7)
Head 6 is any deductions made by the company in respect of any of
25
the following services—
(a)
the supply of water, fuel or power;
(b)
telecommunications services;
(c)
computing services, including computer software;
(d)
postal services;
30
(e)
the transportation of any items;
(f)
the collection, removal and disposal of refuse.
(8)
In this section—
“externally provided worker” has the same meaning as in Part
13 of CTA 2009 (see section 1128 of that Act),
35
“IP-related services” means services provided in connection
with—
(a)
any application for a right to which this Part applies,
or
(b)
any proceedings relating to the enforcement of any
40
such right,
“premises” includes any land,
“telecommunications service” means any service that consists in
the provision of access to, and of facilities for making use of,
any telecommunication system (whether or not one provided
45
by the person providing the service), 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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“telecommunication system” means any system (including the
apparatus comprised in it) which exists for the purpose of
facilitating the transmission of communications by any
means involving the use of electrical or electro-magnetic
energy.
5
(9)
The Treasury may by order amend this section.
357CK
Deductions that are not routine deductions
(1)
For the purposes of section 357CI a deduction is not a “routine
deduction” if it falls within any of the Heads set out in—
(a)
subsection (2) (loan relationships and derivative contracts),
10
(b)
subsection (3) (R&D expenses),
(c)
subsection (4) (capital allowances for R&D or patents),
(d)
subsection (5) (R&D-related employee share acquisitions).
(2)
Head 1 is any debits which are treated as expenses of the trade by
virtue of —
15
(a)
section 297 of CTA 2009 (debits in respect of loan
relationships), or
(b)
section 573 of CTA 2009 (debits in respect of derivative
contracts).
(3)
Head 2 is—
20
(a)
the amount of any expenditure on research and development
in relation to the trade for which an additional deduction for
the accounting period is obtained by the company under Part
13 of CTA 2009, and
(b)
the amount of that additional deduction.
25
(4)
Head 3 is any allowances under—
(a)
Part 6 of CAA 2001 (research and development allowances),
or
(b)
Part 8 of CAA 2001 (patent allowances).
(5)
Head 4 is the appropriate proportion of any deductions allowed
30
under Part 12 of CTA 2009 (relief for employee share acquisitions) in
a case where—
(a)
shares are acquired by an employee or another person
because of the employee’s employment by the company, and
(b)
the employee is wholly or partly engaged directly and
35
actively in relevant research and development (within the
meaning of section 1042 of CTA 2009).
(6)
In subsection (5) “the appropriate proportion”, in relation to a
deduction allowed in respect of an employee, is the proportion of the
staffing costs in respect of the employee which are attributable to
40
relevant research and development for the purposes of Part 13 of
CTA 2009 (see section 1124 of that Act).

“Staffing costs” has the same meaning as in that Part (see section 1123
of that Act).
(7)
Subsections (5) and (6) of section 1124 of CTA 2009 apply for the
45
purposes of subsection (5)(b) as they apply for the purposes of that
section.

Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
157

(8)
The Treasury may by order amend this section.
Election for small claims treatment
357CL
Companies eligible to elect for small claims treatment
(1)
A company may elect for small claims treatment for an accounting
period if condition A or B is met in relation to the accounting period.
5
(2)
Condition A is that the aggregate of the amounts of qualifying
residual profit of each trade of the company for the accounting
period does not exceed £1,000,000.
(3)
Condition B is that—
(a)
the aggregate of the amounts of qualifying residual profit of
10
each trade of the company for the accounting period does not
exceed the relevant maximum, and
(b)
the company did not take Step 6 in section 357C(1) or
357DA(1) for the purpose of calculating the relevant IP
profits of any trade of the company for any previous
15
accounting period beginning within the relevant 4-year
period.
(4)
In subsection (3)(b) “the relevant 4-year period” means the period of
4 years ending immediately before the accounting period mentioned
in subsection (3)(a).
20
(5)
If the company has no associated company in the accounting period,
the relevant maximum is £3,000,000.
(6)
If the company has one or more associated companies in the
accounting period, the relevant maximum is— $equation: over[comma[string["\xa3 3"],num[0.0000000000000000,"000"],num[0.0000000000000000,"000"]], plus[num[1.0000000000000000,"1"],char[N]]]$

where N is the number of those associated companies in relation to
25
which an election under section 357A has effect for the accounting
period.
(7)
For an accounting period of less than 12 months, the relevant
maximum is proportionately reduced.
(8)
Any amount of qualifying residual profit of a trade of the company
30
that is not greater than nil is to be disregarded for the purposes of this
section.
(9)
Sections 25 to 30 (definition of “associated companies”) have effect
for the purposes of this section.
357CM
Small claims amount
35
(1)
This section applies where a company elects for small claims
treatment for an accounting period.
(2)
The small claims amount in relation to each trade of the company for
the accounting period is—
(a)
if the amount in subsection (3) is lower than the small claims
40
threshold, 75% of the qualifying residual profit of the trade
for the accounting period;