Finance (No. 4) Bill

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
164

357DC
The mandatory streaming conditions
(1)
Mandatory streaming condition A is met in relation to a trade of a
company for an accounting period if—
(a)
any amount brought into account as a credit in calculating
the profits of the trade for the accounting period is not fully
5
recognised as revenue for the accounting period, and
(b)
the amount, or the aggregate of any such amounts, is
substantial.
(2)
An amount is a “substantial” amount for the purposes of this section
if it is greater than—
10
(a)
£2,000,000, or
(b)
20% of the total gross income of the trade for the accounting
period,

whichever is the lower.
(3)
But an amount is not a substantial amount for the purposes of this
15
section if it does not exceed £50,000.
(4)
The reference in subsection (1)(a) to an amount brought into account
as a credit includes a reference to any amount brought into account
by virtue of section 147 of TIOPA 2010 (basic transfer-pricing rule).
(5)
Mandatory streaming condition B is met in relation to a trade of a
20
company for an accounting period if the total gross income of the
trade for the accounting period includes—
(a)
relevant IP income, and
(b)
a substantial amount of licensing income that is not relevant
IP income.
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(6)
In subsection (5) “licensing income” means income consisting of any
licence fee, royalty or other payment which the company has
received under an agreement granting another person any right in
respect of any intellectual property held by the company.

“Intellectual property” has the meaning given by section 712(3) of
30
CTA 2009.
(7)
Mandatory streaming condition C is met in relation to a trade of a
company for an accounting period if the total gross income of the
trade for the accounting period includes—
(a)
income that is not relevant IP income, and
35
(b)
a substantial amount of relevant Head 2 income.
(8)
Income is “relevant Head 2 income” for the purposes of subsection
(7) if—
(a)
it is relevant IP income received under an agreement falling
within subsection (6) of section 357CC, and
40
(b)
every qualifying IP right—
(i)
in respect of which a right within paragraph (a) of that
subsection is granted by the agreement, or
(ii)
which is granted in respect of an invention in respect
of which a right within paragraph (b) of that
45
subsection is granted by the agreement,

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Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
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is a right in respect of which the company holds an exclusive
licence.
(9)
In a case where—
(a)
relevant IP income is received under an agreement falling
within section 357CC(6), but
5
(b)
the condition in paragraph (b) of subsection (8) above is not
met,

so much of the relevant IP income as on a just and reasonable
apportionment is attributable to any qualifying IP right falling
within that paragraph is relevant Head 2 income for the purposes of
10
subsection (7).
Chapter 5
Relevant IP losses
357E
Company with relevant IP losses: set-off amount

Where a company would be entitled to make a deduction under
15
section 357A(2) in calculating the profits of a trade of the company
for an accounting period but for the fact that there are relevant IP
losses of the trade for the accounting period, there is a “set-off
amount” in relation to the trade of the company for the accounting
period which is equal to the amount of the relevant IP losses.
20
357EA
Effect of set-off amount on company with more than one trade
(1)
This section applies where—
(a)
there is a set-off amount in relation to a trade of a company
for an accounting period, and
(b)
the company carries on any other trade.
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(2)
The set-off amount is to be reduced (but not to below nil) by any
relevant IP profits of that other trade for the accounting period.
(3)
Section 357A does not apply in relation to so much of the amount of
relevant IP profits of that other trade for the accounting period as is
equal to the amount by which the set-off amount is reduced under
30
subsection (2).
357EB
Allocation of set-off amount within a group
(1)
This section applies where—
(a)
there is a set-off amount in relation to a trade of a company
for an accounting period,
35
(b)
the company is a member of a group, and
(c)
the set-off amount has not been reduced to nil by the
operation of section 357EA(2).
(2)
The set-off amount (or so much of it as remains after the operation of
section 357EA(2)) is to be reduced (but not to below nil) by any
40
relevant IP profits of a trade of a relevant group member for the
relevant accounting period.
(3)
For the purposes of this section—

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)
“relevant group member” means another member of the
group that has made an election under section 357A and is a
qualifying company for the relevant accounting period, and
(b)
“relevant accounting period”, in relation to a company,
means the accounting period of the company in or at the end
5
of which the accounting period mentioned in subsection
(1)(a) ends.
(4)
Section 357A does not apply in relation to so much of the amount of
relevant IP profits of the trade of the relevant group member for the
relevant accounting period as is equal to the amount by which the
10
set-off amount (or so much of it as remains after the operation of
section 357EA(2)) is reduced under subsection (2).
(5)
Where there is more than one relevant group member, the relevant
group members may jointly determine the order in which subsection
(2) is to apply to them.
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(6)
If no determination is made under subsection (5), subsection (2) is to
apply first to the trade that has the greatest amount of relevant IP
profits of any trade of any of the relevant group members for a
relevant accounting period, then to the trade that has the second
greatest amount of relevant IP profits of any of those trades for such
20
a period, and so on.
357EC
Carry-forward of set-off amount
(1)
This section applies where—
(a)
there is a set-off amount in relation to a trade of a company
for an accounting period, and
25
(b)
the set-off amount has not been reduced to nil by the
operation of section 357EA(2) or 357EB(2).
(2)
The set-off amount (or so much of it as remains after the operation of
section 357EA(2) or 357EB(2)) is to be reduced (but not to below nil)
by the amount of any relevant IP profits of the trade of the company
30
for the current accounting period.

The “current accounting period” is the accounting period
immediately following the accounting period mentioned in
subsection (1)(a).
(3)
Section 357A does not apply in relation to so much of the amount of
35
relevant IP profits of the trade of the company for the current
accounting period as is equal to the amount by which the set-off
amount (or so much of it as remains after the operation of section
357EA(2) or 357EB(2)) is reduced under subsection (2).
(4)
If any portion of the set-off amount remains after the operation of
40
subsection (2), that portion (“the remaining portion”) is to be treated
as the set-off amount in relation to the trade of the company for the
current accounting period (and the provisions of this Chapter apply
accordingly).
(5)
If there are relevant IP losses of the trade of the company for the
45
current accounting period, the set-off amount in relation to the trade
of the company for that accounting period is the aggregate of the
remaining portion and an amount equal to the amount of those

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Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
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relevant IP losses (and the provisions of this Chapter apply
accordingly).
357ED
Company ceasing to carry on trade, etc
(1)
This section applies where—
(a)
there is a set-off amount in relation to a trade of a company
5
for an accounting period, and
(b)
at any time in the accounting period immediately following
that accounting period, the company meets any of the
conditions in subsection (2).
(2)
The conditions are—
10
(a)
that the company ceases to carry on the trade,
(b)
that the company ceases to be within the charge to
corporation tax in respect of the trade, or
(c)
that any election made by the company under section 357A
ceases to have effect.
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(3)
Sections 357EA to 357EC continue to have effect in relation to the set-
off amount subject to the following provisions of this section.
(4)
Section 357EB has effect as if—
(a)
the reference in subsection (1)(b) to the company being a
member of a group were a reference to the company having
20
been a member of the group at the time referred to in
subsection (1)(b) of this section,
(b)
for subsection (2) there were substituted—
“(2)
  The set-off amount (or so much of it as remains after
the operation of section 357EA(2)) is to become, or be
25
added to, the set-off amount in relation to a trade of a
relevant group member for the relevant accounting
period.”,
(c)
subsection (4) were omitted,
(d)
for the words after “determine” in subsection (5) there were
30
substituted “the relevant group member to which subsection
(2) is to apply”, and
(e)
for subsection (6) there were substituted—
“(6)
  If no determination is made under subsection (5),
subsection (2) is to apply to the trade that has the
35
greatest amount of relevant IP profits of any trade of
any of the relevant group members for a relevant
accounting period.
(7)
  If there is no relevant group member with any
relevant IP profits of a trade for the relevant
40
accounting period, subsection (2) is to apply to the
trade that has the greatest set-off amount in relation to
any trade of any of the relevant group members for a
relevant accounting period.”
(5)
Sections 357EA to 357EC cease to have effect in relation to the set-off
45
amount in relation to the trade of the company for an accounting
period if—

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)
the company is not carrying on any other trade in that
accounting period, and
(b)
in the case of a company that was a member of a group at the
time referred to in subsection (1)(b) of this section, none of the
members of the group is a relevant group member (within
5
the meaning of section 357EB).
(6)
In such a case, the set-off amount (so far as remaining after the
operation of those sections) is to be reduced to nil.
357EE
Transfer of a trade between group members
(1)
This section applies where—
10
(a)
there is a set-off amount in relation to a trade of a company
for an accounting period,
(b)
the company is a member of a group,
(c)
the company ceases to carry on the trade, and
(d)
another company (“the transferee”) that is a member of the
15
group begins to carry on that trade.
(2)
For the purposes of this Chapter an amount equal to the set-off
amount is to become, or be added to, the set-off amount in relation to
the trade of the transferee for the accounting period in which the
transferee begins to carry on the trade.
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357EF
Payments between group members in consequence of section 357EB
(1)
This section applies if—
(a)
there is a set-off amount in relation to a trade of a company
for an accounting period,
(b)
subsection (2) of section 357EB has effect in relation to a
25
relevant group member for the relevant accounting period
(within the meaning of that section),
(c)
the company and the relevant group member have an
agreement between them in relation to the relevant IP losses
of the company, and
30
(d)
as a result of the agreement the company makes a payment to
the relevant group member that does not exceed the
reduction in the relevant IP profits of the relevant group
member arising under section 357EB(4).
(2)
The payment—
35
(a)
is not to be taken into account in determining the profits or
losses of either company for corporation tax purposes, and
(b)
is not for any purposes of the Corporation Tax Acts to be
regarded as a distribution.
(3)
In a case where section 357ED applies (company ceasing to carry on
40
trade, etc), the reference in subsection (1)(d) to the reduction in the
relevant IP profits of the relevant group member is to be read as a
reference to the amount that becomes, or is added to, the set-off
amount in relation to a trade of the relevant group member for the
relevant accounting period under section 357EB(2).
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Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
169

Chapter 6
Anti-avoidance
Licences conferring exclusive rights
357F
Licences conferring exclusive rights

A licence that confers any right in respect of a qualifying IP right to
5
the exclusion of all other persons is not to be regarded as an exclusive
licence if the main purpose, or one of the main purposes, of
conferring the right is to secure that the licence is an exclusive licence
for the purposes of this Part.
Incorporation of qualifying items
10
357FA
Incorporation of qualifying items
(1)
Income arising from the sale of any item that incorporates a
qualifying item is not relevant IP income if the main purpose, or one
of the main purposes, of incorporating the qualifying item is to
secure that income arising from any such sale is relevant IP income.
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(2)
“Qualifying item” has the same meaning as in section 357CC(2).
Tax advantage schemes
357FB
Tax advantage schemes
(1)
This section applies where—
(a)
a company is entitled to make a deduction under section
20
357A(2) in calculating the profits of a trade of the company
for an accounting period,
(b)
the company is or has at any time been a party to a scheme,
and
(c)
the main purpose, or one of the main purposes, of the
25
company or, where the company is a member of a group, any
member of the group in being a party to the scheme is (or
was) to obtain the chance of securing a relevant tax
advantage.
(2)
There is a “relevant tax advantage” for the purposes of this section
30
if—
(a)
(apart from this section) there would be an increase in the
amount of any deduction made under section 357A(2) in
calculating the profits of a trade of the company or (as the
case may be) any other member of the group for any
35
accounting period, and
(b)
the increase would arise from—
(i)
the avoidance of the operation of any provision of this
Part,
(ii)
artificially inflating the amount of relevant IP income
40
brought into account in calculating those profits (see
subsection (3)), or

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Part 1 — Amendments of CTA 2010
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(iii)
a mismatch between relevant IP income and
expenditure (see subsection (4)).
(3)
The reference in subsection (2)(b) to artificially inflating the amount
of relevant IP income brought into account in calculating the profits
mentioned in subsection (2)(a) is a reference to doing any of the
5
following—
(a)
bringing into account in calculating those profits an amount
of relevant IP income that wholly or substantially
corresponds to an increase in the amounts brought into
account as debits in calculating those profits;
10
(b)
bringing into account in calculating those profits an
additional amount of relevant IP income that wholly or
substantially corresponds to a decrease in the amount of
income that is not relevant IP income which is brought into
account in calculating those profits.
15
(4)
For the purposes of this section there is a mismatch between relevant
IP income and expenditure if—
(a)
any relevant IP income brought into account in calculating
the profits mentioned in subsection (2)(a) is attributable to
any qualifying IP right or an exclusive licence in respect of
20
any such right, and
(b)
any expenditure incurred in relation to that right is brought
into account in calculating the profits of a trade of the
company or (as the case may be) any other member of the
group for an accounting period for which an election under
25
section 357A did not have effect.
(5)
The amount of the deduction which may be made by the company
for the accounting period mentioned in subsection (1)(a) is the
amount that would secure that no relevant tax advantage arises (and
may be nil).
30
(6)
In this section “scheme” includes any scheme, arrangements or
understanding of any kind whatever, whether or not legally
enforceable, involving a single transaction or two or more
transactions.
Chapter 7
35
Supplementary
Elections under section 357A
357G
Making of election under section 357A
(1)
An election made by a company under section 357A is made by
giving notice to an officer of Revenue and Customs.
40
(2)
The notice must specify the first accounting period of the company
for which the election is to have effect.
(3)
The notice must be given on or before the last day on which an
amendment of the company’s tax return for that accounting period
could be made under paragraph 15 of Schedule 18 to FA 1998.
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