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
171

(4)
The election has effect in relation to each trade carried on by the
company.
(5)
Subject to section 357GA, the election has effect for the accounting
period specified in the notice and all subsequent accounting periods
of the company.
5
357GA
Revocation of election made under section 357A
(1)
A company may revoke an election made by it under section 357A
by giving notice to an officer of Revenue and Customs.
(2)
The notice must specify the first accounting period of the company
for which the revocation is to have effect.
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(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.
(4)
The revocation has effect in relation to the accounting period
specified in the notice and all subsequent accounting periods of the
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company.
(5)
An election made under section 357A by a company that has given
notice under this section does not have effect in relation to any
accounting period of the company that begins before the end of the
period of 5 years beginning with the day after the last day of the
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accounting period specified in the notice.
Partnerships
357GB
Application of this Part in relation to partnerships
(1)
This section applies if a firm (within the meaning of CTA 2009)
carries on a trade and any partner in the firm is a company within the
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charge to corporation tax.

Such a partner is referred to in this section as a “corporate partner”.
(2)
Subject to the following provisions of this section, this Part applies in
relation to the firm as it applies in relation to a company.
(3)
Any election under this Part—
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(a)
may be made or revoked not by the firm but instead by any
one or more of the corporate partners (whether jointly or
otherwise), and
(b)
has effect in relation to each corporate partner making or
revoking it as if made or revoked by the firm.
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(4)
Accordingly, any reference in section 357G(3) or 357GA(3) (time
limit for making or revoking elections under section 357A) to the
company making or revoking the election is to be read as a reference
to the corporate partner so doing.
(5)
Section 1261 of CTA 2009 (accounting periods of firms) applies for
40
the purposes of this Part as it applies for the purposes of Part 17 of
that Act.

Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
172

(6)
Section 357B (meaning of “qualifying company”) has effect as if in
subsection (1) the words “in the case of a company that is a member
of a group” were omitted.
(7)
For the purposes of this Part the firm meets the development
condition in relation to a right to which this Part applies if—
5
(a)
the firm has at any time carried out qualifying development
in relation to the right, or
(b)
there is a relevant corporate partner in the firm who meets
the development condition in relation to the right.
(8)
A “relevant corporate partner” is a corporate partner who is entitled
10
to a share of at least 40% of the profits or losses of the firm for any
accounting period of the firm.
(9)
Section 357BD applies for the purposes of subsection (7)(a) of this
section as it applies for the purposes of section 357BC.
(10)
Section 357BE (active ownership condition) has effect as if the
15
reference in subsection (4) to section 357BC(2) or (3) included a
reference to subsection (7)(a) of this section.
(11)
Sections 357CL and 357CM (election for small claims treatment) have
effect as if—
(a)
any reference to a company having one or more associated
20
companies were a reference to any corporate partner in
relation to which an election under section 357CL has effect
having one or more associated companies, and
(b)
any reference to a company having no associated company
were a reference to each such corporate partner having no
25
associated company.
(12)
Subsection (13) applies where a corporate partner is a party to an
arrangement at any time during an accounting period of the firm
which produces for the corporate partner a return within section
357CB(1)(c).
30
(13)
For the accounting period of the firm the corporate partner’s share of
a profit or loss of a trade carried on by the firm is determined for
corporation tax purposes as if no election under section 357A had
effect in relation to the trade.
Cost-sharing arrangements
35
357GC
Application of this Part in relation to cost-sharing arrangements
(1)
This section applies where a company is a party to an arrangement
under which—
(a)
one of the parties to the arrangement holds a qualifying IP
right or an exclusive licence in respect of such a right,
40
(b)
each of the parties to the arrangement is required to
contribute to the cost of, or perform activities for the purpose
of, creating or developing the invention or any item or
process incorporating the invention,
(c)
under the arrangement each of those parties—
45

Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
173

(i)
is entitled to a share of any income attributable to the
right or licence, or
(ii)
has one or more rights in respect of the invention, and
(d)
the amount of any income received by each of those parties is
proportionate to its participation in the arrangement as
5
described in paragraph (b).
(2)
The company is to be treated for the purposes of this Part as if it held
the qualifying IP right or (as the case may be) the exclusive licence in
respect of the qualifying IP right.
(3)
But this section does not apply where the arrangement produces for
10
the company a return within section 357CB(1)(c).
(4)
The reference in subsection (1)(b) to developing the invention
includes developing ways in which the invention may be used or
applied.
Interpretation
15
357GD
Meaning of “group”
(1)
For the purposes of this Part a company (“company A”) is a member
of a group at any time if any other company is at that time associated
with company A.
(2)
The group consists of company A and each company in relation to
20
which the condition in subsection (1) is met.
(3)
For the purposes of this section a company (“company B”) is
associated with company A at a time (“the relevant time”) if any of
the following five conditions is met.
(4)
The first condition is that the financial results of company A and
25
company B, for a period that includes the relevant time, meet the
consolidation condition.
(5)
The second condition is that there is a connection between company
A and company B for the accounting period of company A in which
the relevant time falls.
30
(6)
The third condition is that, at the relevant time, company A has a
major interest in company B or company B has a major interest in
company A.
(7)
The fourth condition is that—
(a)
the financial results of company A and a third company, for
35
a period that includes the relevant time, meet the
consolidation condition, and
(b)
at the relevant time the third company has a major interest in
company B.
(8)
The fifth condition is that—
40
(a)
there is a connection between company A and a third
company for the accounting period of company A in which
the relevant time falls, and
(b)
at the relevant time the third company has a major interest in
company B.
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Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
174

(9)
In this section, the financial results of any two companies for any
period meet “the consolidation condition” if—
(a)
they are required to be fully comprised in group accounts,
(b)
they would be required to be fully comprised in such
accounts but for the application of an exemption, or
5
(c)
they are in fact fully comprised in such accounts.
(10)
In subsection (9) “group accounts” means accounts prepared
under—
(a)
section 399 of the Companies Act 2006, or
(b)
any corresponding provision of the law of a country or
10
territory outside the United Kingdom.
(11)
The following provisions apply for the purposes of this section—
sections 466 to 471 of CTA 2009 (companies connected for
accounting period), and
sections 473 and 474 of CTA 2009 (meaning of “major interest”).
15
357GE
Other interpretation
(1)
In this Part—
“invention”, in relation to a right to which this Part applies,
means the item or process in respect of which the right is
granted,
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“item” includes any substance,
“the OECD Model Tax Convention” means—
(a)
the version of the Model Tax Convention on Income
and on Capital published in July 2010 by the
Organisation for Economic Co-operation and
25
Development (“the OECD”), or
(b)
such other document approved and published by the
OECD in place of that (or a later) version or in place
of that Convention as is designated for the time being
by order made by the Treasury,
30
“the OECD transfer pricing guidelines” means—
(a)
the version of the Transfer Pricing Guidelines for
Multinational Enterprises and Tax Administrations
published in July 2010 by the OECD, or
(b)
such other document approved and published by the
35
OECD in place of that (or a later) version or in place
of those Guidelines as is designated for the time being
by order made by the Treasury,
including, in either case, such material published by the
OECD as part of (or by way of update or supplement to) the
40
version or other document concerned as may be so
designated, and
“qualifying residual profit” of a trade, in relation to any
accounting period, is the amount obtained by the application
of Steps 1 to 4 in section 357C or (as the case may be) section
45
357DA in relation to the trade for the accounting period.
(2)
Any reference in this Part to calculating the profits of a trade of a
company for an accounting period is a reference to calculating those
profits for corporation tax purposes (and any reference to the profits

Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 2 — Amendments of TIOPA 2010
175

or losses of a trade of a company for an accounting period is to be
read accordingly).”
      (2)
In Schedule 4 to CTA 2010 (index of defined expressions), at the appropriate
place insert—

“exclusive licence (in Part
section 357BA”;

5

8A)

“finance income (in Part
section 357CB”;

8A)

“group (in Part 8A)
section 357GD”;

“invention (in Part 8A)
section 357GE”;

10

“item (in Part 8A)
section 357GE”;

“the OECD Model Tax
section 357GE”;

Convention (in Part 8A)

“the OECD transfer
section 357GE”;

pricing guidelines (in

15

Part 8A)

“qualifying company (in
section 357B”;

Part 8A)

“qualifying IP right (in
section 357B(4)”;

Part 8A)

20

“qualifying residual
section 357GE”;

profit of a trade (in Part

8A)

“relevant IP income (in
section 357CC”;

Part 8A)

25

“total gross income of a
section 357CA”.

trade (in Part 8A)

Part 2
Amendments of TIOPA 2010
2
In Part 4 of TIOPA 2010 (transfer pricing), Chapter 3 (exemptions from basic
30
rule) is amended as follows.
3
In section 166 (exemption for small and medium-sized enterprises), in
subsection (2)(a), for “section 167” substitute “sections 167 and 167A”.
4
After section 167 insert—
“167A
Small enterprises: exception from exemption: transfer pricing notice
35
(1)
Section 166(1) does not apply in relation to any provision made or
imposed if—

Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 3 — Commencement and transitional provision
176

(a)
the potentially advantaged person is a small enterprise for
the chargeable period,
(b)
the person meets the condition in subsection (2), and
(c)
the Commissioners for Her Majesty’s Revenue and Customs
give that person a notice requiring the person to calculate the
5
profits and losses of that chargeable period in accordance
with section 147(3) or (5) in the case of that provision.
(2)
A person meets the condition referred to in subsection (1)(b) if—
(a)
provision has been made or imposed as between the person
and any other person by means of a transaction or series of
10
transactions,
(b)
the basic pre-condition in section 147 is met in respect of the
provision, and
(c)
the transaction, or one or more of the series of transactions, is
taken into account in calculating, for the purposes of Part 8A
15
of CTA 2010 (profits arising from the exploitation of patents
etc), the relevant IP profits of a trade of a person who is or
was a party to the transaction or transactions.
(3)
A notice under subsection (1) is referred to in this Chapter as a
transfer pricing notice.”
20
5
In section 170 (appeals against transfer pricing notices), in subsection (1), for
the words from “on the ground that” to the end substitute “on one of the
following grounds—
(a)
that the condition in section 167A(1)(b) is not met, or
(b)
that the condition in section 168(1)(a) is not met.”
25
6
In section 171 (tax returns where transfer pricing notice given), in subsection
(3)(a), before “medium-sized” insert “small or”.
Part 3
Commencement and transitional provision
Application
30
7     (1)
The amendments made by this Schedule have effect in relation to accounting
periods beginning on or after 1 April 2013 for which an election under
section 357A of CTA 2010 has effect.
      (2)
Sub-paragraph (3) applies where a company has an accounting period
beginning before 1 April 2013 and ending on or after that date (“the
35
straddling period”).
      (3)
For the purposes of Part 8A of CTA 2010—
(a)
so much of the straddling period as falls before 1 April 2013, and so
much of that period as falls on or after that date, are treated as
separate accounting periods, and
40
(b)
any amounts brought into account for the purposes of calculating for
corporation tax purposes the profits of any trade of the company for
the straddling period are apportioned to the two separate accounting
periods on such basis as is just and reasonable.

Finance (No. 4) Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 3 — Commencement and transitional provision
177

Special treatment of profits from patents etc to be phased in
8     (1)
In each of the financial years in the Table below, the reference to RP in the
formula in section 357A(3) of CTA 2010 is to be read as a reference to the
percentage of RP given for that year—

Financial year
Percentage of

5

RP

2013
60%

2014
70%

2015
80%

2016
90%

10
      (2)
Sub-paragraph (3) applies where there is a set-off amount in relation to any
trade of a company for an accounting period falling wholly or partly within
a financial year mentioned in the Table in sub-paragraph (1) (“the relevant
year”) and—
(a)
section 357EB of CTA 2010 (allocation of set-off amount within
15
group) applies in relation to the set-off amount (or so much of it as
remains after the operation of section 357EA(2) of that Act) for a
relevant accounting period falling wholly or partly within the
financial year following the relevant year, or
(b)
section 357EC of that Act (carry-forward of set-off amount) applies
20
in relation to the set-off amount (or so much of it as remains after the
operation of section 357EA(2) or 357EB(2) of that Act).
      (3)
For the purposes of section 357EB or (as the case may be) 357EC of CTA 2010
there is to be deducted from the relevant amount an amount equal to the
appropriate fraction of that amount.
25

“The relevant amount” is the amount in relation to which that section applies
as mentioned in sub-paragraph (2).
      (4)
The appropriate fraction is—

where P is—
(a)
the percentage given as the percentage of RP by that Table
30
for the financial year following the relevant year, or
(b)
where the relevant year is the financial year 2016, 100%.
      (5)
If a company’s accounting period falls within more than one financial year—
(a)
the amount of any relevant IP profits of a trade of the company for
the accounting period, and
35
(b)
where sub-paragraph (3) applies, the relevant amount (within the
meaning of that sub-paragraph),

must for the purposes of this paragraph be apportioned between the
financial years in which the accounting period falls on such basis as is just
and reasonable.
40