Finance Bill

Session 2012 - 13
Internet Publications
Other Bills before Parliament

Finance Bill

Finance 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”
5
(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
10
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.
15
(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,
20

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
25
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.
30
(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).
35
(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 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
10

Calculate the percentage (“X%”) given by the following formula—


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
15
“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).
25

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,
30
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.
35

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
40
provides in certain circumstances for profits arising before the grant

Finance 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
10
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),
15
(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
20
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
25
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)
30
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.
35
(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
45

Finance Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
147

(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—
10
(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
20
(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
25
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
35
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),
40
(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
45
following items—

Finance Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
148

(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
15
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
20
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
25
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
30
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.
35
(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)
40
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 Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
149

(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
10
(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
15
(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
20
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
25
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.
30
(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.
35
(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,
45
(e)
the appropriate percentage for the accounting period is
determined at the beginning of the accounting period,

Finance Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
150

(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
10
(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
15
(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
25
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
30
(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
35
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
40
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.
45