Finance Bill

Session 2012 - 13
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Finance Bill

Finance Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
158

(b)
in any other case, the amount given by—


where—
SCT is the small claims threshold, and
T is the number of trades of the company.
(3)
The amount referred to in subsection (2)(a) is—
0.75 × QRP

5

where QRP is the aggregate of the amounts of qualifying residual
profit of each trade of the company for the accounting period (but see
subsection (4)).
(4)
Any amount of qualifying residual profit of a trade of the company
that is not greater than nil is to be disregarded for the purposes of
10
subsection (3).
(5)
If the company has no associated company in the accounting period,
the small claims threshold is £1,000,000.
(6)
If the company has one or more associated companies in the
accounting period, the small claims threshold is—

15

where N is the number of those associated companies in relation to
which an election under section 357A has effect for the accounting
period.
(7)
For an accounting period of less than 12 months, the small claims
threshold is proportionately reduced.
20
(8)
Sections 25 to 30 (definition of “associated companies”) have effect
for the purposes of this section.
Marketing assets return figure
357CN
Marketing assets return figure
(1)
The marketing assets return figure in relation to a trade of a company
25
for an accounting period is—
NMR − AMR


where—
NMR is the notional marketing royalty in respect of the trade
for the accounting period (see section 357CO), and
AMR is the actual marketing royalty in respect of the trade for
30
the accounting period (see section 357CP).
(2)
Where—
(a)
AMR is greater than NMR, or
(b)
the difference between NMR and AMR is less than 10% of the
qualifying residual profit of the trade for the accounting
35
period,

the marketing assets return figure is nil.

Finance Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
159

357CO
Notional marketing royalty
(1)
The notional marketing royalty in respect of a trade of a company for
an accounting period is the appropriate percentage of the relevant IP
income for that accounting period.

In this section “relevant IP income”, in relation to a trade of a
5
company for an accounting period, means so much of the total gross
income of the trade for the accounting period as is relevant IP
income.
(2)
The “appropriate percentage” is the proportion of any relevant IP
income for an accounting period which the company would pay
10
another person (“P”) for the right to exploit the relevant marketing
assets in that accounting period if the company were not otherwise
able to exploit them.
(3)
For the purposes of this section a marketing asset is a “relevant
marketing asset” in relation to an accounting period if the relevant IP
15
income of the trade of the company for the accounting period
includes any income arising from things done by the company that
involve the exploitation by the company of that marketing asset.
(4)
For the purposes of determining the appropriate percentage under
this section, assume that—
20
(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 marketing assets to
the exclusion of any other person (including P),
(c)
the company will have the same rights in relation to the
25
relevant marketing assets as it actually has,
(d)
the right to exploit the relevant marketing assets is conferred
on the relevant day,
(e)
the appropriate percentage for the accounting period is
determined at the beginning of the accounting period,
30
(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 marketing
assets, and
(g)
no income other than relevant IP income will arise from
35
anything done by the company that involves the exploitation
by the company of the relevant marketing assets.
(5)
In subsection (4)(d) “the relevant day”, in relation to a relevant
marketing asset, means—
(a)
the first day of the accounting period, or
40
(b)
if later, the day on which the company first acquired the
relevant marketing asset or the right to exploit the asset.
(6)
In determining the appropriate percentage, the company must act in
accordance with—
(a)
Article 9 of the OECD Model Tax Convention, and
45
(b)
the OECD transfer pricing guidelines.
(7)
In this section “marketing asset” means any of the following
(whether or not capable of being transferred or assigned)—

Finance Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
160

(a)
anything in respect of which proceedings for passing off
could be brought, including a registered trade mark (within
the meaning of the Trade Marks Act 1994),
(b)
anything that corresponds to a marketing asset within
paragraph (a) and is recognised under the law of a country or
5
territory outside the United Kingdom,
(c)
any signs or indications (so far as not falling within
paragraph (a) or (b)) which may serve, in trade, to designate
the geographical origin of goods or services, and
(d)
any information which relates to customers or potential
10
customers of the company, or any other member of a group
of which the company is a member, and is intended to be
used for marketing purposes.
357CP
Actual marketing royalty
(1)
The actual marketing royalty in respect of a trade of a company for
15
an accounting period is X% of the aggregate of any sums which—
(a)
were paid by the company for the purposes of acquiring any
relevant marketing assets, or the right to exploit any such
assets, and
(b)
were brought into account as debits in calculating the profits
20
of the trade for the accounting period.
(2)
In this section—
“relevant marketing assets” has the same meaning as in section
357CO, and
“X%” is the percentage given by Step 2 in section 357C(1).
25
Profits arising before grant of right
357CQ
Profits arising before grant of right
(1)
This section applies where a company—
(a)
holds a right mentioned in paragraph (a), (b) or (c) of section
357BB(1) (rights to which this Part applies) or an exclusive
30
licence in respect of such a right, or
(b)
would hold such a right or licence but for the fact that the
company disposed of any rights in the invention or (as the
case may be) the licence before the right was granted.
(2)
The company may elect that, for the purposes of determining the
35
relevant IP profits of a trade of the company for the accounting
period in which the right is granted, there is to be added the amount
determined in accordance with subsection (3) (the “additional
amount”).
(3)
The additional amount is the difference between—
40
(a)
the aggregate of the relevant IP profits of the trade for each
relevant accounting period, and
(b)
the aggregate of what the relevant IP profits of the trade for
each relevant accounting period would have been if the right
had been granted on the relevant day.
45

Finance Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
161

(4)
For the purposes of determining the additional amount, the amount
of any relevant IP profits to which section 357A does not apply by
virtue of Chapter 5 (relevant IP losses) is to be disregarded.
(5)
In this section “relevant accounting period” means—
(a)
the accounting period of the company in which the right is
5
granted, and
(b)
any earlier accounting period of the company which meets
the conditions in subsection (6).
(6)
The conditions mentioned in subsection (5)(b) are—
(a)
that it is an accounting period for which an election made by
10
the company under section 357A has effect,
(b)
that it is an accounting period for which the company is a
qualifying company, and
(c)
that it ends on or after the relevant day.
(7)
In this section “the relevant day” is the later of—
15
(a)
the first day of the period of 6 years ending with the day on
which the right is granted, or
(b)
the day on which—
(i)
the application for the grant of the right was filed, or
(ii)
in the case of a company that holds an exclusive
20
licence in respect of the right, the licence was granted.
(8)
Where the company would be a qualifying company for an
accounting period but for the fact that the right had not been granted
at any time during that accounting period, the company is to be
treated for the purposes of this section as if it were a qualifying
25
company for that accounting period.
(9)
Where the company would be a qualifying company for the
accounting period in which the right was granted but for the fact that
the company disposed of the rights or licence mentioned in
subsection (1)(b) before the right was granted, the company is to be
30
treated for the purposes of section 357A as if it were a qualifying
company for that accounting period.
Chapter 4
Streaming
357D
Alternative method of calculating relevant IP profits: “streaming”
35
(1)
A company may elect to apply section 357DA (instead of section
357C) for the purposes of determining the relevant IP profits of any
trade of the company for an accounting period.
(2)
An election made under subsection (1) is known as a “streaming
election”.
40
(3)
A streaming election has effect—
(a)
for the accounting period for which it is made, and
(b)
for each subsequent accounting period.

This is subject to section 357DB.

Finance Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
162

(4)
If any of the mandatory streaming conditions in section 357DC is met
in relation to a trade of a company for an accounting period, the
company must apply section 357DA (instead of section 357C) for the
purposes of determining the relevant IP profits of the trade for that
accounting period.
5
357DA
Relevant IP profits
(1)
To determine the relevant IP profits of a trade of a company for an
accounting period in accordance with this section—

Step 1

Take any amounts which are brought into account as credits in
10
calculating the profits of the trade for the accounting period, other
than any amounts of finance income (see section 357CB), and divide
them into two “streams”, amounts of relevant IP income (see sections
357CC and 357CD) and amounts that are not amounts of relevant IP
income.
15

The stream consisting of relevant IP income is “the relevant IP
income stream”.

Step 2

Take any amounts which are brought into account as debits in
calculating the profits of the trade for the accounting period, other
20
than any amounts referred to in section 357CG(3), and allocate them
on a just and reasonable basis between the two streams.

(See also section 357CG(5).)

Step 3

Deduct from the relevant IP income stream the amounts allocated to
25
that stream under Step 2.

Step 4

Deduct from the amount given by Step 3 the routine return figure
(see subsection (4)).

The amount given by this step is the “qualifying residual profit”.
30

If the amount of the qualifying residual profit is not greater than nil,
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).
35

If the company has not, go to Step 6.

Step 6

Deduct from the qualifying residual profit the marketing assets
return figure (see section 357CN and subsection (6)).

Step 7
40

If the company has made an election under section 357CQ (which
provides in certain circumstances for profits arising before the grant
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
45
accordance with subsection (3) of that section.

Finance Bill
Schedule 2 — Profits arising from the exploitation of patents etc
Part 1 — Amendments of CTA 2010
163

(2)
If the amount given by subsection (1) is greater than nil, that amount
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).
5
(4)
The routine return figure, in relation to a trade of a company for an
accounting period, is 10% of the aggregate of any routine deductions
which—
(a)
have been made by the company in calculating the profits of
the trade for the accounting period, and
10
(b)
have been allocated to the relevant IP income stream under
Step 2.

In this subsection “routine deductions” is to be read in accordance
with sections 357CJ and 357CK.
(5)
Subsections (2) and (3) of section 357CI have effect for the purposes
15
of subsection (4) of this section as they have effect for the purposes of
that section.
(6)
For the purposes of determining the marketing assets return figure
in Step 6, section 357CP (actual marketing royalty) has effect as if the
reference to X% of the aggregate of any sums falling within
20
subsection (1) of that section were a reference to the aggregate of any
such sums which have been allocated to the relevant IP income
stream under Step 2.
357DB
Method of allocation
(1)
In this section “method of allocation” means the method of
25
allocating, for the purposes of Step 2 in section 357DA(1), the
amounts mentioned in that step.
(2)
A company that applies section 357DA for the purposes of
determining the relevant IP profits of a trade of the company for an
accounting period must use the same method of allocation in relation
30
to the trade for that accounting period as it used in the last
accounting period of the company for which it applied that section
for the purposes of determining the relevant IP profits of the trade.
(3)
But subsection (2) does not apply if there is a change of
circumstances relating to the trade which makes the use of that
35
method of allocation in relation to the trade for the accounting period
inappropriate.
(4)
In such a case, the company may—
(a)
use a different method of allocation in relation to the trade for
the accounting period (and subsection (2) applies
40
accordingly for subsequent accounting periods), or
(b)
elect not to apply section 357DA for the purposes of
determining the relevant IP profits of the trade for the
accounting period.
(5)
Subsection (4)(b) does not prevent the company making a fresh
45
streaming election in relation to the trade for any subsequent
accounting period.