Finance Bill (HC Bill 49)

(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
5just and reasonable apportionment is properly attributable to such a
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 10 Notional royalty

(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
15exclusive licence in respect of any such rights, and

(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
20accounting period includes any income arising from things
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) 25The company may elect that the notional royalty in respect of the
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
30income for that accounting period.

(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
35able to exploit them.

(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,
40will have the right to exploit the relevant qualifying IP rights
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
45day,

(e) the appropriate percentage for the accounting period is
determined at the beginning of the accounting period,

(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) 5no income other than IP-derived income will arise from
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) 10the first day of the accounting period, or

(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) 15Article 9 of the OECD Model Tax Convention, and

(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) 20For the purposes of this Part income falling within any of the Heads
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.

25In this subsection “oil extraction activities” and “oil rights” have the
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) 30is a licence in respect of an item or process, but

(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) 35the licence also confers on the company (or on the company
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
40any such rights, and the other a non-exclusive licence conferring
those rights.

357CF Mixed sources of income

(1) This section applies to any income that—

(a) is mixed income, or

(b) 45is paid under a mixed agreement.

(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) 5A “mixed agreement” is an agreement providing for—

(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) 10The matters are—

(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) 15the sale of any other item,

(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
20properly attributable to—

(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),

25is to be regarded for the purposes of this Part as relevant IP income.

(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
30of this Part as relevant IP income.

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) 35In calculating the profits of the trade for the accounting period—

(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
40trade by virtue of—

(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

(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) 5The amounts to be deducted are any amounts of finance income
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
10the trade for a relevant accounting period (see section 357CH), the
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)—

• 15“R&D expenditure” means expenditure on research and
  development in relation to the trade,

• “relevant accounting period”, in relation to a company,
  means—

  (a)

  the first accounting period for which—

  (i)

  20the company is a qualifying company, and

  (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
  25period, and

• “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 30 Shortfall in R&D expenditure

(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
35expenditure.

(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) 40the actual R&D expenditure, as adjusted under subsections
(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
45(ignoring section 357CG(5)) is brought into account in
calculating the profits of the trade for the accounting period,
and

(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—

5where—

• E is the amount of R&D expenditure that—

  (a)

  has been incurred by the company during the
  relevant period, and

  (b)

  has been brought into account in calculating the
  10profits of the trade for any accounting period ending
  before the first relevant accounting period, and

• 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
15relevant accounting period, and

(b) the period beginning with the day on which the company
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
20amount of R&D expenditure is proportionately reduced.

(7) Subsections (8) to (11) apply for the purposes of determining—

(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
25of subsection (2).

(8) If the amount of the actual R&D expenditure for a relevant
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
30period.

(9) If—

(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
35shortfall in R&D expenditure for that accounting period,

the remaining portion of the additional amount is to be added to the
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
  40period, means any amount added to the actual R&D
  expenditure for that accounting period by virtue of
  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 BillPage 155

  (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) 5If—

(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,

10the additional amount is to be added to the actual R&D expenditure
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) 15To determine the routine return figure in relation to a trade of a
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.

20Step 2

Multiply that amount by 0.1.

Step 3

Calculate X% of the amount given by Step 2.

(2) In a case where—

(a) 25the 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
deduction in respect of the expenses in calculating the profits
of the trade for the accounting period, and

(d) 30the 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.

(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
35relation 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.

357CJ Routine deductions

(1) For the purposes of section 357CI “routine deductions” means
40deductions falling within any of the Heads set out in—

(a) subsection (2) (capital allowances),

(b) subsection (3) (costs of premises),

(c) subsection (4) (personnel costs),

(d) subsection (5) (plant and machinery costs),

(e) subsection (6) (professional services),

(f) 5subsection (7) (miscellaneous services).

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
10premises occupied by the company.

(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
15plant or machinery used by the company.

(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) 20insurance services, and

(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) 25Head 6 is any deductions made by the company in respect of any of
the following services—

(a) the supply of water, fuel or power;

(b) telecommunications services;

(c) computing services, including computer software;

(d) 30postal services;

(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
  3513 of CTA 2009 (see section 1128 of that Act),

• “IP-related services” means services provided in connection
  with—

  (a)

  any application for a right to which this Part applies,
  or

  (b)

  40any proceedings relating to the enforcement of any
  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,
  45any telecommunication system (whether or not one provided
  by the person providing the service), and

Finance BillPage 157

• “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
  5energy.

(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) 10subsection (2) (loan relationships and derivative contracts),

(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
15virtue of —

(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) 20Head 2 is—

(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) 25the amount of that additional deduction.

(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) 30Head 4 is the appropriate proportion of any deductions allowed
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) 35the employee is wholly or partly engaged directly and
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
40staffing costs in respect of the employee which are attributable to
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) 45Subsections (5) and (6) of section 1124 of CTA 2009 apply for the
purposes of subsection (5)(b) as they apply for the purposes of that
section.

(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
5period if condition A or B is met in relation to the accounting period.

(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) 10the aggregate of the amounts of qualifying residual profit of
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
15profits of any trade of the company for any previous
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
20in subsection (3)(a).

(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—

25

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 relevant
30maximum is proportionately reduced.

(8) 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 this
section.

(9) Sections 25 to 30 (definition of “associated companies”) have effect
35for the purposes of this section.

357CM Small claims amount

(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
40the accounting period is—

(a) if the amount in subsection (3) is lower than the small claims
threshold, 75% of the qualifying residual profit of the trade
for the accounting period;

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

where—

• 5SCT 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—

where QRP is the aggregate of the amounts of qualifying residual
10profit 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
subsection (3).

(5) 15If 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—

20where 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.

(8) 25Sections 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
30for an accounting period is—

where—

• NMR is the notional marketing royalty in respect of the trade
  for the accounting period (see section 357CO), and

• 35AMR is the actual marketing royalty in respect of the trade for
  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
40qualifying residual profit of the trade for the accounting
period,

the marketing assets return figure is nil.