Finance Bill (HC Bill 49)

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.

5In this section “relevant IP income”, in relation to a trade of a
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
10income for an accounting period which the company would pay
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
15marketing asset” in relation to an accounting period if the relevant IP
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
20this 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 marketing assets to
the exclusion of any other person (including P),

(c) 25the company will have the same rights in relation to the
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
30determined 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 marketing
assets, and

(g) 35no income other than relevant IP income will arise from
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) 40the first day of the accounting period, or

(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) 45Article 9 of the OECD Model Tax Convention, and

(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)—

(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
5paragraph (a) and is recognised under the law of a country or
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) 10any information which relates to customers or potential
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) 15The actual marketing royalty in respect of a trade of a company for
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) 20were brought into account as debits in calculating the profits
of the trade for the accounting period.

(2) In this section—

• “relevant marketing assets” has the same meaning as in section
  357CO, and

• 25“X%” is the percentage given by Step 2 in section 357C(1).

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
30357BB(1) (rights to which this Part applies) or an exclusive
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) 35The company may elect that, for the purposes of determining the
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) 40The additional amount is the difference between—

(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
45had been granted on the relevant day.

(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) 5the accounting period of the company in which the right is
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) 10that it is an accounting period for which an election made by
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) 15In this section “the relevant day” is the later of—

(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) 20in the case of a company that holds an exclusive
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
25treated for the purposes of this section as if it were a qualifying
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
30subsection (1)(b) before the right was granted, the company is to be
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”

(1) 35A 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”.

(3) 40A 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.

(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
5accounting period.

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

10Take any amounts which are brought into account as credits in
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
15income.

Step 2

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

Step 3

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

Step 4

25Deduct from the amount given by Step 3 the routine return figure
(see subsection (4)).

If the amount of the qualifying residual profit is not greater than nil,
go to Step 7.

Step 5

30If the company has elected for small claims treatment, calculate the
small claims amount in relation to the trade (see section 357CM).

Step 6

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

35Step 7

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
40was 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
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
5Chapter 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
10the trade for the accounting period, and

(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) 15Subsections (2) and (3) of section 357CI have effect for the purposes
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
20reference to X% of the aggregate of any sums falling within
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) 25In this section “method of allocation” means the method of
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
30accounting period must use the same method of allocation in relation
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
35circumstances relating to the trade which makes the use of that
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
40the accounting period (and subsection (2) applies
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) 45Subsection (4)(b) does not prevent the company making a fresh
streaming election in relation to the trade for any subsequent
accounting period.

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
5the profits of the trade for the accounting period is not fully
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
10if it is greater than—

(a) £2,000,000, or

(b) 20% of the total gross income of the trade for the accounting
period,

whichever is the lower.

(3) 15But an amount is not a substantial amount for the purposes of this
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) 20Mandatory streaming condition B 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) relevant IP income, and

(b) a substantial amount of licensing income that is not relevant
25IP income.

(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.

30“Intellectual property” has the meaning given by section 712(3) of
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) 35income that is not relevant IP income, and

(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
40within subsection (6) of section 357CC, and

(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
45of which a right within paragraph (b) of that
subsection is granted by the agreement,

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
5within section 357CC(6), but

(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
10within that paragraph is relevant Head 2 income for the purposes of
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
15section 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.

357EA 20 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.

(2) 25The 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
30subsection (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,

(b) 35the 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
40relevant IP profits of a trade of a relevant group member for the
relevant accounting period.

(3) For the purposes of this section—

(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,
5means the accounting period of the company in or at the end
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
10relevant 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)) 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
15(2) is to apply to them.

(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
20greatest amount of relevant IP profits of any of those trades for such
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
25for an accounting period, and

(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)
30by the amount of any relevant IP profits of the trade of the company
for the current accounting period.

The “current accounting period” is the accounting period
immediately following the accounting period mentioned in
subsection (1)(a).

(3) 35Section 357A does not apply in relation to so much of the amount of
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) 40If any portion of the set-off amount remains after the operation of
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) 45If there are relevant IP losses of the trade of the company for the
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

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
5for 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—

(a) 10that 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.

(3) 15Sections 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
20been 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
25added 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
30substituted “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
35greatest 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
40accounting 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
45amount in relation to the trade of the company for an accounting
period if—

(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
5members of the group is a relevant group member (within
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) 10This section applies where—

(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) 15another company (“the transferee”) that is a member of the
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
20transferee begins to carry on the trade.

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) 25subsection (2) of section 357EB has effect in relation to a
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
30of the company, and

(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) 35The payment—

(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) 40In a case where section 357ED applies (company ceasing to carry on
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
45relevant accounting period under section 357EB(2).