CHAPTER 6 Anti-avoidance

Licences conferring exclusive rights

357F Licences conferring exclusive rights

A licence that confers any right in respect of a qualifying IP right to
5the exclusion of all other persons is not to be regarded as an exclusive
licence if the main purpose, or one of the main purposes, of
conferring the right is to secure that the licence is an exclusive licence
for the purposes of this Part.

Incorporation of qualifying items

357FA 10 Incorporation of qualifying items

(1) Income arising from the sale of any item that incorporates a
qualifying item is not relevant IP income if the main purpose, or one
of the main purposes, of incorporating the qualifying item is to
secure that income arising from any such sale is relevant IP income.

(2) 15“Qualifying item” has the same meaning as in section 357CC(2).

Tax advantage schemes

357FB Tax advantage schemes

(1) This section applies where—

(a) a company is entitled to make a deduction under section
20357A(2) in calculating the profits of a trade of the company
for an accounting period,

(b) the company is or has at any time been a party to a scheme,
and

(c) the main purpose, or one of the main purposes, of the
25company or, where the company is a member of a group, any
member of the group in being a party to the scheme is (or
was) to obtain the chance of securing a relevant tax
advantage.

(2) There is a “relevant tax advantage” for the purposes of this section
30if—

(a) (apart from this section) there would be an increase in the
amount of any deduction made under section 357A(2) in
calculating the profits of a trade of the company or (as the
case may be) any other member of the group for any
35accounting period, and

(b) the increase would arise from—

(i) the avoidance of the operation of any provision of this
Part,

(ii) artificially inflating the amount of relevant IP income
40brought into account in calculating those profits (see
subsection (3)), or

(iii) a mismatch between relevant IP income and
expenditure (see subsection (4)).

(3) The reference in subsection (2)(b) to artificially inflating the amount
of relevant IP income brought into account in calculating the profits
5mentioned in subsection (2)(a) is a reference to doing any of the
following—

(a) bringing into account in calculating those profits an amount
of relevant IP income that wholly or substantially
corresponds to an increase in the amounts brought into
10account as debits in calculating those profits;

(b) bringing into account in calculating those profits an
additional amount of relevant IP income that wholly or
substantially corresponds to a decrease in the amount of
income that is not relevant IP income which is brought into
15account in calculating those profits.

(4) For the purposes of this section there is a mismatch between relevant
IP income and expenditure if—

(a) any relevant IP income brought into account in calculating
the profits mentioned in subsection (2)(a) is attributable to
20any qualifying IP right or an exclusive licence in respect of
any such right, and

(b) any expenditure incurred in relation to that right is brought
into account in calculating the profits of a trade of the
company or (as the case may be) any other member of the
25group for an accounting period for which an election under
section 357A did not have effect.

(5) The amount of the deduction which may be made by the company
for the accounting period mentioned in subsection (1)(a) is the
amount that would secure that no relevant tax advantage arises (and
30may be nil).

(6) In this section “scheme” includes any scheme, arrangements or
understanding of any kind whatever, whether or not legally
enforceable, involving a single transaction or two or more
transactions.

CHAPTER 7 35Supplementary

Elections under section 357A

357G Making of election under section 357A

(1) An election made by a company under section 357A is made by
giving notice to an officer of Revenue and Customs.

(2) 40The notice must specify the first accounting period of the company
for which the election is to have effect.

(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 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
5of the company.

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
10for which the revocation is to have effect.

(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
15specified in the notice and all subsequent accounting periods of the
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
20period of 5 years beginning with the day after the last day of the
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)
25carries on a trade and any partner in the firm is a company within the
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) 30Any election under this Part—

(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
35revoking it as if made or revoked by the firm.

(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) 40Section 1261 of CTA 2009 (accounting periods of firms) applies for
the purposes of this Part as it applies for the purposes of Part 17 of
that Act.

(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
5condition in relation to a right to which this Part applies if—

(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) 10A “relevant corporate partner” is a corporate partner who is entitled
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) 15Section 357BE (active ownership condition) has effect as if the
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) 20any reference to a company having one or more associated
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
25were a reference to each such corporate partner having no
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
30357CB(1)(c).

(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.

35Cost-sharing arrangements

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
40right or an exclusive licence in respect of such a right,

(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) 45under the arrangement each of those parties—

(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
5proportionate to its participation in the arrangement as
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) 10But this section does not apply where the arrangement produces for
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.

15Interpretation

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) 20The group consists of company A and each company in relation to
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) 25The first condition is that the financial results of company A and
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
30the relevant time falls.

(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) 35the financial results of company A and a third company, for
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) 40The fifth condition is that—

(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
45company B.

(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
5accounts but for the application of an exemption, or

(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) 10any corresponding provision of the law of a country or
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

• 15sections 473 and 474 of CTA 2009 (meaning of “major interest”).

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
  20granted,

• “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
  25Organisation for Economic Co-operation and
  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
  30by order made by the Treasury,

• “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)

  35such other document approved and published by the
  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
  40OECD as part of (or by way of update or supplement to) the
  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
  45of Steps 1 to 4 in section 357C or (as the case may be) section
  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

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—

Part 2 40Amendments of TIOPA 2010

2 In Part 4 of TIOPA 2010 (transfer pricing), Chapter 3 (exemptions from basic
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 45After section 167 insert—

“167A Small enterprises: exception from exemption: transfer pricing notice

(1) Section 166(1) does not apply in relation to any provision made or
imposed if—

(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
5give that person a notice requiring the person to calculate the
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
10and any other person by means of a transaction or series of
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
15taken into account in calculating, for the purposes of Part 8A
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
20transfer pricing notice.”

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—

“that the condition in section 167A(1)(b) is not met, or

(b) 25that the condition in section 168(1)(a) is not met.”

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

30Application

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
35beginning before 1 April 2013 and ending on or after that date (“the
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
40separate accounting periods, and

(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.

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—

(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) 20section 357EB of CTA 2010 (allocation of set-off amount within
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) 25section 357EC of that Act (carry-forward of set-off amount) applies
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
30appropriate fraction of that amount.

(4) The appropriate fraction is—

where P is—

“(a) the percentage given as the percentage of RP by that Table
35for 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

(b) 40where 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.

(6) In this paragraph—

• “relevant accounting period” has the meaning given by section
  357EB(3) of CTA 2010,

• “relevant IP profits”, in relation to a trade of a company for an
  5accounting period, has the same meaning in this paragraph as in Part
  8A of that Act, and

• “set-off amount”, in relation to a trade of a company for an accounting
  period, is to be read in accordance with Chapter 5 of that Act.

Section 20

SCHEDULE 3 10Relief for expenditure on R&D

Introductory

1 Part 13 of CTA 2009 (additional relief for expenditure on research and
development) is amended as follows.

Amount of relief for expenditure on R&D by small or medium-sized enterprises (“SMEs”)

2 (1) 15Chapter 2 (relief for SMEs: cost of R&D incurred by SME) is amended as
follows.

(2) In section 1044 (additional deduction in calculating profits of trade), in
subsection (8), for “100%” substitute “125%”.

(3) In section 1045 (alternative treatment for pre-trading expenditure: deemed
20trading loss), in subsection (7), for “200%” substitute “225%”.

(4) In section 1055 (tax credit: meaning of “Chapter 2 surrenderable loss”), in
subsection (2)(b), for “200%” substitute “225%”.

(5) In section 1058 (amount of tax credit), in subsection (1)(a), for “12.5%”
substitute “11%”.

25Removal of R&D threshold

3 (1) Chapter 2 (relief for SMEs: cost of R&D incurred by SME) is amended as
follows.

(2) In section 1043 (overview of Chapter), in subsection (3), omit paragraph (e)
(but not the “and” after it).

(3) 30In section 1044 (additional deduction in calculating profits of trade), omit
subsection (3).

(4) In section 1045 (alternative treatment for pre-trading expenditure: deemed
trading loss)—

(a) in subsection (1), omit “, B”, and

(b) 35omit subsection (3).

(5) Omit section 1050 (R&D threshold).

4 (1) Chapter 3 (relief for SMEs: R&D sub-contracted to SME) is amended as
follows.