Finance (No. 2) Bill (HC Bill 155)

(a) the sale of an item falling within section 357BH(2),

(b) the grant of any right falling within paragraph (a), (b) or (c) of
section 357BH(6),

(c) a sale or disposal falling within section 357BH(7),

(d) 5the 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
10properly attributable to—

(a) the sale of an item falling within section 357BH(2),

(b) the grant of any right falling within paragraph (a), (b) or (c) of
section 357BH(6), or

(c) a sale or disposal falling within section 357BH(7),

15is 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 of this Part
20as relevant IP income.

Excluded debits

357BI Excluded debits

For the purposes of this Part “excluded debits” means—

(a) the amount of any debits which are treated as expenses of a
25trade 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),

(b) 30the amount of any additional deduction for an accounting
period obtained by a company under Part 13 of CTA 2009 for
expenditure on research and development in relation to a trade,

(c) the amount of any additional deduction for an accounting
period obtained by a company under Part 15A of CTA 2009 in
35respect of qualifying expenditure on a television programme,

(d) the amount of any additional deduction for an accounting
period obtained by a company under Part 15B of CTA 2009 in
respect of qualifying expenditure on a video game, and

(e) the amount of any additional deduction for an accounting
40period obtained by a company under Part 15C of CTA 2009 in
respect of qualifying expenditure on a theatrical production.

Routine return figure

357BJ Routine return figure

(1) This section applies for the purpose of calculating the routine return
45figure for a relevant IP income sub-stream established at Step 2 in

section 357BF(2) in determining the relevant IP profits of a trade of a
company for an accounting period.

(2) The routine return figure for the sub-stream is 10% of the aggregate of
any routine deductions which—

(a) 5have been made by the company in calculating the profits of the
trade for the accounting period, and

(b) have been allocated to the sub-stream at Step 3 in section
357BF(2).

For the meaning of “routine deductions”, see sections 357BJA and
10357BJB.

(3) In a case where—

(a) the company (“C”) is a member of a group,

(b) another member of the group has incurred expenses on behalf
of C,

(c) 15had 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,

(d) the deduction would have been a routine deduction, and

(e) the deduction would have been allocated to the sub-stream at
20Step 3 in section 357BF(2),

C is to be treated for the purposes of subsection (2) as having made such
a routine deduction and as having allocated the deduction to the sub-
stream.

(4) Where expenses have been incurred by any member of the group on
25behalf of C and any other member of the group, subsection (3) applies
in relation 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.

357BJA Routine deductions

(1) 30For the purposes of this Part, “routine deductions” means deductions
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) 35subsection (5) (plant and machinery costs),

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

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

This is subject to section 357BJB (deductions that are not routine
deductions).

(2) 40Head 1 is any allowances under CAA 2001.

(3) Head 2 is any deductions made by the company in respect of any
premises 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) 45any externally provided workers.

(5) Head 4 is any deductions made by the company in respect of any plant
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) 5legal services, other than IP-related services;

(b) financial services, including—

(i) insurance services, and

(ii) valuation or actuarial services;

(c) services provided in connection with the administration or
10management of the company’s directors and employees;

(d) any other consultancy services.

(7) Head 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) 15telecommunications services;

(c) computing services, including computer software;

(d) postal services;

(e) the transportation of any items;

(f) the collection, removal and disposal of refuse.

(8) 20In this section—

• “externally provided worker” has the same meaning as in Part 13
  of CTA 2009 (see section 1128 of that Act),

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

  (a)

  25any application for a right to which this Part applies, or

  (b)

  any proceedings relating to the enforcement of any such
  right,

• “premises” includes any land,

• “telecommunications service” means any service that consists in
  30the provision of access to, and of facilities for making use of, any
  telecommunication system (whether or not one provided by the
  person providing the service), and

• “telecommunication system” means any system (including the
  apparatus comprised in it) which exists for the purpose of
  35facilitating the transmission of communications by any means
  involving the use of electrical or electromagnetic energy.

(9) The Treasury may by regulations amend this section.

357BJB Deductions that are not routine deductions

(1) For the purposes of this Part a deduction is not a “routine deduction” if
40it falls within any of the Heads set out in—

(a) subsection (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),

(e) 45subsection (8) (television production expenditure),

(f) subsection (9) (video games development expenditure).

(2) Head 1 is any debits which are treated as expenses of the trade by virtue
of—

(a) section 297 of CTA 2009 (debits in respect of loan relationships),
or

(b) 5section 573 of CTA 2009 (debits in respect of derivative
contracts).

(3) Head 2 is—

(a) the amount of any expenditure on research and development in
relation to the trade—

(i) 10for which an additional deduction for the accounting
period is obtained by the company under Part 13 of CTA
2009, or

(ii) in respect of which the company is entitled to an R&D
expenditure credit for the accounting period under
15Chapter 6A of Part 3 of CTA 2009, and

(b) where the company obtains an additional deduction as
mentioned in paragraph (a)(i), the amount of that additional
deduction.

(4) Head 3 is any allowances under—

(a) 20Part 6 of CAA 2001 (research and development allowances), or

(b) Part 8 of CAA 2001 (patent allowances).

(5) Head 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) 25shares are acquired by an employee or another person because
of the employee’s employment by the company, and

(b) the employee is wholly or partly engaged directly and actively
in relevant research and development (within the meaning of
section 1042 of CTA 2009).

(6) 30In subsection (5) “the appropriate proportion”, in relation to a
deduction allowed in respect of an employee, is the proportion of the
staffing 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).

35“Staffing costs” has the same meaning as in that Part (see section 1123
of that Act).

(7) Subsections (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) 40Head 5 is—

(a) the amount of any qualifying expenditure on a television
programme for which an additional deduction for the
accounting period is obtained by the company under Part 15A
of CTA 2009, and

(b) 45the amount of that additional deduction.

(9) Head 6 is—

(a) the amount of any qualifying expenditure on a video game for
which an additional deduction for the accounting period is
obtained by the company under Part 15B of CTA 2009, and

(b) the amount of that additional deduction.

(10) 5The Treasury may by regulations amend this section.

Election for small claims treatment

357BK Companies eligible to elect for small claims treatment

(1) A company may make an election under this section for small claims
treatment for an accounting period if—

(a) 10conditions A and B are met, and

(b) condition C or D is met.

(2) Condition A is that the company carries on only one trade during the
accounting period.

(3) Condition B is that section 357BF applies for the purposes of
15determining the relevant IP profits of the trade for the accounting
period.

(4) Condition C is that the qualifying residual profit of the trade for the
accounting period does not exceed £1,000,000.

(5) Condition D is that—

(a) 20the qualifying residual profit of the trade for the accounting
period does not exceed the relevant maximum, and

(b) the company did not take Step 6 in section 357BF(2), 357C(1) or
357DA(1) for the purpose of calculating the relevant IP profits
of the trade for any previous accounting period beginning
25within the relevant 4-year period.

The “relevant 4-year period” means the period of 4 years ending
immediately before the beginning of the accounting period mentioned
in paragraph (a).

(6) If no other company is a related 51% group company of the company in
30the accounting period, the relevant maximum is £3,000,000.

(7) If one or more other companies are related 51% group companies of the
company in the accounting period, the relevant maximum is—

(8) For an accounting period of less than 12 months, the relevant maximum
is proportionally reduced.

(9) For the purposes of this section and section 357BKA, the “qualifying
40residual profit” of a trade of a company for an accounting period is the
aggregate of the relevant IP income sub-streams established at Step 2 in
section 357BF(2) in determining the relevant IP profits of the trade for
the accounting period, following the deductions required by Step 4

(ignoring the amount of any sub-stream which is not greater than nil
following those deductions).

357BKA Small claims figure

(1) This section applies for the purpose of calculating the small claims
5figure for a relevant IP income sub-stream established at Step 2 in
section 357BF(2) in determining the relevant IP profits of a trade of a
company for an accounting period.

(2) If 75% of the qualifying residual profit of the trade for the accounting
period is lower than the small claims threshold, the small claims figure
10for the sub-stream is 25% of the amount of the sub-stream following
Step 4 in section 357BF(2).

(3) If 75% of the qualifying residual profit of the trade for the accounting
period is higher than the small claims threshold, the small claims figure
for the sub-stream is the amount given by—

15

where—

• A is the amount of the sub-stream following the deductions
  required by Step 4 in section 357BF(2),

• QRP is the qualifying residual profit of the trade of the company
  20for the accounting period, and

• SCT is the small claims threshold.

(4) If no other company is a related 51% group company of the company in
the accounting period, the small claims threshold is £1,000,000.

(5) If one or more other companies are related 51% group companies of the
25company in the accounting period, the small claims threshold is—

(6) 30For an accounting period of less than 12 months, the small claims
threshold is proportionately reduced.

Marketing assets return figure

357BL Marketing assets return figure

(1) The marketing assets return figure for a relevant IP income sub-stream
35is—

(2) Where—

(a) AMR is greater than NMR, or

(b) the difference between NMR and AMR is less than 10% of the
amount of the relevant IP income sub-stream following the
deductions required by Step 4 in section 357BF(2),

5the marketing assets return figure for the sub-stream is nil.

357BLA Notional marketing royalty

(1) The notional marketing royalty in respect of a relevant IP income sub-
stream is the appropriate percentage of the income allocated to that
sub-stream at Step 2 in section 357BF(2).

(2) 10The “appropriate percentage” is the proportion of that income which
the company would pay another person (“P”) for the right to exploit the
relevant marketing assets in the accounting period concerned 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 a relevant IP income sub-stream if the
sub-stream includes any income arising from things done by the
company that involve the exploitation by the company of that
marketing asset.

(4) For the purpose of determining the appropriate percentage under this
20section, 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 is determined at the beginning of
30the accounting period concerned,

(f) the appropriate percentage 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 income within the relevant IP income sub-
35stream 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 concerned, 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.

357BLB Actual marketing royalty

(1) 15The actual marketing royalty for a relevant IP income sub-stream is 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) 20have been allocated to the sub-stream at Step 3 in section
357BF(2).

(2) In this section “relevant marketing asset” has the same meaning as in
section 357BLA.

R&D fraction

357BM 25 Introduction

(1) Sections 357BMA to 357BMH apply for the purpose of determining the
R&D fraction for a relevant IP income sub-stream established at Step 2
in section 357BF(2) in determining the relevant IP profits of a trade of a
company for an accounting period.

(2) 30In sections 357BMA to 357BMH, references to “the sub-stream”, “the
trade”, “the company” and “the accounting period” are to the relevant
IP income sub-stream, the trade, the company and the accounting
period referred to in subsection (1).

357BMA The R&D fraction

(1) 35The R&D fraction for the sub-stream is the lesser of 1 and—

(2) This section is subject to section 357BMH (R&D fraction: increase for
exceptional circumstances).

357BMB Qualifying expenditure on relevant R&D undertaken in-house

(1) In section 357BMA, the company’s “qualifying expenditure on relevant
5R&D undertaken in-house” means the expenditure incurred by the
company during the relevant period which meets conditions A and B.

(2) Condition A is that the expenditure is—

(a) incurred on staffing costs,

(b) incurred on software or consumable items,

(c) 10qualifying expenditure on externally provided workers, or

(d) incurred on relevant payments to the subjects of clinical trials.

(3) Condition B is that the expenditure is attributable to relevant research
and development undertaken by the company itself.

(4) In this section and sections 357BMC and 357BMD, “relevant research
15and development” means research and development (within the
meaning of section 1138) which—

(a) in a case where the sub-stream is an individual IP right sub-
stream, relates to the qualifying IP right to which the income in
the sub-stream is attributable, or

(b) 20in a case where the sub-stream is a product sub-stream, relates
to a qualifying IP right granted in respect of any item
incorporated in a multi-IP item to which income in the sub-
stream is attributable.

(5) Research and development “relates” to a qualifying IP right for the
25purposes of subsection (4) if—

(a) it creates, or contributes to the creation of, the invention,

(b) it is undertaken for the purpose of developing the invention,

(c) it is undertaken for the purpose of developing ways in which
the invention may be used or applied, or

(d) 30it is undertaken for the purpose of developing any item or
process incorporating the invention.

(6) The following provisions of CTA 2009 apply for the purposes of this
section—

(a) section 1123 (meaning of “staffing costs”),

(b) 35section 1124 (when staffing costs are attributable to relevant
research and development),

(c) section 1125 (meaning of “software or consumable items”),

(d) sections 1126 to 1126B (when software or consumable items are
attributable to relevant research and development),

(e) 40sections 1127 to 1131 (meaning of “qualifying expenditure on
externally provided workers”),

(f) section 1132 (when qualifying expenditure on externally
provided workers is attributable to relevant research and
development), and

(g) 45section 1140 (meaning of “relevant payments to the subjects of
clinical trials”),

and in the application of those provisions for the purposes of this
section any reference to “relevant research and development” is to be
read as a reference to relevant research and development within the
meaning given by subsection (4).

357BMC 5 Qualifying expenditure on relevant R&D sub-contracted to
unconnected persons

(1) In section 357BMA, the company’s “qualifying expenditure on relevant
R&D sub-contracted to unconnected persons” means 65% of any
expenditure incurred by the company during the relevant period
10which meets conditions A and B.

(2) Condition A is that the expenditure is incurred in making a payment to
another person (“the sub-contractor”) in respect of relevant research
and development contracted out by the company to the sub-contractor.

(3) Condition B is that the company and the sub-contractor are not
15connected (within the meaning given by section 1122).

(4) Where a payment is made to a person in respect of relevant research
and development contracted out to the person and in respect of other
matters, so much of the payment as is properly attributable to other
matters is to be disregarded for the purposes of this section.

357BMD 20 Qualifying expenditure on relevant R&D sub-contracted to
connected persons

(1) In section 357BMA, the company’s “qualifying expenditure on relevant
R&D sub-contracted to connected persons” means 65% of any
expenditure incurred by the company during the relevant period
25which meet conditions A and B.

(2) Condition A is that the expenditure is incurred in making a payment to
another person (“the sub-contractor”) in respect of relevant research
and development contracted out by the company to the sub-contractor.

(3) Condition B is that the company and the sub-contractor are connected
30(within the meaning given by section 1122).

(4) Where a payment is made to a person in respect of relevant research
and development contracted out to the person and in respect of other
matters, so much of the payment as is properly attributable to other
matters is to be disregarded for the purposes of this section.

357BME 35 Qualifying expenditure on acquisition of relevant qualifying IP
rights

(1) In section 357BMA, the company’s “qualifying expenditure on the
acquisition of relevant qualifying IP rights” means the expenditure
incurred by the company during the relevant period on the acquisition
40of a relevant qualifying IP right or an exclusive licence in respect of a
relevant qualifying IP right.

(2) “Relevant qualifying IP right” means—

(a) in a case where the sub-stream is an individual IP right sub-
stream, the qualifying IP right to which the income in the sub-
45stream is attributable, and