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

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

357BMF 5 Meaning of the “relevant period” etc

(1) Subsections (2) to (6) define “the relevant period” for the purposes of
sections 357BMB to 357BME.

(2) The “relevant period” is the period which—

(a) ends with the last day of the accounting period, and

(b) 10begins on the relevant day or such earlier day as the company
may elect.

This is subject to subsection (6).

(3) The “relevant day” is 1 July 2013 in a case where—

(a) the accounting period begins before 1 July 2021, and

(b) 15the company is a new entrant (see section 357A(11)).

(4) The “relevant day” is 1 July 2016 in any other case.

(5) A day elected under subsection (2)(b) must not be more than 20 years
before the last day of the accounting period.

(6) If the last day of the accounting period is, or is after, 1 July 2036 the
20“relevant period” is the period of 20 years ending with that day.

(7) Expenditure incurred by the company is to be treated for the purposes
of sections 357BMB to 357BME as incurred during the relevant period
if (and only if) the expenditure is allowable as a deduction in
calculating for corporation tax purposes the profits of the trade for an
25accounting period which falls, in whole or in part, within the relevant
period.

357BMG Cases where the company is a new entrant with insufficient
information about pre-enactment expenditure

(1) This section applies if—

(a) 30the accounting period begins before 1 July 2021 and the
company is a new entrant (so that subsection (3) of section
357BMF applies), and

(b) the company has insufficient information about its expenditure
in the period which begins with 1 July 2013 and ends with 30
35June 2016 to be able to calculate the R&D fraction for the sub-
stream.

(2) If the accounting period begins on or after 1 July 2019, the company
may elect that, for the purposes of enabling it to determine the R&D
fraction for the sub-stream, section 357BMF is to have effect as if in
40subsection (3) for “1 July 2013” there were substituted “1 July 2016”.

(3) If the accounting period begins before 1 July 2019 the company may
elect that, for the purposes of enabling it to determine the R&D fraction
for the sub-stream, sections 357BM to 357BME are to have effect as if—

(a) any reference in those sections to the relevant period were to the
45period of three years ending with the last day of the accounting
period,

(b) in section 357BMB, for subsections (4) and (5) there were
substituted—

“(4) In this section and sections 357BMC and 357BMD,
“relevant research and development” means research
5and development (within the meaning of section 1138)
which relates to the trade.”, and

(c) in section 357BME—

(i) in subsection (1) for the words from “a relevant
qualifying IP right” to the end there were substituted
10“qualifying IP rights or exclusive licences in respect of
qualifying IP rights”, and

(ii) subsection (2) were omitted.

357BMH R&D fraction: increase for exceptional circumstances

(1) The company may elect to increase the R&D fraction for the sub-stream
15by the amount mentioned in subsection (2) if (but for the increase)—

(a) it would not be less than 0.325, and

(b) it would, because of exceptional circumstances, be less than the
value fraction for the sub-stream (see subsection (3)).

(2) The amount of the increase referred to in subsection (1) is the amount
20which is equal to the difference between the R&D fraction (before the
increase) and the value fraction.

(3) The “value fraction” for the sub-stream is the fraction which, on a just
and reasonable assessment, represents the proportion of the value of
the relevant qualifying IP rights which is properly attributable to
25research and development undertaken at any time—

(a) by the company itself, or

(b) on behalf of the company by persons not connected with it.

(4) An election under subsection (1) is made by the company giving notice
to an officer of Revenue and Customs.

(5) 30The notice must be given on or before the last day on which an
amendment of the company’s tax return for the accounting period
could be made under paragraph 15 of Schedule 18 to FA 1998.

(6) In this section—

• “relevant qualifying IP rights” has the same meaning as in section
  35357BME, and

• “research and development” has the meaning given by section
  1138.

(7) Section 1122 (meaning of “connected” persons”) applies for the
purposes of this section.

40Profits arising before grant of right

357BN 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
45licence 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
5relevant 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—

(a) 10the 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.

(4) 15For 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
20granted, 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 the
25company 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—

(a) 30the first day of the period of 6 years ending with the day on
which the right is granted, and

(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 licence
35in 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 company for that
40accounting 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 treated for the purposes of
45section 357A as if it were a qualifying company for that accounting
period.

CHAPTER 2B Relevant IP profits: cases mentioned in section 357A(7): income from new
IP

357BO Relevant IP profits

(1) Section 357BF applies, with the modifications set out in section 357BQ,
5for the purposes of determining the relevant IP profits of a trade of a
company for an accounting period in a case where—

(a) the accounting period begins before 1 July 2021,

(b) the company is not a new entrant (see section 357A(11)), and

(c) any amount of relevant IP income brought into account as a
10credit in calculating the profits of the trade for the accounting
period is properly attributable to a new qualifying IP right (see
section 357BP).

(2) Where it is necessary for the purposes of section 357BF, as applied by
this section, to determine the R&D fraction for a relevant IP income sub-
15stream, the company concerned is to be treated for the purposes of
sections 357BMF and 357BMG as if it were a new entrant.

357BP Meaning of “new qualifying IP right” and “old qualifying IP right”

(1) This section applies for the purposes of this Part.

(2) “New qualifying IP right”, in relation to a company, means a qualifying
20IP right which meets condition A, B or C.

(3) “Old qualifying IP right”, in relation to a company, means a qualifying
IP right which does not meet any of those conditions.

(4) Condition A is that the right was granted or issued to the company in
response to an application filed on or after the relevant date.

(5) 25Condition B is that the right was assigned to the company on or after
the relevant date.

(6) Condition C is that an exclusive licence in respect of the right was
granted to the company on or after the relevant date.

(7) The “relevant date” for the purposes of subsections (4), (5) and (6) is 1
30July 2016; but this is subject to subsection (8).

(8) The “relevant date” for the purposes of subsections (5) and (6) is 2
January 2016 if—

(a) the person who assigned the right or granted the licence was
within subsection (9) at the time of the grant or assignment,

(b) 35that person and the company were connected at the time of the
assignment or grant, and

(c) the main purpose, or one of the main purposes, of that person
or the company in being a party to the assignment or grant was
the avoidance of tax.

(9) 40A person is within this subsection if the person—

(a) is not within the charge to corporation tax, and

(b) is not liable to a foreign tax designated for the purposes of this
section by regulations made by the Treasury.

(10) Regulations may be made under subsection (9)(b) which designate a
foreign tax only if it appears to the Treasury that the tax may be charged
at a reduced rate under provisions of the law of the country or territory
concerned which correspond to the provisions of this Part.

(11) 5In this section “foreign tax” means a tax under the law of a country or
territory outside the United Kingdom.

(12) Section 1122 (meaning of “connected” persons) applies for the purposes
of this section.

357BQ The modifications

(1) 10The modifications of section 357BF referred to in section 357BO(1) are
as follows.

(2) Omit subsection (1).

(3) In subsection (2)—

(a) in Step 2—

(i) 15before paragraph (a) insert—

“(aa) a sub-stream consisting of income properly
attributable to old qualifying IP rights (“an old IP
rights sub-stream”),”,”

(ii) in paragraph (a) before “qualifying IP right” insert
20“new”,

(iii) in the words after paragraph (b) for “and (6)” substitute
“to (11)”,

(b) in Step 7, for “relevant IP income sub-stream” substitute
“individual IP right sub-stream and each product sub-stream”,
25and

(c) for Step 8 substitute—

• ““Step 8

• Add together—

  (a)

  the amount of any old IP rights sub-stream
  30(following Steps 4 to 6), and

  (b)

  the amount of each of the individual IP right
  sub-streams and product sub-streams (following
  Step 7).”

(4) In subsection (6) for paragraph (a) substitute—

“(a) 35it would not be reasonably practicable to apportion the income
between—

(i) individual IP rights sub-streams, or

(ii) individual IP rights sub-streams and an old IP rights
sub-stream, or”.

(5) 40After subsection (6) insert—

“(7) Subsections (8) to (11) apply where—

• (a)

  income which is properly attributable to a multi-IP item
  may in accordance with subsection (6) be allocated at
  Step 2 of subsection (2) to a product sub-stream, and

  (b)

  45the multi-IP item incorporates—

  Finance (No. 2) BillPage 115

  (i)

  at least one item in respect of which an old
  qualifying IP right held by the company has
  been granted, and

  (ii)

  at least one item in respect of which a new
  5qualifying IP right held by the company has
  been granted.

(8) If—

• (a)

  the value of the multi-IP item is wholly or mainly
  attributable to the incorporation in it of the item or items
  10referred to in subsection (7)(b)(i), or

  (b)

  the old IP percentage for the multi-IP item is 80% or
  more,

the income properly attributable to the multi-IP item may be
treated as if it were properly attributable to old qualifying IP
15rights only; and, accordingly, the income may be allocated at
Step 2 of subsection (2) to an old qualifying IP rights sub-stream
(rather than to a product sub-stream).

(9) If the old IP percentage for the multi-IP item is less than 80% but
not less than 20%, that percentage of the income which is
20properly attributable to the multi-IP item may be treated as if it
were properly attributable to old qualifying IP rights only; and,
accordingly, that percentage of the income may be allocated at
Step 2 of subsection (2) to an old IP rights sub-stream (and the
remainder is to be allocated to a product sub-stream).

(10) 25Where by reason of subsection (9) only part of the income
properly attributable to the multi-IP item is allocated to a
product sub-stream, the multi-IP item is to be treated, in
determining the R&D fraction for the sub-steam, as if it did not
incorporate the items referred to in subsection (7)(b)(i).

(11) 30For the purposes of subsection (8) and (9), the “old IP
percentage” for a multi-IP item is the percentage found by the
following calculation—

35O is the number of items incorporated in the multi-IP item in
respect of which an old qualifying IP right held by the company
has been granted, and

T is the number of items incorporated in the multi-IP item in
respect of which an old or a new qualifying IP right held by the
40company has been granted.””

(4) Schedule 9 contains amendments consequential on this section.

(5) The amendments made by this section have effect in relation to accounting
periods beginning on or after 1 July 2016.

(6) Subsection (7) applies where a company has an accounting period (“the
45straddling period”) which begins before, and ends on or after, 1 July 2016 or 1
July 2021 (“the relevant date”).

(7) For the purposes of this section and Part 8A of CTA 2010—

(a) so much of the straddling period as falls before the relevant date, and
so much of that period as falls on or after that date, are treated as
separate accounting periods, and

(b) any amounts brought into account for the purposes of calculating for
5corporation 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.

(8) Subsection (9) applies if—

(a) an election is made by a company under section 357A of CTA 2010, and

(b) 10the notice under section 357G of that Act specifies the accounting
period of the company which ends on 30 June 2016, or any earlier
accounting period, as being the first accounting period for which the
election is to have effect.

(9) Nothing in section 357GA(5) prevents the election having effect in relation to
15the accounting period of the company which ends on 30 June 2016 or any
subsequent accounting period.

(10) Subsection (11) applies to an amount of relevant IP income of a company if—

(a) the company is not a new entrant,

(b) the income is properly attributable to a new qualifying IP right which
20was assigned to the company, or in respect of which an exclusive
licence was granted to the company, during the period beginning on 2
January 2016 and ending on 1 July 2016, and

(c) the income accrued to the company during the period beginning on 1
July 2016 and ending on 1 January 2017.

(11) 25The income is to be treated for the purposes of Part 8A of CTA 2010 as being
properly attributable to an old qualifying IP right.

(12) Expressions used in subsections (10) and (11) and in Part 8A of CTA 2010 have
the meaning they have in that Part.

Miscellaneous

61 30Power to make regulations about the taxation of securitisation companies

(1) Section 624 of CTA 2010 (power to make regulations about the application of
the Corporation Tax Acts in relation to securitisation companies) is amended
in accordance with subsections (2) to (4).

(2) In subsection (1), for “Corporation Tax Acts” substitute “Taxes Acts”.

(3) 35In subsection (2), for “Corporation Tax Acts” substitute “Taxes Acts”.

(4) In subsection (9), after “section” insert “—

• “the Taxes Acts” has the meaning given by section 118(1) of TMA
  1970, and”.

(5) In section 625 of CTA 2010 (regulations: supplementary provision) in
40subsection (3) (power to include retrospective provision) after “may” insert “,
insofar as they concern the application of the Corporation Tax Acts in relation
to a securitisation company,”.

62 Hybrid and other mismatches

Schedule 10 contains provision that counteracts, for corporation tax purposes,
hybrid and other mismatches that would otherwise arise.

63 Insurance companies carrying on long-term business

(1) 5Part 2 of FA 2012 (insurance companies carrying on long-term business) is
amended as follows.

(2) In section 73 (the I-E basis), in step 4—

(a) for “(but not below nil) by the” substitute “by the relievable”, and

(b) at the end of the step insert—

10“In this step, “the relievable amount” of a non-trading deficit means so
much of the deficit as does not exceed the total of—

(a) the amount given by the calculation required by step 1,

(b) the amount given by the calculation required by step 2, and

(c) any amount of an I-E receipt under section 92 brought into
15account under step 3.”

(3) In section 88 (loan relationships, derivative contracts and intangible fixed
assets), in subsection (6), for “excess—” and paragraphs (a) and (b), substitute
“excess is treated for the purposes of section 76 as a deemed BLAGAB
management expense for that period.”

(4) 20In section 126 (restrictions in respect of non-trading deficit), in subsection (2),
for “would have under section 388” to the end substitute “has, calculated by
reference only to credits and debits—

(a) arising in respect of such of the company’s loan relationships as are
debtor relationships (see section 302(6) of CTA 2009), and

(b) 25referable, in accordance with Chapter 4, to the company’s basic life
assurance and general annuity business.”

(5) The amendments made by this section have effect in relation to accounting
periods beginning on or after the day on which this Act is passed.

64 Taking over payment obligations as lessee of plant or machinery

(1) 30In Part 20 of CTA 2010 (tax avoidance involving leasing plant or machinery),
after section 894 insert—

““CHAPTER 3 Consideration for taking over payment obligations as lessee treated as
income

894A Consideration for taking over payment obligations as lessee treated as
35income

(1) This section applies where under any arrangements—

(a) a company chargeable to corporation tax (C) agrees to take over
obligations of another person (D) as lessee under a lease of plant
or machinery,

(b) as a result of that agreement C, or a person connected with C,
becomes entitled to income deductions (whether deductions in
calculating income or from total profits), and

(c) a payment is payable to C, or a person connected with C, by way
5of consideration for that agreement.

(2) The payment is treated for the purposes of corporation tax as income
received by C in the period of account in which C takes over the
obligations mentioned in subsection (1)(a).

(3) Subsection (2) does not apply if and to the extent that the payment is
10(apart from this section)—

(a) charged to tax on C, or a person connected with C, as an amount
of income,

(b) brought into account in calculating for tax purposes any income
of C or a person connected with C, or

(c) 15brought into account for the purposes of any provision of CAA
2001 as a disposal receipt, or proceeds from a balancing event or
disposal event, of C or a person connected with C.

(4) It does not matter how C takes over the obligations of D (whether by
assignment, novation, variation or replacement of the contract, by
20operation of law or otherwise).

(5) In this section—

• “arrangements” include any scheme, arrangement,
  understanding, transaction or series of transactions (whether or
  not legally enforceable);

• 25 “lease of plant or machinery” means any kind of agreement or
  arrangement under which sums are paid for the use of, or
  otherwise in respect of, plant or machinery;

• “payment” includes the provision of any benefit, the assumption
  of any liability or the transfer of money or money’s worth (and
  30“payable” is to be construed accordingly);

• “payment by way of consideration” means any payment made,
  directly or indirectly, in consequence of or otherwise in
  connection with, the agreement mentioned in subsection (1)(a),
  where it is reasonable to assume the agreement would not have
  35been made unless the arrangements included provision for the
  payment.

(6) Any priority rule (other than section 212(1) of FA 2013 (general anti-
abuse rule to have priority over other rules)) has effect subject to this
section, despite the terms of the priority rule.

(7) 40For that purpose “priority rule” is a rule (however expressed) to the
effect that particular provisions have effect to the exclusion of, or
otherwise in priority to, anything else.

(8) Examples of priority rules are section 464 of CTA 2009 (priority of loan
relationships rules) and section 6(1) of TIOPA 2010 (effect to be given to
45double taxation arrangements despite anything in any enactment).”

(2) In Chapter 6 of Part 13 of ITA 2007 (avoidance involving leases of plant or

machinery), after section 809ZF insert—

“809ZG Consideration for taking over payment obligations as lessee treated
as income

(1) This section applies where under any arrangements—

(a) 5a person within the charge to income tax (P) agrees to take over
obligations of another person (Q) as lessee under a lease of plant
or machinery,

(b) as a result of that agreement P, or a person connected with P,
becomes entitled to income deductions (whether deductions in
10calculating income or from total profits), and

(c) a payment is payable to P, or a person connected with P, by way
of consideration for that agreement.

(2) The payment is treated for the purposes of income tax as income
received by P in the tax year in which P takes over the obligations
15mentioned in subsection (1)(a).

(3) Subsection (2) does not apply if and to the extent that the consideration
is (apart from this section)—

(a) charged to tax on P, or a person connected with P, as an amount
of income,

(b) 20brought into account in calculating for tax purposes any income
of P or a person connected with P, or

(c) brought into account for the purposes of any provision of CAA
2001 as a disposal receipt, or proceeds from a balancing event or
disposal event, of P or a person connected with P.

(4) 25It does not matter how P takes over the obligations of Q (whether by
assignment, novation, variation or replacement of the contract, by
operation of law or otherwise).

(5) In this section—

• “arrangements” include any scheme, arrangement,
  30understanding, transaction or series of transactions (whether or
  not legally enforceable);

• “lease of plant or machinery” means any kind of agreement or
  arrangement under which sums are paid for the use of, or
  otherwise in respect of, plant or machinery;

• 35“payment” includes the provision of any benefit, the assumption
  of any liability or the transfer of money or money’s worth (and
  “payable” is to be construed accordingly),;

• “payment by way of consideration” includes a payment made,
  directly or indirectly, in consequence of or otherwise in
  40connection with, the agreement mentioned in subsection (1)(a),
  where it is reasonable to assume the agreement would not have
  been made unless the arrangements included provision for the
  payment.

(6) Any priority rule (other than section 212(1) of FA 2013 (general anti-
45abuse rule to have priority over other rules)) has effect subject to this
section, despite the terms of the priority rule.