Finance Bill (HC Bill 47)

(7) Chapters 2B, 3 and 4 make provision for determining the
relevant IP profits or relevant IP losses of a trade of a company
for an accounting period in various cases where—

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

(b) 5the company is not a new entrant.”, and”

(b) after subsection (10) insert—

“(11) A company is a “new entrant” for the purposes of this Part if—

(a) the first accounting period for which the company’s
election (or most recent election) under subsection (1)
10has effect begins on or after 1 July 2016, or

(b) the company elects to be treated as a new entrant for the
purposes of this Part.””

(3) After section 357BE insert—

““CHAPTER 2A 15Relevant IP profits: cases mentioned in section 357A(6)

Steps for calculating relevant IP profits of a trade

357BF Relevant IP profits

(1) This section applies for the purposes of determining the relevant IP
profits of a trade of a company for an accounting period in a case
20where—

(a) the accounting period begins on or after 1 July 2021, or

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

(2) To determine the relevant IP profits—

Step 1

25Take 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 357BG), and divide them
into two “streams”, amounts of relevant IP income (see sections 357BH
to 357BHC) and amounts that are not amounts of relevant IP income.

30The stream consisting of relevant IP income is “the relevant IP income
stream”; the other stream is the “standard income stream”.

Step 2

Divide the relevant IP income stream into “relevant IP income sub-
streams” so that each sub-stream is—

• 35a sub-stream consisting of income properly attributable to a
  particular qualifying IP right (an “individual IP right sub-
  stream”),

• a sub-stream consisting of income properly attributable to a
  particular kind of IP item (a “product sub-stream”), or

• 40a sub-stream consisting of income properly attributable to a
  particular kind of IP process (a “process sub-stream”).

See subsection (5) for the meaning of “IP item” and “IP process” and see
subsections (6) and (7) for further provision in connection with product
sub-streams and process sub-streams.

45Step 3

Take any amounts which are brought into account as debits in
calculating the profits of the trade for the accounting period, other than
any excluded debits (see section 357BI), and allocate them on a just and

reasonable basis between the standard income stream and each of the
relevant IP income sub-streams.

Step 4

Deduct from each relevant IP income sub-stream—

• 5the amounts allocated to the sub-stream at Step 3, and

• the routine return figure for the sub-stream (see section 357BJ).

But see section 357BIA (which provides that certain amounts allocated
to a relevant IP income sub-stream at Step 3 are not to be deducted from
the sub-stream at this Step).

10Step 5

Deduct from each relevant IP income sub-stream which is greater than
nil following Step 4 the marketing assets return figure for the sub-
stream (see section 357BK).

Step 6

15Multiply the amount of each relevant IP income sub-stream (following
the deductions required at Steps 4 and 5) by the R&D fraction for the
sub-stream (see section 357BL).

Step 7

Add together the amounts of the relevant IP income sub-streams
20(following Step 6).

Step 8

If the company has made an election under section 357BM (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
25Step 7 any amount determined in accordance with subsection (3) of that
section.

(3) If the amount given by subsection (2) is greater than nil, that amount is
the relevant IP profits of the trade for the accounting period.

(4) If the amount given by subsection (2) is less than nil, that amount is the
30relevant IP losses of the trade for the accounting period (see Chapter 5).

(5) In this section—

• “IP item” means—

  (a)

  an item in respect of which a qualifying IP right held by
  the company has been granted, or

  (b)

  35an item which incorporates one or more items within
  paragraph (a);

• “IP process” means—

  (a)

  a process in respect of which a qualifying IP right held
  by the company has been granted, or

  (b)

  40a process which incorporates one or more processes
  within paragraph (a).

(6) For the purposes of this section two or more IP items, or two or more IP
processes, may be treated as being of a particular kind if they are
intended to be, or are capable of being, used for the same or
45substantially the same purposes.

(7) Income may be allocated at Step 2 of subsection (2) to a product sub-
stream or process sub-stream only if—

(a) it would not be reasonably practicable to apportion the income
between individual IP right sub-streams, or

(b) 5it would be reasonably practicable to do that but doing so
would result in it not being reasonably practicable to apply any
of the remaining steps in subsection (2).

(8) 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
10which the company holds an exclusive licence.

Finance income

357BG Finance income

(1) For the purposes of this Part “finance income”, in relation to a trade of
a company, means—

(a) 15any credits which are treated as receipts of the trade by virtue
of—

(i) section 297 of CTA 2009 (credits in respect of loan
relationships), or

(ii) section 573 of CTA 2009 (credits in respect of derivative
20contracts),

(b) any amount which in accordance with generally accepted
accounting practice falls to be recognised as arising from a
financial asset, and

(c) any return, in relation to an amount, which—

(i) 25is produced for the company by an arrangement to
which it is a party, and

(ii) is economically equivalent to interest.

(2) In subsection (1)—

• “economically equivalent to interest” is to be construed in
  30accordance with section 486B(2) and (3) of CTA 2009, and

• “financial asset” means a financial asset as defined for the
  purposes of generally accepted accounting practice.

(3) For the purposes of subsection (1)(c), the amount of a return is the
amount which by virtue of the return would, in calculating the
35company’s chargeable profits, be treated under section 486B of CTA
2009 (disguised interest to be regarded as profit from loan relationship)
as profit arising to the company from a loan relationship.

But, in calculating that profit for the purposes of this subsection,
sections 486B(7) and 486C to 486E of that Act are to be ignored.

Relevant IP income

357BH 40 Relevant IP income

(1) For the purposes of this Part “relevant IP income” means income falling
within any of the Heads set out in—

(a) subsection (2) (sales income),

(b) 45subsection (6) (licence fees),

(c) subsection (7) (proceeds of sale etc),

(d) subsection (8) (damages for infringement), and

(e) subsection (9) (other compensation).

This is subject to section 357BHB (excluded income).

(2)
5Head 1 is income arising from the sale by the company of any of the
following items—

(a) items in respect of which a qualifying IP right held by the
company has been granted (“qualifying items”);

(b) items incorporating one or more qualifying items;

(c) 10items that are wholly or mainly designed to be incorporated
into items within paragraph (a) or (b).

(3) For the purposes of this Part an item and its packaging are not to be
treated as a single item, unless the packaging performs a function that
is essential for the use of the item for the purposes for which it is
15intended to be used.

(4) In subsection (3) “packaging”, in relation to an item, means any form of
container or other packaging used for the containment, protection,
handling, delivery or presentation of the item, including by way of
attaching the item to, or winding the item round, some other article.

(5) 20In a case where a qualifying item and an item that is designed to
incorporate that item (“the parent item”) are sold together as, or as part
of, a single unit for a single price, the reference in subsection (2)(b) to an
item incorporating a qualifying item includes a reference to the parent
item.

(6) 25Head 2 is income consisting of any licence fee or royalty which the
company receives under an agreement granting another person any of
the following rights only—

(a) a right in respect of any qualifying IP right held by the
company,

(b) 30any other right in respect of a qualifying item or process, and

(c) in the case of an agreement granting any right within paragraph
(a) or (b), a right granted for the same purposes as those for
which that right was granted.

In this subsection “qualifying process” means a process in respect of
35which a qualifying IP right held by the company has been granted.

(7) Head 3 is any income arising from the sale or other disposal of a
qualifying IP right or an exclusive licence in respect of such a right.

(8) Head 4 is any amount received by the company in respect of an
infringement, or alleged infringement, of a qualifying IP right held by
40the company at the time of the infringement or alleged infringement.

(9) Head 5 is any amount of damages, proceeds of insurance or other
compensation, other than an amount in respect of an infringement or
alleged infringement of a qualifying IP right, which is received by the
company in respect of an event and—

(a) 45is paid in respect of any items that fell within subsection (2) at
the time of that event, or

(b) represents a loss of income which would, if received by the
company at the time of that event, have been relevant IP
income.

(10) But income is not relevant IP income by virtue of subsection (8) or (9)
5unless the event in respect of which the income is received, or any part
of that event, occurred at a time when—

(a) the company was a qualifying company, and

(b) an election under section 357A(1) had effect in relation to it.

(11) In a case where the whole of that event does not occur at such a time,
10subsection (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 just 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
15which the company holds an exclusive licence.

357BHA Notional royalty

(1) This section applies where—

(a) a company holds a qualifying IP right or an exclusive licence in
respect of a qualifying IP right,

(b) 20the qualifying IP right falls within paragraph (a), (b) or (c) of
section 357BB(1), and

(c) the income of a trade of the company for an accounting period
includes income (“IP-derived income”) which—

(i) arises from things done by the company that involve the
25exploitation by the company of the qualifying IP right,
and

(ii) is not relevant IP income, finance income or excluded
income.

(2) The company may elect that the appropriate percentage of the IP-
30derived income is to be treated for the purposes of this Part as if it were
relevant IP income.

(3) The “appropriate percentage” is the proportion of the IP-derived
income which the company would pay another person (“P”) for the
right to exploit the qualifying IP right in the accounting period
35concerned if the company were not otherwise able to exploit it.

(4) 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, will
40have the right to exploit the qualifying IP right to the exclusion
of any other person (including P),

(c) the company will have the same rights in relation to the
qualifying IP right as it actually has,

(d) the right to exploit the qualifying IP right is conferred on the
45relevant day,

(e) the appropriate percentage is determined at the beginning of
the 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 qualifying IP right, and

(g) no income other than IP-derived income will arise from
5anything done by the company that involves the exploitation by
the company of the qualifying IP right.

(5) In subsection (4)(d) “the relevant day” means—

(a) the first day of the accounting period concerned, or

(b) if later, the day on which the company first began to hold the
10qualifying IP right or licence.

(6) In determining the appropriate percentage, the company must act in
accordance with—

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

(b) the OECD transfer pricing guidelines.

(7) 15In this section “excluded income” means any income falling within
either of the Heads in section 357BHB.

357BHB Excluded income

(1) For the purposes of this Part income falling within either of the Heads
set out in the following subsections is not relevant IP income—

(a) 20subsection (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.

In this subsection “oil extraction activities” and “oil rights” have the
same meaning as in Part 8 (see sections 272 and 273).

(3) 25Head 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) is a licence in respect of an item or process, but

(b) is not an exclusive licence in respect of a qualifying IP right.

(4) 30In a case where—

(a) a company holds an exclusive licence in respect of a qualifying
IP right, and

(b) the licence also confers on the company (or on the company and
persons authorised by it) any right in respect of the invention
35otherwise 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 any such
rights, and the other a non-exclusive licence conferring those rights.

357BHC Mixed sources of income

(1) 40This section applies to any income that—

(a) is mixed income, or

(b) is paid under a mixed agreement.

(2) “Mixed income” means the proceeds of sale where an item falling
within subsection (2) of section 357BH and an item not falling within

that subsection are sold together as, or as part of, a single unit for a
single price.

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

(a) one or more of the matters in paragraphs (a) to (c) of subsection
5(4), and

(b) one or more of the matters in paragraphs (d) to (g) of that
subsection.

(4) The matters are—

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

(b) 10the 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) the sale of any other item,

(e) the grant of any other right,

(f) 15any other sale or disposal,

(g) the provision of any services.

(5) So much of the income as on a just and reasonable apportionment is
properly attributable to—

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

(b) 20the 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),

is 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
25properly 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
as relevant IP income.

Excluded debits etc

357BI 30Excluded debits

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

(a) the amount of any debits which are treated as expenses of a
trade by virtue of—

(i) section 297 of CTA 2009 (debits in respect of loan
35relationships), or

(ii) section 573 of CTA 2009 (debits in respect of derivative
contracts),

(b) the amount of any additional deduction for an accounting
period obtained by a company under Part 13 of CTA 2009 for
40expenditure 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
respect of qualifying expenditure on a television programme,

(d) the amount of any additional deduction for an accounting
45period 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
period obtained by a company under Part 15C of CTA 2009 in
respect of qualifying expenditure on a theatrical production.

357BIA Certain amounts not to be deducted from sub-streams at Step 4 of
5section 357BF

(1) This section applies where a company enters into an arrangement with
a person under which—

(a) the person assigns to the company a qualifying IP right or
grants or transfers to the company an exclusive licence in
10respect of a qualifying IP right, and

(b) the company makes to the person an income-related payment.

(2) A payment is an “income-related payment” for the purposes of
subsection (1) if—

(a) the obligation to make the payment arises under the
15arrangement by reason of the amount of income the company
has accrued which is properly attributable to the right or
licence, or

(b) the amount of the payment is determined under the
arrangement by reference to the amount of income the company
20has accrued which is so attributable.

(3) If the amount of the income-related payment is allocated to a relevant
IP income sub-stream at Step 3 of section 357BF(2), the amount is not to
be deducted from the sub-stream at Step 4 of section 357BF(2) unless
the payment will not affect the R&D fraction for the sub-stream.”

25Routine return figure

357BJ Routine return figure

(1) This section applies for the purpose of calculating the routine return
figure 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
30company for an accounting period.

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

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

(b) 35have been allocated to the sub-stream at Step 3 in section
357BF(2).

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

(3) In a case where—

(a) 40the company (“C”) is a member of a group,

(b) another member of the group has incurred 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
45for 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
Step 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-
5stream.

(4) Where expenses have been incurred by any member of the group on
behalf 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
10behalf of C.

357BJA Routine deductions

(1) For the purposes of this Part, “routine deductions” means deductions
falling within any of the Heads set out in—

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

(b) 15subsection (3) (costs of premises),

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

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

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

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

20This is subject to section 357BJB (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
premises occupied by the company.

(4) 25Head 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 plant
or machinery used by the company.

(6) 30Head 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) insurance services, and

(ii) 35valuation 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) Head 6 is any deductions made by the company in respect of any of the
40following services—

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

(b) telecommunications services;

(c) computing services, including computer software;

(d) postal services;

(e) 45the 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 13
  of CTA 2009 (see section 1128 of that Act),

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

  (a)

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

  (b)

  any proceedings relating to the enforcement of any such
  right,

• 10“premises” includes any land,

• “telecommunications service” means any service that consists in
  the 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

• 15“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 electromagnetic energy.

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

357BJB 20Deductions that are not routine deductions

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

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

(b) subsection (3) (R&D expenses),

(c) 25subsection (4) (capital allowances for R&D or patents),

(d) subsection (5) (R&D-related employee share acquisitions),

(e) subsection (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
30of—

(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) 35Head 2 is—

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

(i) for which an additional deduction for the accounting
period is obtained by the company under Part 13 of CTA
402009, or

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

(b) where the company obtains an additional deduction as
45mentioned in paragraph (a)(i), the amount of that additional
deduction.

(4) Head 3 is any allowances under—