Finance Bill (HC Bill 47)

(a) Part 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
5where—

(a) shares 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
10section 1042 of CTA 2009).

(6) In 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
152009 (see section 1124 of that Act).

“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
20section.

(8) Head 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
25of CTA 2009, and

(b) the 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
30obtained by the company under Part 15B of CTA 2009, and

(b) the amount of that additional deduction.

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

Marketing assets return figure

357BK Marketing assets return figure

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

(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),

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

357BKA 5Notional 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) The “appropriate percentage” is the proportion of that income which
10the 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
marketing asset” in relation to a relevant IP income sub-stream if the
15sub-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
section, assume that—

(a) 20the 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) the company will have the same rights in relation to the relevant
25marketing 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
the accounting period concerned,

(f) 30the 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-
stream will arise from anything done by the company that
35involves 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) the first day of the accounting period concerned, or

(b) 40if 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) Article 9 of the OECD Model Tax Convention, and

(b) 45the 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.

357BKB 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 357BKA.

R&D fraction

357BL 25 Introduction

(1) Sections 357BLA to 357BLH 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 357BLA to 357BLH, 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).

357BLA The R&D fraction

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

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

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

(1) In section 357BLA, 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) If an election made by the company under section 18A of CTA 2009
15(election for exemption for profits or losses of company’s foreign
permanent establishments) applies to the relevant period, expenditure
incurred by the company during the period which meets conditions A
and B—

(a) is not “qualifying expenditure on relevant R&D undertaken in-
20house”, but

(b) is “qualifying expenditure on relevant R&D sub-contracted to
connected persons”,

so far as it is expenditure brought into account in calculating a relevant
profits amount, or a relevant losses amount, aggregated at section
2518A(4)(a) or (b) of CTA 2009 in calculating the company’s foreign
permanent establishments amount for the period.

(5) In this section and sections 357BLC and 357BLD, “relevant research and
development” means research and development (within the meaning
of section 1138) which—

(a) 30in 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,

(b) in a case where the sub-stream is a product sub-stream, relates
to a qualifying IP right granted in respect of any item—

(i) 35to which income in the sub-stream is attributable, or

(ii) which is incorporated in an item to which income in the
sub-stream is attributable, or

(c) in a case where the sub-stream is a process sub-stream, relates
to a qualifying IP right granted in respect of any process—

(i) 40to which income in the sub-stream is attributable, or

(ii) which is incorporated in a process to which income in
the sub-stream is attributable.

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

(a) 45it 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) it is undertaken for the purpose of developing any item or
process incorporating the invention.

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

(a) 5section 1123 (meaning of “staffing costs”),

(b) section 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
10attributable to relevant research and development),

(e) sections 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
15development), and

(g) section 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
20read as a reference to relevant research and development within the
meaning given by subsection (5).

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

(1) In section 357BLA, the company’s “qualifying expenditure on relevant
25R&D sub-contracted to unconnected persons” means the expenditure
incurred by the company during the relevant period in making
payments within subsection (2).

(2) A payment is within this subsection if—

(a) it is made to a person in respect of relevant research and
30development contracted out by the company to the person, and

(b) the company and the person are not connected (within the
meaning given by section 1122).

(3) If an election made by the company under section 18A of CTA 2009
(election for exemption for profits or losses of company’s foreign
35permanent establishments) applies to the relevant period, expenditure
incurred by the company during the period in making payments within
subsection (2)—

(a) is not “qualifying expenditure on relevant R&D sub-contracted
to unconnected persons”, but

(b) 40is “qualifying expenditure on relevant R&D sub-contracted to
connected persons”,

so far as it is expenditure brought into account in calculating a relevant
profits amount, or a relevant losses amount, aggregated at section
18A(4)(a) or (b) of CTA 2009 in calculating the company’s foreign
45permanent establishments amount for the period.

(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.

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

(1) In section 357BLA, the company’s “qualifying expenditure on relevant
R&D sub-contracted to connected persons” means the total of—

(a) 5any expenditure which is “qualifying expenditure on relevant
R&D sub-contracted to connected persons” as a result of section
357BLB(4) or 357BLC(3) (certain expenditure attributed to
company’s foreign permanent establishments), and

(b) the expenditure incurred by the company during the relevant
10period in making payments within subsection (2).

(2) A payment is within this subsection if—

(a) it is made to a person in respect of relevant research and
development contracted out by the company to the person, and

(b) the company and the person are connected (within the meaning
15given by section 1122).

(3) 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.

357BLE 20 Qualifying expenditure on acquisition of relevant qualifying IP
rights

(1) In section 357BLA, the company’s “qualifying expenditure on the
acquisition of relevant qualifying IP rights” means the expenditure
incurred by the company in making during the relevant period
25payments within any of subsections (2), (3) and (4).

(2) A payment is within this subsection if it is made to a person in respect
of the assignment by that person to the company of a relevant
qualifying IP right.

(3) A payment is within this subsection if it is made to a person in respect
30of the grant or transfer by that person to the company of an exclusive
licence in respect of a relevant qualifying IP right.

(4) A payment is within this subsection if—

(a) it is made to a person in respect of the disclosure by that person
to the company of any item or process, and

(b) 35the company applies for and is granted a relevant qualifying IP
right in respect of that item or process (or any item or process
derived from it).

(5) Where the company has incurred expenditure in making a series of
payments to a person in respect of a single assignment, grant, transfer
40or disclosure, each of the payments in the series is to be treated for the
purposes of this section as having been made on the date on which the
first payment in the series was made.

(6) “Relevant qualifying IP right” means—

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

(b) in a case where the sub-stream is a product sub-stream, a
qualifying IP right granted in respect of an item—

(i) to which income in the sub-stream is attributable, or

(ii) which is incorporated in an item to which income in the
5sub-stream is attributable, or

(c) in a case where the sub-stream is a process sub-stream, a
qualifying IP right granted in respect of a process—

(i) to which income in the sub-stream is attributable, or

(ii) which is incorporated in a process to which income in
10the sub-stream is attributable.

357BLF Meaning of the “relevant period” etc

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

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

(a) 15ends with the last day of the accounting period, and

(b) begins 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) 20the accounting period begins before 1 July 2021, and

(b) the 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) 25If the last day of the accounting period is, or is after, 1 July 2036 the
“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 357BLB to 357BLD as incurred during the relevant period if
(and only if) the expenditure is allowable as a deduction in calculating
30for corporation tax purposes the profits of the trade for an accounting
period which falls, in whole or in part, within the relevant period.

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

(1) This section applies if—

(a) 35the accounting period begins before 1 July 2021 and the
company is a new entrant (so that subsection (3) of section
357BLF applies), and

(b) the company has insufficient information about its expenditure
in the period which begins with 1 July 2013 and ends with 30
40June 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 357BLF is to have effect as if in
45subsection (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 357BL to 357BLE are to have effect as if—

(a) any reference in those sections to the relevant period were to the
5period of three years ending with the last day of the accounting
period,

(b) in section 357BLB, for subsections (5) and (6) there were
substituted—

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

(c) in section 357BLE—

(i) in each of subsections (2), (3) and (4) the word “relevant”
15were omitted, and

(ii) subsection (6) were omitted.

357BLH R&D fraction: increase for exceptional circumstances

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

(a) 20it 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
which is equal to the difference between the R&D fraction (before the
25increase) 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
research and development undertaken at any time—

(a) 30by 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) The notice must be given on or before the last day on which an
35amendment 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
  357BLE, and

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

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

Profits arising before grant of right

357BM 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
5357BB(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) 10The 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) 15The 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 had
20been 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) 25the 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) 30that it is an accounting period for which an election made by the
company under section 357A(1) 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) 35In 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, and

(b) the day on which—

(i) the application for the grant of the right was filed, or

(ii) 40in 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 treated for the
45purposes 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 subsection (1)(b) before
the right was granted, the company is to be treated for the purposes of
5section 357A as if it were a qualifying company for that accounting
period.

Small claims treatment

357BN Small claims treatment

(1) This section applies where—

(a) a company carries on only one trade during an accounting
10period,

(b) section 357BF applies for the purposes of determining the
relevant IP profits of the trade for the accounting period, and

(c) the qualifying residual profit of the trade for the accounting
period does not exceed whichever is the greater of—

(i) 15£1,000,000, and

(ii) the relevant maximum for the accounting period.

(2) The company may make any of the following elections for the
accounting period—

(a) a notional royalty election (see section 357BNA),

(b) 20a small claims figure election (see section 357BNB), and

(c) a global streaming election (see section 357BNC).

This is subject to subsections (3) and (4).

(3) The company may not make a notional royalty election, a small claims
figure election or a global streaming election for the accounting period
25if—

(a) the qualifying residual profit of the trade for the accounting
period exceeds £1,000,000,

(b) section 357BF applied for the purposes of determining the
relevant IP profits of the trade for any previous accounting
30period beginning within the relevant 4-year period, and

(c) the company did not make a notional royalty election, a small
claims figure election or (as the case may be) a global streaming
election for that previous accounting period.

(4) The company may not make a small claims figure election for the
35accounting period if—

(a) the qualifying residual profit of the trade for the accounting
period exceeds £1,000,000,

(b) section 357C or 357DA applied for the purposes of determining
the relevant IP profits of the trade for any previous accounting
40period beginning within the relevant 4-year period, and

(c) the company did not make an election under section 357CL for
small claims treatment for that previous accounting period.

(5) In subsections (3) and (4) “the relevant 4-year period” means the period
of 4 years ending with the beginning of the accounting period
45mentioned in subsection (1)(a).