Clause 1311: Apportionment to different periods     136

Clause 1312: Abbreviated references to Acts     136

Clause 1313: Activities in UK sector of continental shelf     137

Clause 1314: Meaning of “caravan”     137

Clause 1315: Claims and elections     137

Clause 1316: Meaning of “connected” persons and “control”     137

Clause 1317: Meaning of “farming” and related expressions     137

Clause 1318: Meaning of grossing up     139

Clause 1319: Other definitions     139

Clause 1320: Interpretation: Scotland     139

Clause 1321: Interpretation: Northern Ireland     140

Clause 1322: Minor and consequential amendments     140

Clause 1323: Power to make consequential provision     140

Clause 1324: Power to undo changes     140

Clause 1325: Transitional provisions and savings     141

Clause 1326: Repeals and revocations     141

Clause 1327: Index of defined expressions     141

Clause 1328: Extent     141

Clause 1329: Commencement     141

Clause 1330: Short title     141

Schedule 1: Minor and consequential amendments     141

Part 1: Income and Corporation Taxes Act 1988     141

Section 15 of ICTA     142

Section 42 of ICTA     142

Section 74 of ICTA     142

Sections 76ZA to 76ZO of ICTA     143

Section 84A of ICTA     144

Section 86 of ICTA     144

Section 89 of ICTA     144

Section 92 of ICTA     144

Section 101 of ICTA     144

Section 116(4) of ICTA     145

Section 119(2) of ICTA     145

Section 209(6A) of ICTA     145

Section 337A(2)(b) of ICTA     145

Section 396 of ICTA     145

Section 399 of ICTA     146

Section 431 of ICTA     146

Section 584 of ICTA     146

Sections 586 and 587 of ICTA     146

Section 695 of ICTA     146

Section 779 of ICTA     146

Section 781 of ICTA     146

Section 782 of ICTA     147

Section 785 of ICTA     147

Section 798A of ICTA     147

Sections 807B to 807G of ICTA     147

Section 817 of ICTA     147

Section 826(5A) of ICTA     148

Section 834(1) of ICTA     148

Section 834A of ICTA     148

Section 842 of ICTA     148

Section 843C of ICTA     148

Paragraph 5 of Schedule 30 to ICTA     149

Part 2: Other enactments     149

Section 12AE of TMA     149

Section 19(2) of TMA     149

Section 31(3) of TMA     149

Section 42(7) of TMA     149

Section 109A of TMA     149

Section 91 of IHTA     149

Paragraph 3(1) of Schedule 12 to FA 1988     149

Section 59 of TCGA     150

Sections 116A and 116B of TCGA     150

Sections 151E to 151G of TCGA     150

Sections 156ZA and 156ZB of TCGA     150

Section 158 of TCGA     150

Section 286A of TCGA     151

Section 126 of FA 1995     151

Section 127 of FA 1995     151

Paragraph 84 of Schedule 18 to FA 1998     151

Section 63 of FA 1999     151

Section 46 of FA 2000     152

Sections 108, 112, 115, 263 265, 559 and 577 of CAA     152

Paragraph 141 of Schedule 29 to FA 2002     152

Paragraph 142 of Schedule 29 to FA 2002     153

Paragraph 143 of Schedule 29 to FA 2002     153

Sections 28 and 44 of the Energy Act 2004     154

Section 48 of ITTOIA     154

Section 49 of ITTOIA     154

Sections 79, 79A and 80 of ITTOIA     154

Sections 155 of ITTOIA     154

Sections 175 to 184 of ITTOIA     155

Section 303 of ITTOIA     155

Section 860 of ITTOIA     155

Section 749A of ITTOIA     155

Sections 861 and 862 of ITTOIA     155

Section 49(2) of FA 2005     155

Sections 46 and 47 of FA 2006     155

Section 121 of FA 2006     155

Paragraph 28 of Schedule 10 to FA 2006     156

Section 835A of ITA     156

Schedule 2: Transitionals and savings     156

Part 1: General provisions     156

Part 2: Changes in the law     156

Part 3: Charge to corporation tax on income     156

Part 5: Company residence: exceptions to section 14     157

Part 6: Trading income     157

Part 7: Property income     157

Part 8: Loan relationships     157

Part 10: Derivative contracts     158

Part 14: Other relief for employee share acquisitions     164

Part 17: Film production     164

Part 19: Unremittable income     164

Part 21: Other provisions     165

Schedule 3: Repeals and revocations     166

Schedule 4: Index of defined expressions     166

Part 9: Intellectual property: know-how and patents

Overview

2289.     This Part rewrites some special provisions in Chapter 1 of Part 13 of ICTA which charge to corporation tax certain receipts from intellectual property. The corresponding rules for income tax are in Chapter 2 of Part 5 of ITTOIA.

2290.     This Part applies to capital sums arising from the disposal of know-how in certain circumstances and capital sums from the sale of patent rights.

2291.     This Part does not rewrite those parts of the provisions in Chapter 1 of Part 13 of ICTA which apply to trades (such as section 531(1) to (3) of ICTA). Such parts of the source provisions are rewritten in Chapter 13 of Part 3 of this Bill.

2292.     This Part does not apply to amounts arising from intangible fixed assets within Part 8 of this Bill. The rules in Chapter 16 of Part 8 define which assets and amounts come within Part 8. If an asset is within Part 8 that Part gives all the tax rules that apply.

2293.     The rules in this Part largely mirror the corresponding rules for income tax and bring the corporation tax provisions back into line with their income tax counterparts. Where there are differences between the two they derive mainly from the way in which the two taxes are charged and the possibility that accounting periods, unlike tax years, will not be of 12 months duration.

Chapter 1: Introduction

Clause 907: Overview of Part

2294.     This clause introduces the charges applied by the Part. It is new.

2295.     Subsections (4) and (5) alert readers to the primacy of the intangible fixed assets rules in Part 8 of the Bill. Very broadly, the rules in Part 8 apply only to intangible fixed assets that were created or acquired on or after 1 April 2002. Otherwise the rules in this Part continue to apply.

2296.     Royalties from intellectual property are an exception to this as they automatically fall within Part 8 if they are recognised for accounting purposes on or after 1 April 2002. Most income from intellectual property is in the form of royalties. So specific rules in the source legislation applying to royalties are obsolete in a way that rules applying to other (mainly capital) amounts are not. To the extent that, exceptionally, other income receipts from intellectual property not within Part 8 may arise (such as casual profits from the exploitation of intellectual property charged in the source legislation under Case V or VI of Schedule D) those receipts will be subject to the “sweep-up” charge in clause 979 of this Bill.

2297.     For this reason there is no need, in the corporation tax context, for rules equivalent to those in sections 579 to 582 of ITTOIA (which apply to royalties and other income from intellectual property).

Chapter 2: Disposals of know-how

Clause 908: Charge to tax on profits from disposals of know-how

2298.     The clauses in Chapter 2 deal with consideration received for the disposal of know-how. This clause applies the charge to corporation tax on income to the proceeds of certain disposals of know-how. It is based on section 531 of ICTA. The corresponding rule for income tax is in section 583 of ITTOIA.

2299.     Under the source legislation, income from disposals of know-how is charged to tax under Schedule D Case VI of ICTA.

2300.     Subsection (1) applies the charge to corporation tax on income. Subsection (1)(b) is based on section 531(8) of ICTA but the words “whether absolute or qualified” are omitted since they are superfluous.

2301.     Subsection (5) restores a definition of “mineral deposits” that applied before CAA was enacted. This change reproduces Change 51 in ITTOIA and so brings the income and corporation tax codes back into line. See Change 41 in Annex 1.

Clause 909: Exceptions to charge under section 908

2302.     This clause sets out the exceptions to the charge under clause 908. It is based on section 531 of ICTA. The corresponding rule for income tax is in section 584 of ITTOIA.

Clause 910: Profits charged under section 908

2303.     This clause sets out the amount charged to tax under clause 908. It is based on section 531 of ICTA. The corresponding rule for income tax is in section 585 of ITTOIA.

2304.     Subsection (3) is new and gives a signpost to the clause which deals with contributions to expenditure. This is necessary because section 532 of ICTA treats section 531 of ICTA as if it were contained in CAA.

Chapter 3: Sales of Patent Rights

Clause 911: Overview of Chapter

2305.     This clause introduces the rules in this Chapter about the sales of patent rights. It is new.

Clause 912: Charge to tax on profits from sales of patent rights

2306.     This clause applies the charge to corporation tax on income to capital sums from the sale of patent rights. It is based on sections 524 and 533 of ICTA. The corresponding rule for income tax is in section 587 of ITTOIA.

2307.     Section 524(5) of ICTA is not rewritten because it does not appear to add anything to the proposition set out in clause 5(3) of this Bill (which defines the scope of the charge to corporation tax on a non-UK resident company trading in the UK through a permanent establishment in the UK). Any non-capital proceeds of the sale of patent rights will be amounts of income forming part of a non-UK resident company’s chargeable profits by virtue of clause 19(3)(b) of this Bill (which defines the chargeable profits of a non-UK resident company). So the company will be within the charge to corporation tax in respect of such amounts.

Clause 913: Profits charged under section 912

2308.     This clause sets out the amount charged to tax under clause 912. It is based on section 524 of ICTA. The corresponding rule for income tax is in section 588 of ITTOIA.

2309.     This clause is subject to the spreading rules in clauses 914 to 917.

2310.     Subsection (2) defines deductible costs as the capital cost of the rights sold plus any incidental expenses of sale. This makes it explicit that such expenses may be deducted. The types of expenses which may be allowed under this clause are not listed. Incidental expenses which relate to both capital sale proceeds and other sums not chargeable to tax under clause 912 are effectively apportioned under the rules about net proceeds of sale in clause 929.

2311.     Subsection (5) is new and includes a signpost to clause 926 which deals with contributions to expenditure. This signpost is necessary because section 532 of ICTA treats section 524 of ICTA as if it were contained in CAA.

Clause 914: UK resident companies: proceeds of sale not received in instalments

2312.     This clause sets out the spreading rules if the company chargeable by virtue of clause 912 is UK resident and does not receive the proceeds of sale in instalments. It is based on section 524 of ICTA. The corresponding rule for income tax is in section 590(1) to (3) and (6) of ITTOIA.

2313.     The approach in this clause differs from that in section 590 of ITTOIA. The latter also deals with the case where the taxpayer is UK resident and receives the proceeds of sale in instalments but in this Part that case is dealt with in a separate clause (see clause 915).

2314.     Subsection (5) states the time limit for elections under subsection (4). Unlike the source legislation this clause does not specify to whom the election must be made. But the general rules about claims and elections in Schedule 18 to FA 1998 require elections to be made in a return or, if that is not possible, to “an officer of Revenue and Customs” in accordance with Schedule 1A to TMA.

Clause 915: UK resident companies: proceeds of sale received in instalments

2315.     This clause sets out the spreading rules if the company chargeable by virtue of clause 912 is UK resident and receives the proceeds of sale in instalments. It is based on section 524 of ICTA. The corresponding rule for income tax is in section 590(1) and (4) to (6) of ITTOIA.

2316.     Subsection (5) states the time limit for elections under subsection (4). Unlike the source legislation this clause does not specify to whom the election must be made. But the general rules about claims and elections in Schedule 18 to FA 1998 require elections to be made in a return or, if that is not possible, to “an officer of Revenue and Customs” in accordance with Schedule 1A to TMA.

Clause 916: Non-UK resident companies: proceeds of sale not received in instalments

2317.     This clause sets out how non-UK resident companies are taxed on capital sums from the sale of patent rights if the sale proceeds are not received in instalments. It is based on section 524 of ICTA. The corresponding rule for income tax is in section 591 of ITTOIA.

2318.     Subsection (4) states the time limit for making an election under subsection (3). The reference in section 524(6) of ICTA to “the Board” has not been reproduced and this clause does not specify to whom the election must be made. But the general rules about claims and elections in Schedule 18 to FA 1998 require elections to be made in a return or, if that is not possible, to an “officer of Revenue and Customs” in accordance with Schedule 1A to TMA. This change reproduces Change 149 in ITTOIA and so brings the income and corporation tax codes back into line. See Change 1 in Annex 1.

2319.     A non-UK resident company is within the charge to corporation tax in respect of sales of patent rights only if it is carrying on a trade in the UK through a UK permanent establishment and the patent is held for that trade (see clause 19). Subsection (5) of this clause (and of clause 917) is relevant if such a company, having elected for spreading under subsection (3) of this clause (or of clause 917) ceases within the maximum allowed spreading period of six years to be within the charge to corporation tax in respect of the trade it was carrying on through its UK permanent establishment. If (for example) in year four the company ceased to carry on the trade through a UK permanent establishment then the capital sum would be spread rateably over four years and any earlier spreading based on a presumption that it would continue to carry on the trade in the UK through a UK permanent establishment for the whole six years would be revised in accordance with subsection (6) of this clause (or of clause 917).

Clause 917: Non-UK resident companies: proceeds of sale received in instalments

2320.     This clause sets out how non-UK resident companies are taxed on capital sums from the sale of patent rights if the sale proceeds are received in instalments. It is based on section 524 of ICTA. The corresponding rule for income tax is in section 592 of ITTOIA.

2321.     Subsection (2) makes explicit what is implicit in the source legislation.

2322.     Subsection (4) states the time limit for elections under subsection (3). The reference in section 524(6) of ICTA to “the Board” has not been reproduced and this clause does not specify to whom the election must be made. But the general rules about claims and elections in Schedule 18 to FA 1998 require elections to be made in a return or, if that is not possible, to “an officer of Revenue and Customs” in accordance with Schedule 1A to TMA. So Change 149 in ITTOIA is reproduced to bring the income and corporation tax codes back into line. See Change 1 in Annex 1.

2323.     The note on clause 916(5) is also relevant to subsection (5) of this clause.

2324.     Section 524(10) of ICTA is not rewritten. Section 524 of ICTA prescribes particular tax treatments with alternatives available by election. Section 524(10) of ICTA requires claims for relief under section 524 to be made to the Board. The claim relates to the spreading over six years of capital sums received from the sale of patent rights for the purposes of charging the sum to tax. As spreading is automatic for UK resident companies, the claim can be relevant only to non-UK resident companies. However, section 524(6) of ICTA, which deals with spreading rules for non-UK resident companies, refers to an election the rules for which are fully stated in that subsection and rewritten in clauses 916 and 917. Section 524(10) of ICTA is, therefore, superfluous.

Clause 918: Winding up of a body corporate

2325.     This clause deals with a body corporate which is chargeable to corporation tax under clause 912 if it commences to be wound up. It is based on section 525 of ICTA. The corresponding rule for income tax is in section 594 of ITTOIA.

Clause 919: Deduction of tax from payments to non-UK resident companies

2326.     This clause provides rules relating to the deduction of tax from payments to non-UK resident companies which are liable for tax under clause 912 on profits from the sale of the whole or part of any patent rights. It is based on section 524 of ICTA. The corresponding rules for income tax are in section 595 of ITTOIA.

Clause 920: Adjustments where tax has been deducted

2327.     This clause provides a rule relating to adjustments which may be necessary if tax is deducted from payments to a non-UK resident company under clause 919. It is based on section 524 of ICTA. The corresponding rule for income tax is in section 596 of ITTOIA.

Clause 921: Licences connected with patents

2328.     This clause provides that certain matters relating to the acquisition or grant of a licence in respect of patent rights are treated for the purposes of the Chapter as a purchase or (as the case may be) sale of patent rights. The clause is based on section 533 of ICTA. The corresponding rule for income tax is in section 597 of ITTOIA.

Clause 922: Rights to acquire future patent rights

2329.     This clause brings rights to acquire future patent rights within the patent rights rules in this Chapter. It is based on section 533 of ICTA. The corresponding rule for income tax is in section 598 of ITTOIA.

Clause 923: Sums paid for Crown use etc treated as paid under licence

2330.     This clause provides that sums paid for Crown use, or by a government of a country outside the United Kingdom are, in certain circumstances, to be treated as paid under a licence. It is based on section 533 of ICTA. The corresponding rule for income tax is in section 599 of ITTOIA.

2331.     The reference in section 533(4) of ICTA to “sections 46 to 49 of the Patents Act 1949” has not been reproduced in this section. This is because patents granted under these provisions have ceased to have effect so it is unnecessary to reproduce this reference. The removal of this unnecessary material follows the line adopted in section 482 of CAA and mirrors what was done in section 599 of ITTOIA.

2332.     The words “used” and “use” in this clause (which correspond with the relieving legislation in section 482 of CAA) are intended to be read widely and cover “make” and “sell”.