Chapter 3: Allowances and charges
Overview
1668.This Chapter deals with allowances and charges on qualifying expenditure. Qualifying expenditure is pooled. There is a separate pool for each trade for which a person has qualifying trade expenditure and a single pool for a person’s qualifying non-trade expenditure. Disposal receipts can arise in relation to qualifying expenditure. Disposal receipts effectively reduce allowances or lead to balancing charges.
1669.Section 470 requires pooling and sets out the separate pools.
1670.Section 471 sets out whether there is an allowance or a charge for a chargeable period.
1671.Section 472 deals with the amount of the allowance or charge.
1672.Sections 473 to 475 set out how to find “AQE” which is a term used in the earlier sections.
1673.Section 476 and 477 deal with when a disposal receipt is to be brought into account in respect of qualifying expenditure and its amount.
Section 470: Pooling of expenditure
1674.This section is drafted to introduce pooling explicitly.
1675.Subsection (2) provides that there is a separate pool for each trade for which a person has qualifying trade expenditure and a single pool for any qualifying non-trade expenditure of that person. As with plant and machinery and know-how, this Act refers explicitly to these separate pools rather than, as in CAA 1990, leaving them to be deduced.
Section 471: Determination of entitlement or liability
1676.This section is based on section 520(4) to (6) of ICTA. It determines if a person is entitled to an allowance of liable to a charge. It applies to each pool separately for each chargeable period.
1677.Section 473 defines “AQE” in the pool for a chargeable period. Section 476 defines the “disposal receipts” which contribute to the calculation of TDR to come out of the pool for a chargeable period.
1678.There is a minor change. Subsections (4) to (6) determine if an entitlement to an allowance is to a writing-down allowance or a balancing allowance. In the case of qualifying non-trade expenditure, subsection (6) provides for a balancing allowance when all of the patent rights, on which such expenditure was incurred, have been wholly disposed of or come to an end. Section 520(4)(c) and (5) of ICTA might be read as denying a balancing allowance if the last of the relevant patent rights does not come to an end but is wholly disposed of. See Change 56 in Annex 1.
Section 472: Amount of allowances and charges
1679.This section is based on section 520(4) and (6) of ICTA. It determines the amount of a writing-down allowance.
1680.Subsections (1) to (3) set out the calculation of a writing-down allowance for a chargeable period. The rate at which writing-down allowances are given is 25% per year on a reducing-balance basis. The amount of a writing-down allowance is adjusted if the length of the chargeable period is more or less than a year and if the trade was carried on for only part of the chargeable period.
1681.There is a minor change. Subsection (4) allows a person to claim a writing-down allowance of less than the full entitlement for the chargeable period. There is nothing for this in CAA 1990. See Change 38 in Annex 1.
1682.Subsections (5) and (6) set out the calculation of a balancing charge or allowance for a chargeable period.
Section 473: Available qualifying expenditure
1683.This section is based on section 521(1) of ICTA. It defines “available qualifying expenditure” in a pool for a chargeable period.
Section 474: Allocation of qualifying expenditure to pools
1684.This section is based on sections 520(2), 521(1)(a) and 528(1) of ICTA. It allows qualifying expenditure to be put into the pool either in the chargeable period in which it is incurred or in a later chargeable period.
1685.There is a minor change. This section allows qualifying expenditure to be allocated to a pool for any chargeable period subject to the specific provisions in subsections (2) to (4). So it allows qualifying expenditure to be added to a pool for a chargeable period after that in which it is incurred. It is unlikely that taxpayers will in practice wish to do so. But this flexibility is consistent with the approach taken for plant and machinery allowances in Part 2. See Change 54 in Annex 1.
Section 475: Unrelieved qualifying expenditure
1686.This section is based on section 521(1)(b) of ICTA. It sets out the amount that is carried forward in a pool from one chargeable period to the next chargeable period.
1687.Subsection (3) stops any amount being carried forward after the trade is permanently discontinued. There would only be unrelieved qualifying expenditure if the taxpayer were to choose for some reason not to claim all of a balancing allowance that is available in those circumstances. See Note 60 in Annex 2.
Section 476: Disposal value of patent rights
1688.This section is based on section 521(2) of ICTA. It defines “disposal receipt”. It is the disposal value under this section or (in rare circumstances) under Schedule 12 to FA 1997 or any other enactment.
1689.Subsection (2) sets out when disposal values are to be brought into account.
1690.Subsection (3) sets out the amount of a disposal value under this section. But this is subject to section 477. That ensures the disposal values in relation to particular patent rights do not exceed the qualifying expenditure incurred on the purchase of those patent rights.
1691.There is a minor change. This section limits the amounts to capital sums. This makes clear that proceeds that are income are not both taxed as income and brought into account as disposal receipts. ICTA does not limit the disposal value to capital sums. See Change 55 in Annex 1.
Section 477: Limit on amount of disposal value
1692.This section is based on section 521(3) and (4) of ICTA. It limits a person’s disposal value, or disposal values, from a sale of patent rights to the qualifying expenditure incurred by that person on purchasing the rights.
1693.Subsections (2) and (3) increase the limit of a person’s disposal value, or disposal values, if the patent rights were acquired from a connected person.
