Overview
2291.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.
2292.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.
2293.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 Act.
2294.This Part does not apply to amounts arising from intangible fixed assets within Part 8 of this Act. 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.
2295.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
Section 907: Overview of Part
2296.This section introduces the charges applied by the Part. It is new.
2297.Subsections (4) and (5) alert readers to the primacy of the intangible fixed assets rules in Part 8 of the Act. 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.
2298.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 section 979 of this Act.
2299.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
Section 908: Charge to tax on profits from disposals of know-how
2300.The sections in Chapter 2 deal with consideration received for the disposal of know-how. This section 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.
2301.Under the source legislation, income from disposals of know-how is charged to tax under Schedule D Case VI of ICTA.
2302.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.
2303.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.
Section 909: Exceptions to charge under section 908
2304.This section sets out the exceptions to the charge under section 908. It is based on section 531 of ICTA. The corresponding rule for income tax is in section 584 of ITTOIA.
Section 910: Profits charged under section 908
2305.This section sets out the amount charged to tax under section 908. It is based on section 531 of ICTA. The corresponding rule for income tax is in section 585 of ITTOIA.
2306.Subsection (3) is new and gives a signpost to the section 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
Section 911: Overview of Chapter
2307.This section introduces the rules in this Chapter about the sales of patent rights. It is new.
Section 912: Charge to tax on profits from sales of patent rights
2308.This section 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.
2309.Section 524(5) of ICTA is not rewritten because it does not appear to add anything to the proposition set out in section 5(3) of this Act (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 section 19(3)(b) of this Act (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.
Section 913: Profits charged under section 912
2310.This section sets out the amount charged to tax under section 912. It is based on section 524 of ICTA. The corresponding rule for income tax is in section 588 of ITTOIA.
2311.This section is subject to the spreading rules in sections 914 to 917.
2312.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 section are not listed. Incidental expenses which relate to both capital sale proceeds and other sums not chargeable to tax under section 912 are effectively apportioned under the rules about net proceeds of sale in section 929.
2313.Subsection (5) is new and includes a signpost to section 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.
Section 914: UK resident companies: proceeds of sale not received in instalments
2314.This section sets out the spreading rules if the company chargeable by virtue of section 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.
2315.The approach in this section 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 section (see section 915).
2316.Subsection (5) states the time limit for elections under subsection (4). Unlike the source legislation this section 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.
Section 915: UK resident companies: proceeds of sale received in instalments
2317.This section sets out the spreading rules if the company chargeable by virtue of section 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.
2318.Subsection (5) states the time limit for elections under subsection (4). Unlike the source legislation this section 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.
Section 916: Non-UK resident companies: proceeds of sale not received in instalments
2319.This section 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.
2320.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 section 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.
2321.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 section 19). Subsection (5) of this section (and of section 917) is relevant if such a company, having elected for spreading under subsection (3) of this section (or of section 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 section (or of section 917).
Section 917: Non-UK resident companies: proceeds of sale received in instalments
2322.This section 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.
2323.Subsection (2) makes explicit what is implicit in the source legislation.
2324.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 section 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.
2325.The note on section 916(5) is also relevant to subsection (5) of this section.
2326.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 sections 916 and 917. Section 524(10) of ICTA is, therefore, superfluous.
Section 918: Winding up of a body corporate
2327.This section deals with a body corporate which is chargeable to corporation tax under section 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.
Section 919: Deduction of tax from payments to non-UK resident companies
2328.This section provides rules relating to the deduction of tax from payments to non-UK resident companies which are liable for tax under section 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.
Section 920: Adjustments where tax has been deducted
2329.This section provides a rule relating to adjustments which may be necessary if tax is deducted from payments to a non-UK resident company under section 919. It is based on section 524 of ICTA. The corresponding rule for income tax is in section 596 of ITTOIA.
Section 921: Licences connected with patents
2330.This section 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 section is based on section 533 of ICTA. The corresponding rule for income tax is in section 597 of ITTOIA.
Section 922: Rights to acquire future patent rights
2331.This section 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.
Section 923: Sums paid for Crown use etc treated as paid under licence
2332.This section 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.
2333.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.
2334.The words “used” and “use” in this section (which correspond with the relieving legislation in section 482 of CAA) are intended to be read widely and cover “make” and “sell”.
Chapter 4: Relief from corporation tax on patent income
Section 924: Relief for expenses: patent income
2335.This section provides relief for certain expenses in connection with patents. It is based on sections 526 and 528 of ICTA. The corresponding rule for income tax is in section 600 of ITTOIA.
2336.The relief is on the basis of expenses incurred. This relaxes any requirement in the source legislation that fees have to be paid before a deduction can be made.
2337.Subsection (2) defines “patent application and maintenance expenses” for the purposes of this section. Relief for such expenses is excluded from the scope of this section if the expenditure is incurred for the purposes of a trade carried on by the payer. This is because there is a similar provision for trading expenses connected with patents (in section 89 of the Act).
2338.Subsection (4) gives a signpost to section 926 which deals with contributions to expenditure. This is necessary because section 532 of ICTA treats section 526 and 528 of ICTA as if those provisions were contained in CAA.
Section 925: How relief is given under section 924
2339.This section sets out how relief is given when a claim is made under section 924 for patent expenses to be set against patent income. It is based on sections 526, 528 and 533 of ICTA. The corresponding rule for income tax is in section 601 of ITTOIA.
2340.Subsection (2) allows relief for expenditure against patent income in the accounting period in which the expenditure is incurred. However, if the expenses exceed the patent income in the accounting period, the surplus expenses cannot be used to create a loss under this section. Any such surplus is dealt with in accordance with subsection (3).
Chapter 5: Supplementary
Section 926: Contributions to expenditure
2341.This section restricts expenditure allowable under section 910, section 913 and section 924 to the extent that the expenditure is met by a public body or someone other than the company. It is based on section 532 of ICTA and section 532 of CAA. The corresponding rule for income tax is in section 603 of ITTOIA.
2342.Subsection (3) is new and excludes the application of this section to incidental expenses incurred by the seller of patent rights (see section 913(2)(b)). This is because section 524 of ICTA only bites in the first place on the net proceeds of a sale.
Section 927: Contributions not made by public bodies nor eligible for tax relief
2343.This section qualifies the general rule in section 926 by providing that contributions not made by public bodies may still be eligible as deductible expenditure in certain circumstances. The section is based on section 532 of ICTA and section 536 of CAA. The corresponding rule for income tax is in section 604 of ITTOIA.
Section 928: Exchanges
2344.This section extends the definition of a sale of property to include exchanges of property for the purposes of this Part. It is based on section 532 of ICTA and sections 453 and 572 of CAA. The corresponding rule for income tax is in section 605 of ITTOIA.
Section 929: Apportionment where property sold together
2345.This section provides for the apportionment of sale proceeds and expenditure on a just and reasonable basis if property within the scope of this Part is sold with other property. It is based on section 532 of ICTA and sections 453 and 562 of CAA. The corresponding rule for income tax is in section 606 of ITTOIA.
Section 930: Questions about apportionments affecting two or more persons
2346.This section provides for questions relating to apportionment under section 929 that affect two or more persons to be determined by the body prescribed by section 563 of CAA. It is based on section 532 of ICTA and section 563 of CAA. The corresponding rule for income tax is in section 607 of ITTOIA.
Section 931: Meaning of “capital sums” etc
2347.This section applies section 4 of CAA (which defines “capital expenditure” and “capital sums”) for the purposes of the Part. It is based on section 532 of ICTA. The corresponding rule for income tax is in section 608 of ITTOIA.
