Profits from the exploitation of patents etc

Finance Bill – in a Public Bill Committee am 10:15 am ar 5 Gorffennaf 2016.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of David Gauke David Gauke The Financial Secretary to the Treasury 10:15, 5 Gorffennaf 2016

I beg to move amendment 50, in clause 60, page 94, line 16, at end insert

“, or

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

With this it will be convenient to discuss the following:

Government amendments 51 to 115 and 136.

Clause stand part.

Government amendments 116 to 121.

That schedule 9 be the Ninth schedule to the Bill.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

Clause 60 and schedule 9 make changes to ensure that the UK’s patent box operates in line with a newly agreed international framework resulting from the base erosion and profit shifting action plan. The Forum on Harmful Tax Practices—the international group leading work on action 5—focused on harmonising the level of substantive activity required for access to preferential intellectual property regimes such as the patent box. This was linked to the BEPS action plan’s overall aim of aligning taxation with economic substance. The framework applies to all patent and innovation box-type regimes that apply preferential tax treatment to IP income in OECD, G20 and EU countries. It ensures that preferential tax treatment cannot be offered for as little as simply registering ownership of IP in a jurisdiction offering such a regime. While the UK’s patent box includes adequate safeguards to address these concerns, this framework will ensure that robust standards apply internationally.

The new framework also takes a slightly different approach from the UK patent box, so amendments to the current regime are required. In particular, the international framework links the availability of a lower tax rate offered by a preferential IP regime to the proportion of the development expenditure on the IP that the claimant taxpayer incurred, directly or through a third-party subcontractor. This means that if, for example, a claimant taxpayer directly incurred only half of the expenditure on a patent, with the other half of the expenditure being on acquisition, IP, or outsourcing to a related party, only half the profit derived from that patent will benefit from a lower tax rate.

The patent box was introduced in the Finance Act 2012 following extensive consultation. Once fully phased in, it gives an effective corporation tax rate of 10% on trading profits earned from patents and other similar types of intellectual property. To qualify under current rules, the claimant taxpayer needs either to have had significant involvement in the development of the IP or to actively manage the IP in the UK. That will not change. The patent box provides an incentive for companies to develop, retain and commercialise new and existing patents in the UK. That in turn incentivises companies to bring to the UK high-value jobs and investment associated with the development, manufacturer and exploitation of patents.

The changes made by clause 60 will bring the UK patent box in line with the new international framework. The main change is the introduction of the research and development fraction, which provides the link between the IP profit and the R and D undertaken on that IP, implementing the key principle of the international framework. The fraction is defined as the ratio of the company’s direct R and D spend on the IP plus any third-party subcontracting to total spend, which adds in the cost of acquiring the IP and related party subcontracting.

The figures in the ratio are cumulative, building up over time to reflect the development history of the IP asset. The result can be increased by up to 30% when the ratio is less than 1, although the final value cannot exceed 1. The final value is then applied to the relevant IP profits to give the amount of profit that can benefit from the lower patent box tax rate. The qualifying profit will be the same or less than the amount under the current patent box rules. If in exceptional circumstances the ratio is not a true reflection of the claimant’s value-creating activities, the company may be able to increase it accordingly to take such circumstances into account. The new rules apply from July 2016.

As the UK already has a patent box, transitional provisions are needed for companies already claiming for existing IP. To allow claimant taxpayers to ensure that they can comply with the requirements of the new patent box, a five-year transitional period begins on 30 June 2016, after which only those taxpayers who would qualify to elect into the patent box for periods prior to that date will be allowed to claim under the current rules. A claimant taxpayer will be able to continue to apply the current patent box rules for existing IP if it qualifies for the transitional period and there are no major changes to its position during that period. An existing IP broadly means patents applied for before 1 July 2016.

If a company has income from a product that relies on existing IP and patents applied for on or after that date, it will continue to be treated according to the current patent box rules, as long as the core technology of that product is protected by patents applied for before 1 July 2016. If that is not the case, the profit from the product will transition to the new rules linked to the proportion of patents that do not qualify as existing IP over total patents. The transitional period will end five years later on 30 June 2021, after which only the new form of the patent box will be available.

The transitional arrangements will not be available where IP has been acquired directly or indirectly from a country without a preferential IP regime after 1 January 2016, and that acquisition was undertaken with a tax avoidance motive. That safeguards the transitional provisions from an abuse whereby a company would aim to acquire IP simply to access the five-year period. That safeguard is part of the international framework and so applies to all preferential IP regimes, including the UK patent box.

Those affected by the changes are UK companies that hold and exploit patents or patent-like rights and that claim relief under the current patent box. We expect that these changes will restrict the overall amount that can be claimed through the patent box, reducing cost to the Exchequer. That reduction is expected to be £120 million over the next five years.

The Government amendments to clause 60 introduce features that ensure that the benefit of the patent box is protected for claimant taxpayers and respond to specific issues raised by interested parties during formal consultation. If some of these amendments were not introduced, a number of interested parties would see their claims significantly reduced under the new patent box rules. The new rules could also potentially be open to manipulation and abuse. These amendments do not cover provisions addressing the issue of how the revised rules will apply in the context of more complex, collaborative R and D arrangements, such as cost share agreements. It is the Government’s intention to include such provisions in Finance Bill 2017, to provide an opportunity for consultation with interested parties.

Amendment 50 allows taxpayers to forgo the right to use the transitional provisions, should they prefer to opt straight into the new patent box. Amendments 51 to 56, 60 to 63, 69 to 70, 78 to 79 and 88 to 112 give companies greater flexibility to track IP income and R and D expenditure at product or product family level, by removing the requirement that a product must contain more than one IP asset. We have created rules to account for the implementation of the international framework, which, incidentally, has a double impact on a taxpayer’s patent box claims where an acquisition of IP involves staged payments made to the seller, allowing for sharing in the success of further development. We are also extending the definition of an acquisition of IP to cover expenditure on such an acquisition from which the relevant qualifying IP is derived, evolved or enhanced. These features are introduced by amendments 57, 66, 77, 80 and 81, and 121.

Amendments 58 and 59, 64, 67, 82 to 84 and 116 to 120 introduce simplification rules for taxpayers with smaller claims, so that they are not discouraged from claiming the patent box. Amendment 65 addresses the fact that legislation does not currently exclude finance income from the overall income that can benefit from the patent box; the measures would otherwise result in unintentional widening of the patent box.

Amendments 68, 73 and 74 ensure that any relevant R and D expenditure incurred by a foreign branch of a UK claimant company that has opted out of UK taxation under foreign branch exemption rules is treated as related party subcontract expenditure of the UK company for the purposes of calculating the R and D fraction. Under the Bill, only 65% of subcontracted R and D costs are used in the R and D fraction. Amendments 71, 72, 75 and 76 remove the treatment on subcontracted R and D costs, so that the entire amount is counted towards qualifying expenditure amounts.

The safeguard in the transitional provisions requires a determination as to whether an IP asset has been acquired from a country with or without a preferential IP regime in place. Amendments 85 to 87 clarify that the power to designate foreign tax regimes operates properly when it is used after Royal Assent. Amendment 113 widens the existing anti-avoidance provisions to take into account potential abuses of the changing rules. Finally, amendments 114 and 115 ensure that where one company takes over a trade from another, the transferee will be able to step into the shoes of the transferrer, inheriting both the IP and the expenditure history on that IP.

Let me briefly anticipate and respond to amendment 136, which would require the Chancellor of the Exchequer to publish

“within six months of the passing of this Act” a report on the patent box, giving an

“assessment of the value for money…and…efficacy of, the Patent Box.”

This amendment is not needed and would fall short of the plans the Government already have in place. Due to the time periods allowed for electing into the patent box and the impact of the transitional provisions, a one-time publication would not give a substantive picture of how the patent box is operating, or take into account the revisions to the regime. That is why we are proposing to publish annual statistics on the patent box, rather than a one-time publication. The Government intend to make the first publication in September this year and annually thereafter.

To conclude, the changes made by clause 60 will ensure that the patent box complies with the new internationally agreed framework, while the amendments ensure that the benefit of the patent box is protected for claimant taxpayers. I therefore commend clause 60, schedule 9 and amendments 50 to121.

Photo of Rebecca Long-Bailey Rebecca Long-Bailey Shadow Chief Secretary to the Treasury, Member, Labour Party National Executive Committee 10:30, 5 Gorffennaf 2016

Clause 60 and schedule 9 make substantial changes to the patent box, which provides for a reduced rate of corporation tax on profits from patents and similar intellectual property. The changes in this clause ensure compliance with the new international framework developed by the OECD for preferential IP regimes as part of the base erosion and profit shifting project.

The changes mean that the amount of profit for an IP asset that qualifies for the reduced 10% rate of corporation tax available through the UK patent box will depend on the proportion of the asset’s development expenditure incurred by the company. According to the explanatory notes to the Bill, the amended rules will require profit for the purpose of the patent box to be calculated at the level of an IP asset—for example, the patent, product, or product family relying on an IP asset or assets. The profit will be adjusted to reflect the proportion of the development activity on the asset, product, or product category undertaken by the company.

As the Minister confirmed, the measure will have effect for new entrant companies to the patent box on or after 1 July 2016, and also for some IP assets acquired on or after 2 January 2016. The new rules are being phased in, which is welcome; the current patent box rules will apply to some companies and IP throughout a transitional period lasting until 2021. The new rules will apply to all companies and IP after 2021.

By way of background, in December 2009 the Labour Government announced that they would consult on introducing a patent box—a reduced rate of corporation tax applied to income from patents—from April 2013 at a possible annual cost of £1.3 billion. The coalition Government took up our proposals for a patent box in a wider review of corporate taxation launched in November 2010. The consultation document argued that a tax relief would be most effective if it focused on patents, and that it would be proportionate to charge corporation tax at just 10% on profits made from them.

The coalition Government confirmed their plans in the 2011 Budget, and published a further consultation document in June. Draft legislation for the Finance Bill 2012 was published in December, including provisions for the patent box. In Budget 2012, the Government confirmed the introduction of the patent box, which would be phased in over five years from 1 April 2013. They estimated that its cost would rise from £350 million in 2013-14 to £910 million by 2016-17.

The Opposition welcomed the introduction of the relief, while moving an amendment to require the Government to report on

“other opportunities to introduce targeted support for business”.

This tax reform was clearly strongly supported by business at the time, but was not uncontroversial. Concerns were raised by several European countries, as well as the European Commission, that reform might represent harmful tax competition, encouraging companies to shift the ownership of patents created in other countries to the UK.

In late 2013, the EU code of conduct group raised concerns about the UK patent box, leading to press speculation that the Government might have to substantively amend the new relief. In November 2014, the Government announced that the UK had agreed with Germany that preferential intellectual property regimes—of which the UK patent box is one—should not encourage harmful tax competition and, as a result, certain changes would be made to the UK regime from June 2016. Subsequently, in October 2015, HMRC launched a consultation on amending the patent box regime to take account of these concerns. In December 2015, draft legislation to give effect to this change was published along with an impact note on the measure.

The 2016 Budget specifically confirmed that

“The government will modify the operation of the Patent Box to comply with a new set of international rules created by the OECD, making the lower tax rate dependent on, and proportional to, the extent of research and development expenditure incurred by the company claiming the relief. This will come into effect on 1 July 2016.”

According to the commentary in the Tax Journal,

“Whilst the majority of the provisions are consistent with the draft clauses released in December 2015, there were a number of important changes and previously omitted items included in the Bill.”

Those include flexibility for the grandfathering of products that contain both pre-1 July IP qualifying rights and post- 30 June IP qualifying rights, and a provision allowing for an increase in the R and D fraction in exceptional circumstances. Perhaps the Minister could take this opportunity to confirm what would constitute exceptional circumstances.

The Tax Journal goes on to say:

“The default length of the ‘relevant period’ for tracking and tracing R&D expenditure to the IP has been extended from 15 years to 20 years. In addition, a new provision has been introduced within the relevant period rules to provide clarification on the timing of expenditure for tracking and tracing purposes. Whilst this rule looks to align the timing of expenditure with the time at which it becomes deductible for corporation tax purposes, it should also act as an anti-forestalling measure. Unfortunately, despite representations, it seems that a company is only able to track and trace R&D expenditure at product family level (rather than as individual IP rights) where the product contains more than one item of IP. This remains a significant issue for some taxpayers.”

Could the Minister confirm why that is the case?

My hon. Friends and I have tabled amendment 136 because we have heard from stakeholders that the efficacy of the patent box may be somewhat undermined as a result of the changes to ensure that we comply with the OECD recommendations. We support the principle of the patent box—indeed, we brought it in—but we also think that it needs to be reviewed in the light of these changes to make sure that it is the best mechanism to achieve its desired aim of incentivising patents based in the UK. Furthermore, the necessity for clause 60 and schedule 9 is somewhat in question, given the country’s decision to leave the EU; I made a similar point about earlier clauses. Has the Minister considered the implications of the vote on the patent box? We are happy to accept Government amendments 50 to 121, which were tabled after consultation with stakeholders.

To conclude, we are very supportive of the patent box, but we have concerns about its efficacy, given all these changes. I hope that the Minister can address some of the concerns I have raised, but I will not push amendment 136 to a vote.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

I thank the hon. Lady for her broad support for the patent box. What we sought to do with the patent box—both when it was introduced and now—is ensure that we have incentives in our tax system to encourage internationally mobile activity. This is about bringing jobs and investment to the United Kingdom. It is not about artificial profit shifting. On the Government’s wider approach to the international tax system, we believe that there should be close alignment between economic activity, the profits that relate to that, and where those profits are taxed. That is why the UK has taken a leading role in the OECD’s base erosion and profit shifting process. Of course, any process like BEPS requires compromise, but the direction in which we believe the international tax system should go—towards closer alignment—is the one that BEPS has pursued, and we are pleased with the outcomes.

The changes to the patent box reflect a degree of compromise, but in essence, thanks to the patent box, the UK continues to offer an attractive place in which intellectual property may be developed. That is something that we wish to continue. I have to pick up on three of the points made by the hon. Member for Salford and Eccles. In the context of the EU, I will make a similar point to one I made earlier: we are still in the EU and a negotiation has yet to be undertaken to know where we stand exactly. There is also a wider point: when addressing the challenges of the international tax system, much of the legislation would apply whether we were in the EU or not, because the OECD BEPS process applies to all OECD countries. I do not think that anyone is proposing a referendum on whether we should leave the OECD—it is not one that I would welcome. In these circumstances, we expect to comply with the OECD standard, and that is very much our approach.

The hon. Lady also made a couple of technical points, the first of which was about what constitutes exceptional circumstances. For example, IP might have been purchased but turned out to be worth less, so that its contribution to the fraction is out of line with the cost. Obviously I cannot be exhaustive, but I hope that example is helpful in illustrating the types of things we are talking about. She also asked about tracking and tracing at an individual product level, and why that is not the approach we have taken. Companies will be able to track and trace at IP product level, so I hope that she is reassured, but I will write to her with further information.

Amendment 50 agreed to.

Amendments made: 51, in clause 60, page 94, line 38, leave out “either”.

Amendment 52, in clause 60, page 94, line 43, leave out “multi-IP” and insert “IP”.

Amendment 53, in clause 60, page 94, line 43, at end insert

“, or

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

Amendment 54, in clause 60, page 95, line 1, leave out from “See” to second “and” and insert

“subsection (5) for the meaning of “IP item” and “IP process””.

Amendment 55, in clause 60, page 95, line 2, before “further” insert

“see subsections (5A) and (6) for”.

Amendment 56, in clause 60, page 95, line 2, at end insert “and process sub-streams”.

Amendment 57, in clause 60, page 95, line 12, at end insert—

“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).”

Amendment 58, in clause 60, page 95, leave out lines 13 to 17.

Amendment 59, in clause 60, page 95, line 19, leave out from beginning to “deduct” in line 20.

Amendment 60, in clause 60, page 95, leave out lines 40 to 47 and insert—

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

(5A) 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 substantially the same purposes.”

Amendment 61, in clause 60, page 95, line 48, leave out

“which is properly attributable to a multi-IP item”.

Amendment 62, in clause 60, page 95, line 49, after “sub-stream” insert “or process sub-stream”.

Amendment 63, in clause 60, page 96, line 5, at end insert—

‘( ) 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 which the company holds an exclusive licence.”

Amendment 64, in clause 60, page 98, line 2, leave out “357A” and insert “357A(1)”.

Amendment 65, in clause 60, page 98, line 21, after first “income” insert “, finance income”.

Amendment 66, in clause 60, page 100, line 41, at end insert—

(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 respect 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 arrangement 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 has 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.”

Amendment 67, in clause 60, page 104, line 6, leave out from beginning to end of line 31 on page 105.

Amendment 68, in clause 60, page 108, line 13, at end insert—

“(3A) If an election made by the company under section 18A of CTA 2009 (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-house”, 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 18A(4)(a) or (b) of CTA 2009 in calculating the company’s foreign permanent establishments amount for the period.”

Amendment 69, in clause 60, page 108, line 22, leave out

“incorporated in a multi-IP item”

and insert

“—

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

(ii) which is incorporated in an item”.

Amendment 70, in clause 60, page 108, line 23, at end insert

“, 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) to 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.”

Amendment 71, in clause 60, page 109, line 8, leave out “65% of any” and insert “the”.

Amendment 72, in clause 60, page 109, leave out lines 10 to 15 and insert

“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 not connected (within the meaning given by section 1122).”

Amendment 73, in clause 60, page 109, line 15, at end insert—

“(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 permanent 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) 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 18A(4)(a) or (b) of CTA 2009 in calculating the company’s foreign permanent establishments amount for the period.”

Amendment 74, in clause 60, page 109, line 23, after “means” insert “the total of—

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

(b) ”.

Amendment 75, in clause 60, page 109, line 23, leave out “65% of any” and insert “the”.

Amendment 76, in clause 60, page 109, leave out lines 25 to 30 and insert

“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 given by section 1122).”

Amendment 77, in clause 60, page 109, line 39, leave out from “company” to end of line 41 and insert

“in making during the relevant period payments within any of subsections (1A), (1B) and (1C).

(1A) 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.

(1B) A payment is within this subsection if it is made to a person in respect of the grant or transfer by that person to the company of an exclusive licence in respect of a relevant qualifying IP right.

(1C) 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) the 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).

(1D) Where the company has incurred expenditure in making a series of payments to a person in respect of a single assignment, grant, transfer or 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.”

Amendment 78, in clause 60, page 110, line 2, leave out

“incorporated in a multi-IP item” and insert “—

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

(ii) which is incorporated in an item”.

Amendment 79, in clause 60, page 110, line 4, at end insert

“, 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 the sub-stream is attributable.”

Amendment 80, in clause 60, page 110, line 22, leave out “357BME” and insert “357BMD”.

Amendment 81, in clause 60, page 111, leave out from beginning of line 8 to “, and” in line 11 and insert

“in each of subsections (1A), (1B) and (1C) the word “relevant” were omitted”.

Amendment 82, in clause 60, page 112, line 25, leave out “357A” and insert “357A(1)”.

Amendment 83, in clause 60, page 112, line 46, at end insert—

“Small claims treatment

357BNA Small claims treatment

(1) This section applies where—

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

(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) £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 357BNB),

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

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

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 if—

(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 period 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 accounting 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 period 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 mentioned in subsection (1)(a).

(6) For the purposes of this section, the “qualifying residual profit” of a trade of a company for an accounting period is the amount which (assuming the company did not make an election under this section) would be equal to the aggregate of the relevant IP income sub-streams established at Step 2 in section 357BF(2) in determining the relevant IP profits of the trade for the accounting period, following the deductions from those sub-streams required by Step 4 in section 357BF(2) (ignoring the amount of any sub-stream which is not greater than nil following those deductions).

(7) For the purposes of this section, the “relevant maximum” for an accounting period of a company is—

(a) in a case where no company is a related 51% group company of the company in the accounting period, £3,000,000;

(b) in a case where one or more companies are related 51% group companies of the company in the accounting period, the amount given by the formula—

where N is the number of those related 51% group companies in relation to which an election under section 357A(1) has effect for the accounting period.

(8) For an accounting period of less than 12 months, the relevant maximum is proportionally reduced.

357BNB Notional royalty election

(1) Subsection (2) applies where a company has made a notional royalty election for an accounting period under section 357BNA(2)(a).

(2) In its application for the purposes of determining the relevant IP profits of the trade of the company for the accounting period, section 357BHA (notional royalty) has effect as if—

(a) in subsection (2) for “the appropriate percentage” there were substituted “75%”, and

(b) subsections (3) to (6) were omitted.”

357BNC Small claims figure election

(1) Subsection (2) applies where a company has made a small claims figure election for an accounting period under section 357BNA(2)(b).

(2) In its application for the purposes of determining the relevant IP profits of the trade of the company for the accounting period, section 357BF(2) (steps for calculating relevant IP profits) has effect as if in Step 6—

(a) for “marketing assets return figure” there was substituted “small claims figure”, and

(b) for “(see section 357BL)” there was substituted “(see section 357BNC(3))”.

(3) Subsections (4) to (9) apply for the purpose of calculating the small claims 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 company for an accounting period.

(4) If 75% of the qualifying residual profit of the trade for the accounting period is lower than the small claims threshold, the small claims figure for the sub-stream is 25% of the amount of the sub-stream following Step 4 in section 357BF(2).

(5) If 75% of the qualifying residual profit of the trade for the accounting period is higher than the small claims threshold, the small claims figure for the sub-stream is the amount given by—

where—

A is the amount of the sub-stream following the deductions required by Step 4 in section 357BF(2),

QRP is the qualifying residual profit of the trade of the company for the accounting period, and

SCT is the small claims threshold.

(6) If no company is a related 51% group company of the company in the accounting period, the small claims threshold is £1,000,000.

(7) If one or more companies are related 51% group companies of the company in the accounting period, the small claims threshold is—

where N is the number of those related 51% group companies in relation to which an election under section 357A(1) has effect for the accounting period.

(8) For an accounting period of less than 12 months, the small claims threshold is proportionately reduced.

(9) Subsection (6) of section 357BNA (meaning of “qualifying residual profit”) applies for the purposes of subsection (4) and (5) of this section.

357BND Global streaming election

(1) Subsection (2) applies where a company has made a global streaming election for an accounting period under section 357BNA(2)(c).

(2) In its application for the purpose of determining the relevant IP profits of the trade of the company for the accounting period, this Chapter has effect with the following modifications.

(3) In subsection (2) of section 357BF (relevant IP profits)—

(a) omit Step 2,

(b) in Step 3 for “each of the relevant IP income sub-streams” substitute “the relevant IP income stream”,

(c) in Step 4—

(i) in the words before paragraph (a), for “each” substitute “the”,

(ii) for “sub-stream”, in each place it occurs, substitute “stream”,

(d) in Step 6—

(i) at the beginning insert “If the relevant IP income stream is greater than nil following Step 4,”,

(ii) for the words from “each” to “Step 4” substitute “the stream”,

(iii) for “sub-stream”, in the second place it occurs, substitute “stream”,

(e) in Step 7—

(i) for “each relevant IP income sub-stream” substitute “the relevant IP income stream”,

(ii) for “sub-stream”, in the second place it occurs, substitute “stream”,

(f) omit Step 8, and

(g) in Step 9 for “given by Step 8” substitute “of the relevant IP income stream following Step 7”.

(4) In subsection (3) of that section for “given by” substitute “of the relevant IP income stream following the Steps in”.

(5) In subsection (4) of that section for “given by” substitute “of the relevant IP income stream following the Steps in”.

(6) Omit subsections (5), (5A) and (6) of that section.

(7) In section 357BIA(3) (certain amounts not to be deducted from sub-streams at Step 4 of section 357BF)—

(a) for “a relevant IP income sub-stream” substitute “the relevant IP income stream”;

(b) for “sub-stream”, in the second and third places it occurs, substitute “stream”.

(8) In section 357BJ (routine return figure)—

(a) for “sub-stream”, in each place it occurs, substitute “stream”, and

(b) in subsection (1) for “Step 2” substitute “Step 1”.

(9) In section 357BL (marketing asset return figure) for “sub-stream”, in each place it occurs, substitute “stream”.

(10) In section 357BLA (notional marketing royalty)—

(a) for “sub-stream”, in each place it occurs, substitute “stream”, and

(b) in subsection (1) for “Step 2” substitute “Step 1”.

(11) In section 357BLB (actual marketing royalty) for “sub-stream”, in each place it occurs, substitute “stream”.

(12) In section 357BM (R&D fraction: introduction)—

(a) for “sub-stream” (in each place it occurs) substitute “stream”, and

(b) in subsection (1) for “Step 2” substitute “Step 1”.

(13) In section 357BMA(1) (R&D fraction) for “sub-stream” substitute “stream”.

(14) In section 357BMB(4) (qualifying expenditure on relevant R&D undertaken in-house) for the words after “1138)” substitute “which relates to a qualifying IP right to which income in the stream is attributable”.

(15) In section 357BME(2) (qualifying expenditure on acquisition of relevant qualifying IP rights) for the words from “means” to the end substitute “means a qualifying IP right to which income in the stream is attributable”.

(16) In section 357BMG (cases where the company is a new entrant with insufficient information about pre-enactment expenditure) for “sub-stream”, in each place it occurs, substitute “stream”.

(17) In section 357BMH (R&D fraction: increase for exceptional circumstances) for “sub-stream”, in each place it occurs, substitute “stream”.

(18) In section 357BNC (small claims figure election)—

(a) for “sub-stream”, in each place it occurs, substitute “stream”;

(b) in subsection (3) for “Step 2” substitute “Step 1”.”

Amendment 84, in clause 60, page 113, line 17, at end insert—

“( ) Where section 357BF applies by reason of this section for the purposes of determining the relevant IP profits of a trade of a company for an accounting period, the company may not make a global streaming election for the accounting period under section 357BNA(2)(c).”

Amendment 85, in clause 60, page 113, leave out lines 34 to 44 and insert—

“(a) the company and the person who assigned the right or granted the licence were connected at the time of the assignment or grant,

(b) the main purpose, or one of the main purposes, of the assignment of the right or the grant of the licence was the avoidance of a foreign tax,

(c) the person who assigned the right or granted the licence was not within the charge to corporation tax at the time of the assignment or grant, and

(d) the person who assigned the right or granted the licence was not liable at the time of the assignment or grant to a foreign tax which is designated for the purposes of this section by regulations made by the Treasury.”

Amendment 86, in clause 60, page 114, line 1, leave out “(9)(b)” and insert “(8)(d)”.

Amendment 87, in clause 60, page 114, line 4, at end insert—

“( ) Regulations may not be made under subsection (8)(d) after 31 December 2016.”

Amendment 88, in clause 60, page 114, line 21, leave out “(b)” and insert “(c)”.

Amendment 89, in clause 60, page 114, line 24, leave out

“and each product sub-stream”

and insert

“, each product sub-stream and each process sub-stream”.

Amendment 90, in clause 60, page 114, line 32, leave out

“and product sub-streams”

and insert

“, each of the product sub-streams and each of the process sub-streams”.

Amendment 91, in clause 60, page 114, line 42, leave out “a multi-IP item” and insert

“an IP item or IP process”.

Amendment 92, in clause 60, page 114, line 44, after “sub-stream” insert “or process sub-stream”.

Amendment 93, in clause 60, page 114, line 45, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 94, in clause 60, page 115, line 1, after “item” insert “or process”.

Amendment 95, in clause 60, page 115, line 4, after “item” insert “or process”.

Amendment 96, in clause 60, page 115, line 8, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 97, in clause 60, page 115, line 9, leave out “item or items” and insert “items or processes”.

Amendment 98, in clause 60, page 115, line 11, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 99, in clause 60, page 115, line 13, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 100, in clause 60, page 115, line 17, after “sub-stream” insert “or process sub-stream”.

Amendment 101, in clause 60, page 115, line 18, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 102, in clause 60, page 115, line 20, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 103, in clause 60, page 115, line 24, after “sub-stream” insert “or process sub-stream”.

Amendment 104, in clause 60, page 115, line 26, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 105, in clause 60, page 115, line 27, after “sub-stream” insert “or process sub-stream”.

Amendment 106, in clause 60, page 115, line 27, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 107, in clause 60, page 115, line 29, after “items” insert “or processes”.

Amendment 108, in clause 60, page 115, line 31, leave out “a multi-IP” and insert

“an IP item or IP process”.

Amendment 109, in clause 60, page 115, line 35, after “items” insert “or processes”

Amendment 110, in clause 60, page 115, line 35, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 111, in clause 60, page 115, line 38, after “items” insert “or processes”.

Amendment 112, in clause 60, page 115, line 38, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 113, in clause 60, page 115, line 40, at end insert—

“( ) In section 357FB (tax advantage schemes)—

(a) in subsection (2)(b) (list of ways by which deductions can be inflated)—

(i) omit “or” at the end of sub-paragraph (ii), and

(ii) after sub-paragraph (iii) insert “, or

(iv) an R&D fraction (see subsection (4A)) being greater than it would be but for the scheme.”, and

(b) after subsection (4) insert—

“(4A) The reference in subsection (2)(b)(iv) to an R&D fraction is a reference to such a fraction as is mentioned at Step 7 of section 357BF(2).””

Amendment 114, in clause 60, page 115, line 40, at end insert—

“( ) After section 357GC insert—

“Transferred trades

357GCA Application of this Part in relation to transferred trades

(1) Where—

(a) a company (“the transferor”) ceases to carry on a trade which involves the exploitation of a qualifying IP right (“the relevant qualifying IP right”),

(b) the transferor assigns the relevant qualifying IP right, or grants or transfers an exclusive licence in respect of it, to another company (“the transferee”), and

(c) the transferee begins to carry on the trade,

the following provisions apply in determining under this Part the relevant IP profits of the trade carried on by the transferee.

(2) The transferee is to be treated as not being a new entrant if—

(a) an election under section 357A(1) has effect in relation to the transferor on the date of the assignment, grant or transfer mentioned in subsection (1)(b) (“the transfer date”), and

(b) the first accounting period of the transferor for which that election had effect began before 1 July 2016.

(3) The relevant qualifying IP right is to be treated as being an old qualifying IP right in relation to the transferee if by reason of section 357BP it is an old qualifying IP right in relation to the transferor.

(4) Expenditure incurred prior to the transfer date by the transferor which is attributable to relevant research and development undertaken by the transferor is to be treated for the purposes of section 357BMB as if it is expenditure incurred by the transferee which is attributable to relevant research and development undertaken by the transferee.

(5) Expenditure incurred prior to the transfer date by the transferor in making a payment to a person in respect of relevant research and development contracted out by the transferor to that person is to be treated for the purposes of sections 357BMC and 357BMD as if it is expenditure incurred by the transferee in making a payment to that person in respect of relevant research and development contracted out by the transferee to that person.

(6) Expenditure incurred prior to the transfer date by the transferor in making a payment in connection with the relevant qualifying IP right which is within subsection (1A), (1B) or (1C) of section 357BME is to be treated for the purposes of that section as if it is expenditure incurred by the transferee in making a payment in connection with that right which is within one of those subsections.

(7) Expenditure incurred by the transferee in making a payment to the transferor in respect of the assignment, grant or transfer mentioned in subsection (1)(b) is to be ignored for the purposes of section 357BME.

(8) In this section—

“trade” includes part of a trade, and

“relevant research and development” means research and development which relates to the relevant qualifying IP right.

(9) For the purposes of this section research and development “relates” to the relevant qualifying IP right if—

(a) it 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.””

Amendment 115, in clause 60, page 116, line 9, for “357A” substitute “357A(1)”.—(Mr Gauke.)

Clause 60, as amended, ordered to stand part of the Bill.

Schedule 9