Capital Allowances Act 2001

Part 7 U.K. Know-how allowances

Chapter 1 U.K. Introduction

452 Know-how allowances U.K.

(1) Allowances are available under this Part if a person incurs qualifying expenditure on the acquisition of know-how.

(2) In this Part “know-how” means any industrial information or techniques likely to assist in—

(a) manufacturing or processing goods or materials,

(b) working a source of mineral deposits (including searching for, discovering or testing mineral deposits or obtaining access to them), or

(c) carrying out any agricultural, forestry or fishing operations.

(3) In subsection (2)(b)—

(a) “mineral deposits” includes any natural deposits capable of being lifted or extracted from the earth and for this purpose geothermal energy is to be treated as a natural deposit, and

(b) “source of mineral deposits” includes a mine, an oil well and a source of geothermal energy.

453 Know-how as property U.K.

(1) Know-how is to be treated as property for the purposes of this Act.

(2) References in this Act to the purchase or sale of property include the acquisition or disposal of know-how.

Chapter 2 U.K. Qualifying expenditure

454 Qualifying expenditure U.K.

(1) In this Part “qualifying expenditure” means, subject to section 455, capital expenditure incurred on the acquisition of know-how by a person if—

(a) the person is carrying on a trade at the time of the acquisition and the know-how is acquired for use in that trade,

(b) the person acquires the know-how and subsequently sets up and commences a trade in which it is used,

(c) the person acquires the know-how together with the trade or part of a trade in which it was used and the parties to the acquisition make an election under [F1 section 194 of ITTOIA 2005 or under] [F2 section 178 of CTA 2009] (consideration for know-how on disposal of trade to be treated as payment for goodwill unless parties otherwise elect), or

(d) the person acquires the know-how together with the trade or part of a trade in which it was used and the trade in question was, before the acquisition, carried on wholly outside the United Kingdom.

(2) The same expenditure may not be taken into account as qualifying expenditure in relation to more than one trade.

(3) Qualifying expenditure incurred before the setting up and commencement of the relevant trade is to be treated for the purposes of this Part as incurred when the trade is set up and commenced.

(4) “Relevant trade” means the trade by reference to which expenditure is qualifying expenditure.

Textual Amendments

F1 Words in s. 454(1)(c) inserted (6.4.2005) by Income Tax (Trading and Other Income) Act 2005 (c. 5) , s. 883(1) , Sch. 1 para. 562 (with Sch. 2 )

F2 Words in s. 454(1)(c) substituted (with effect in accordance with s. 1329(1) of the amending Act) by Corporation Tax Act 2009 (c. 4), s. 1329(1), Sch. 1 para. 509 (with Sch. 2 Pts. 1, 2)

455 Excluded expenditure U.K.

(1) Expenditure on the acquisition of know-how is not qualifying expenditure to the extent that it is otherwise deducted for tax purposes.

(2) Expenditure on the acquisition of know-how is not qualifying expenditure if—

(a) the buyer is a body of persons over whom the seller has control,

(b) the seller is a body of persons over whom the buyer has control, or

(c) the buyer and the seller are both bodies of persons and another person has control over both of them.

(3) In subsection (2) “body of persons” includes a partnership.

(4) Expenditure on the acquisition of know-how is not qualifying expenditure if it is treated as a payment for goodwill under [F3 section 194(3) of ITTOIA 2005 or under] [F4 section 178(3) of CTA 2009] (consideration for know-how on disposal of trade to be treated as payment for goodwill, unless parties otherwise elect etc.).

Textual Amendments

F3 Words in s. 455(4) inserted (6.4.2005) by Income Tax (Trading and Other Income) Act 2005 (c. 5) , s. 883(1) , Sch. 1 para. 563 (with Sch. 2 )

F4 Words in s. 455(4) substituted (with effect in accordance with s. 1329(1) of the amending Act) by Corporation Tax Act 2009 (c. 4), s. 1329(1), Sch. 1 para. 510 (with Sch. 2 Pts. 1, 2)

Chapter 3 U.K. Allowances and charges

456 Pooling of expenditure U.K.

(1) Qualifying expenditure has to be pooled for the purpose of determining a person’s entitlement to writing-down allowances and balancing allowances and liability to balancing charges.

(2) There is a separate pool for each trade in respect of which the person has qualifying expenditure.

457 Determination of entitlement or liability U.K.

(1) Whether a person is entitled to a writing-down allowance or a balancing allowance, or liable to a balancing charge, for a chargeable period is determined separately for each pool of qualifying expenditure and depends on—

(a) the available qualifying expenditure in that pool for that period (“AQE”), and

(b) the total of any disposal values to be brought into account in that pool for that period (“TDV”).

(2) If AQE exceeds TDV, the person is entitled to a writing-down allowance or a balancing allowance for the period.

(3) If TDV exceeds AQE, the person is liable to a balancing charge for the period.

(4) The entitlement under subsection (2) is to a writing-down allowance except for the final chargeable period when it is to a balancing allowance.

(5) The final chargeable period is the chargeable period in which the trade is permanently discontinued.

458 Amount of allowances and charges U.K.

(1) The amount of the writing-down allowance to which a person is entitled for a chargeable period is 25% of the amount by which AQE exceeds TDV.

(2) If the chargeable period is more or less than a year, the amount is proportionately increased or reduced.

(3) If the trade has been carried on for part only of the chargeable period, the amount is proportionately reduced.

(4) A person claiming a writing-down allowance may require the allowance to be reduced to a specified amount.

(5) The amount of the balancing charge to which a person is liable for a chargeable period is the amount by which TDV exceeds AQE.

(6) The amount of the balancing allowance to which a person is entitled for the final chargeable period is the amount by which AQE exceeds TDV.

459 Available qualifying expenditure U.K.

A person’s available qualifying expenditure in a pool for a chargeable period consists of—

(a) any qualifying expenditure allocated to the pool for that period in accordance with section 460, and

(b) any unrelieved qualifying expenditure carried forward in the pool from the previous chargeable period under section 461.

460 Allocation of qualifying expenditure to pools U.K.

(1) The following rules apply to the allocation of a person’s qualifying expenditure to a pool.

(2) An amount of qualifying expenditure is not to be allocated to the pool for a chargeable period if that amount has been taken into account in determining the person’s available qualifying expenditure for an earlier chargeable period.

(3) Qualifying expenditure is not to be allocated to the pool for a chargeable period before that in which the expenditure is incurred.

461 Unrelieved qualifying expenditure U.K.

(1) A person has unrelieved qualifying expenditure to carry forward from a chargeable period if for that period AQE exceeds TDV.

(2) The amount of the unrelieved qualifying expenditure is—

(a) the excess less the writing-down allowance made for the period, or

(b) if no writing-down allowance is claimed for the period, the excess.

(3) No amount may be carried forward as unrelieved qualifying expenditure from the final chargeable period.

[F5 461A Unrelieved qualifying expenditure: entry to cash basis U.K.

(1) If a person carrying on a trade enters the cash basis for a tax year, any cash basis deductible amount may not be carried forward as unrelieved qualifying expenditure in the pool for the trade from the chargeable period ending [F6 in the previous tax year (or, if there is more than one such period, the latest of them)].

(2) A “cash basis deductible amount” means any amount of unrelieved qualifying expenditure for which a deduction would be allowed in calculating the profits of the trade on the cash basis on the assumption that the expenditure was paid in the tax year for which the person enters the cash basis.

(3) Any cash basis deductible amount is to be determined on such basis as is just and reasonable in all the circumstances.

(4) Subsections (9) and (11) of section 1A (capital allowances and charges: cash basis) apply for the purposes of this section as they apply for the purposes of that section.]

Textual Amendments

F5 S. 461A inserted (with effect in accordance with Sch. 2 para. 64 of the amending Act) by Finance (No. 2) Act 2017 (c. 32), Sch. 2 para. 56

F6 Words in s. 461A(1) substituted (for the tax year 2024-25 and subsequent tax years) by Finance Act 2022 (c. 3), Sch. 1 paras. 36, 61(1)

Modifications etc. (not altering text)

C1 S. 461A(1) excluded by Income Tax (Trading and Other Income) Act 2005 (c. 5), s. 240C(5A) (as inserted (with effect in accordance with Sch. 2 para. 64 of the amending Act) by Finance (No. 2) Act 2017 (c. 32), Sch. 2 para. 7(7))

462 Disposal values U.K.

(1) A person is required to bring a disposal value into account for the chargeable period in which he sells know-how on which he has incurred qualifying expenditure.

(2) The disposal value to be brought into account is the net proceeds of the sale, so far as they consist of capital sums.

(3) But no disposal value need be brought into account if the consideration received for the sale is treated as a payment for goodwill under [F7 section 194(2) of ITTOIA 2005 or under] [F8 section 178(2) of CTA 2009] (consideration for know-how on disposal of trade to be treated as payment for goodwill, unless parties otherwise elect).

Textual Amendments

F7 Words in s. 462(3) inserted (6.4.2005) by Income Tax (Trading and Other Income) Act 2005 (c. 5) , s. 883(1) , Sch. 1 para. 564 (with Sch. 2 )

F8 Words in s. 462(3) substituted (with effect in accordance with s. 1329(1) of the amending Act) by Corporation Tax Act 2009 (c. 4), s. 1329(1), Sch. 1 para. 511 (with Sch. 2 Pts. 1, 2)

[F9 462A Persons leaving cash basis U.K.

(1) This section applies if—

(a) a person carrying on a trade leaves the cash basis in a chargeable period,

(b) the person has incurred expenditure at a time when [F10 the cash basis applies] in relation to the trade,

(c) some or all of the expenditure was brought into account in calculating the profits of the trade on the cash basis, and

(d) the expenditure would have been qualifying expenditure if [F11 the cash basis had not applied] at the time the expenditure was incurred.

(2) In this section the “relieved portion” of the expenditure is the higher of the following—

(a) the amount of that expenditure for which a deduction was allowed in calculating the profits of the trade, or

(b) the amount of that expenditure for which a deduction would have been so allowed if the expenditure had been incurred wholly and exclusively for the purposes of the trade.

(3) For the purposes of determining the person's available qualifying expenditure in the pool for the trade for the chargeable period (see section 456)—

(a) the whole of the expenditure must be allocated to the pool for the trade in that chargeable period, and

(b) the available qualifying expenditure in that pool is reduced by the relieved portion of that expenditure.

(4) For the purposes of determining any disposal values (see section 462), the expenditure incurred by the person is to be regarded as qualifying expenditure.

[F12 (4A) Subsection (11)(za) of section 1A (capital allowances and charges: cash basis) applies for the purposes of this section as it applies for the purposes of that section.]

(5) For the purposes of this section a person carrying on a trade leaves the cash basis in a chargeable period if—

(a) immediately before the beginning of the chargeable period [F13 the cash basis applied] in relation to the trade, and

(b) [F14 the cash basis does not apply] in relation to the trade for the chargeable period.]

Textual Amendments

F9 S. 462A inserted (with effect in accordance with Sch. 2 para. 64 of the amending Act) by Finance (No. 2) Act 2017 (c. 32), Sch. 2 para. 57

F10 Words in s. 462A(1)(b) substituted (for the tax year 2024-25 and subsequent tax years) by Finance Act 2024 (c. 3), Sch. 10 paras. 43(2)(a), 47 (with Sch. 10 paras. 48-50)

F11 Words in s. 462A(1)(d) substituted (for the tax year 2024-25 and subsequent tax years) by Finance Act 2024 (c. 3), Sch. 10 paras. 43(2)(b), 47 (with Sch. 10 paras. 48-50)

F12 S. 462A(4A) inserted (for the tax year 2024-25 and subsequent tax years) by Finance Act 2024 (c. 3), Sch. 10 paras. 43(4), 47 (with Sch. 10 paras. 48-50)

F13 Words in s. 462A(5)(a) substituted (for the tax year 2024-25 and subsequent tax years) by Finance Act 2024 (c. 3), Sch. 10 paras. 43(3)(a), 47 (with Sch. 10 paras. 48-50)

F14 Words in s. 462A(5)(b) substituted (for the tax year 2024-25 and subsequent tax years) by Finance Act 2024 (c. 3), Sch. 10 paras. 43(3)(b), 47 (with Sch. 10 paras. 48-50)

463 Giving effect to allowances and charges U.K.

An allowance or charge to which a person is entitled or liable under this Part for a chargeable period is to be given effect in calculating the profits of the trade, by treating—

(a) the allowance as an expense of the trade, and

(b) the charge as a receipt of the trade.