Chapter 13: Disposal and acquisition of know-how
Overview
658.This Chapter sets out the rules for calculating trade profits if a trading company receives a payment for know-how. Payments to non-traders are dealt with by the rules in Chapter 2 of Part 9 of this Act.
659.Part 8 of this Act sets out rules for the taxation of gains and losses on companies’ intangible fixed assets. Those rules take priority over any other tax rules (see section 906). So the Part 8 rules generally apply instead of the rules in this Chapter. But Chapter 16 of Part 8 ensures that the new rules apply only to assets created or acquired on or after 1 April 2002.
660.The Chapter refers to the “disposal” of know-how. As Walton J pointed out in John and E Sturges Ltd v Hessel (1975), 51 TC 183 ChD(6) (on page 206):
the mere imparting of “know-how” cannot be equated with the disposal of a capital asset. Just like the schoolmaster’s knowledge, it remains the property of the person imparting it as well after as before another is told.
661.This Act retains “disposal” because “disclosure” gives rise to difficulties in identifying the person to whom the disclosure is made (who may not be the person who buys the know-how).
Section 176: Meaning of “know-how” etc
662.This section sets out the meaning of know-how and explains other concepts used in the Chapter. It is based on sections 531 and 533 of ICTA and section 572 of CAA. The corresponding rule for income tax is in section 192 of ITTOIA.
663.The definition of “mineral deposits” in subsection (2) is restored to what it was before the enactment of CAA. See Change 41 in Annex 1.
664.Subsections (5) and (6) extend the meaning of “sale” to include an exchange. This rule is based on section 572 of CAA, which applies to section 531 of ICTA in accordance with section 532 of ICTA.
Section 177: Disposal of know-how if trade continues to be carried on
665.This section sets out a general rule for the treatment of payments received for the disposal of know-how. It is based on section 531 of ICTA. The corresponding rule for income tax is in section 193 of ITTOIA.
666.Subsections (3) to (6) deal with the case where know-how is disposed of with other assets. The rules are based on sections 562 and 563 of CAA, which apply to section 531 of ICTA in accordance with section 532 of ICTA.
Section 178: Disposal of know-how as part of disposal of all or part of a trade
667.This section sets out the main exception to the general rule in section 177. It is based on section 531 of ICTA. The corresponding rule for income tax is in section 194 of ITTOIA.
668.Subsection (2) provides that a payment for know-how as part of the disposal of a trade is generally treated as a capital receipt for goodwill. This rule applies only if the person making the disposal is liable to corporation tax. If that person is liable to income tax the rule in section 194 of ITTOIA applies, with the same result.
669.Subsection (5) allows the parties to the transaction to elect for the payment not to be treated as one for goodwill. The effect of an election for the purchaser is that the payment may qualify for capital allowances under Part 7 of CAA. Or, exceptionally, the purchaser may be able to treat the payment as a trading expense. As such an election may affect both parties to the transaction the election has to be made by both.
670.The question whether the election is made under this section or under section 194(5) of ITTOIA is decided by reference to the position of the person disposing of the know-how. If that person is liable to corporation tax this section applies; if the person is liable to income tax, ITTOIA applies.
671.This section does not specify that the election is to be made to “the inspector”. 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.
672.Subsection (6) gives the time limit for the election. Most elections in this Act have to be made “not later than two years after the end of the accounting period …”. But in this case one of the persons making the election may be chargeable to income tax. So the time limit for an election is based on the date of the disposal.
673.Subsection (7) deals with a disposal by an income tax payer to a corporation tax payer. An election under section 194(5) of ITTOIA is treated as an election under this section. The corresponding rule for a disposal by a corporation payer to an income tax payer is in section 194(7) of ITTOIA.
Section 179: Seller controlled by buyer etc
674.This section ensures that if the seller and buyer are under common control:
the general rule in section 177 does not apply; and
the parties to the transaction may not elect for the payment for know-how not to be treated as a capital payment for goodwill.
675.The section is based on section 531 of ICTA. The corresponding rule for income tax is in section 195 of ITTOIA.
676.For the purposes of this section, “control” is defined in section 840 of ICTA (as applied by section 1316 of this Act). The ICTA definition of “control” is identical in effect to that in section 574 of CAA. But, as the relevance of “control” in this Act goes wider than this Chapter, the ICTA definition is used here.
677.This section is one of the exceptions to the general rule in section 1258 of this Act that a firm is not to be regarded for tax purposes as a separate entity. If a firm is connected with the seller or purchaser of its know-how the payment for know-how is treated as one for goodwill.
[1975] STC 127