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HMRC internal manual

Capital Allowances Manual

Patents: Allowances: Qualifying expenditure

CAA01/S467 - S469, CAA01/S481

Patent allowances are capital allowances given on capital expenditure incurred on the purchase of patent rights.

The current system of patent allowances applies to expenditure incurred on or after 1 April 1986. The system is similar to the system of plant and machinery allowances in that expenditure is normally pooled and allowances are given at an annual rate of 25% on the reducing balance basis. The system for expenditure incurred before 1 April 1986 is described at CA75140.

The expenditure on which patent allowances are given is called qualifying expenditure. Qualifying expenditure is either qualifying trade expenditure or qualifying non-trade expenditure.

Qualifying trade expenditure is capital expenditure incurred by a person on the purchase of patent rights for the purposes of a trade within the charge to tax carried on by that person. Pre-trading expenditure on buying patent rights is treated as incurred on the first day of trading provided that the person owns the rights on that date.

Qualifying non-trade expenditure is capital expenditure incurred by a person on the purchase of patent rights that is not qualifying trade expenditure provided that income receivable from those rights is liable to tax.

Qualifying expenditure is restricted if a person buys patent rights and either:

  • the person buying the rights is connected with the seller, or
  • the sale is a sole or main benefit transaction. A sole or main benefit transaction is one, or one of a series, where the sole or main benefit, which might be expected to accrue to the parties, is the obtaining of a patents allowance.

 

In those cases the buyer’s expenditure qualifying for capital allowances is restricted to:

a. the seller’s disposal value if there is one,

b. if the seller has no disposal value but receives a capital sum which is chargeable that capital sum,

c. if neither (a) nor (b) applies the smallest of:

  • the open market value of the patent rights,
  • where capital expenditure was incurred by the seller, that capital expenditure,
  • where capital expenditure was incurred by anyone connected with the seller his or her capital expenditure.