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HMRC internal manual

Capital Allowances Manual

HM Revenue & Customs
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Patents: Allowances: Balancing allowances and balancing charges

CAA01/S472, S476 - S477

There is a balancing allowance for a chargeable period if:

  • that chargeable period is the period in which the trade permanently ceases, or
  • it is the chargeable period in which the last of the patent rights in the non-trade pool comes to an end and the pool for the chargeable period exceeds any disposal values.


The balancing allowance is the amount by which the pool exceeds the disposal values.

There is a balancing charge if the pool for a chargeable period is less than the disposal values for that chargeable period. The balancing charge is the difference between the pool and the disposal values.

The disposal value of patent rights is the net proceeds of sale. Disposal value is restricted to cost unless the patent rights were acquired in a connected person transaction or a series of connected person transactions. In such a case the limit on disposal value is the greatest amount of capital expenditure incurred by any of the people involved in those transactions. If the disposal is restricted to original cost any excess will be taxable under Case VI for a company or assessable to income tax for an individual CA75200.

Example David, Stephen and Graham are connected. David buys patent rights for £11,000. He sells them to Stephen for £10,000 who then sells them to Graham for £9,000. If Graham sells the rights for £12,000 the limit on his disposal value is £11,000, the amount David paid for the rights. It is not £9,000, the amount Graham paid to Stephen for the rights.

There may be a series of sales of patent rights. If there is the total of the disposal values brought to account in the capital allowance computation cannot exceed the original capital expenditure incurred. Any excess will be taxed under Case VI for a company or assessable to income tax for an individual.

Example Eric spends £10,000 on buying patent rights and claims capital allowances. He grants a licence to Geoff for £6,000. He has to bring a disposal value of £6,000 to account then. If Eric grants a licence next year to Jack for £6,000 the disposal value that he has to bring to account is £4,000. The original capital expenditure was £10,000 and £6,000 was treated as disposal value when Eric granted the licence to Geoff. This means that any later disposal value is restricted to £4,000 (=£10,000 - £6,000). The remaining £2,000 he received when he granted the licence to Jack is assessed to income tax.