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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate debt: transfers of income streams: company transferors

Company transferors: what they transfer

Paragraph 1: transfer of right to ‘relevant receipts’

The provisions in CTA10/S753(3) apply where a company transfers a right to ‘relevant receipts’ to a person and this transfer is not the consequence of the transfer of the asset from which the receipts arise. In other words the provisions apply to the sale of an income stream where the seller retains the underlying asset from which the income arises.

The transfer of income must be the consequence of the transfer of a right, and not simply an application of the transferor’s income. So the legislation will not apply where, for example, trustees of a trust distribute trust income or apply trust income for the benefit of a beneficiary where the trustees remain liable to tax in respect of the income.

S752(2) defines relevant receipts as any income which but for the transfer would be charged to corporation tax as income of the transferor or brought into account in calculating the profits of the transferor for the purposes of corporation tax. So relevant receipts include not just amounts of pure income, but also income which would be a component of the calculation of profits from a trade or other business.

Subject to two exceptions, the legislation will not apply in any case where there is an outright sale of the income-producing asset.

This definition of relevant receipts ensures that the legislation, like many of the provisions it replaces, deals with the transferable income which the payer would have paid regardless of the transfer and regardless of who held the right to payment.

Example 1

A Ltd sells a picture-framing business to B. This includes assigning the lease for the premises and the sale of equipment and stock and the transfer of a number of income-producing assets.

Although, there has, in a sense, been a transfer of an income stream from A Ltd to B (that is, the trading income), the transfer of income streams provisions will not apply. The underlying income-producing assets have been sold.

Example 2

C Ltd has a software development and consultancy business. In the course of the trade, the company develops a computer program in which there is commercial interest. C Ltd sets up a subsidiary company, D Ltd, to exploit and market the software. C Ltd enters into a licensing agreement granting D Ltd a 25-year licence on the source code and intellectual property rights in the software, in exchange for a licence fee paid quarterly. The agreement does not require C Ltd to further develop or maintain the software, or supply technical advice to users - this is all done by D Ltd.

The licence fees are agreed to form part of C Ltd’s trading income, and are reflected in the amount it returns as trading profits.

C Ltd sells the right to the quarterly licence fees paid by D Ltd to an unconnected company, E Ltd.

Depending on the facts of the case, the sale proceeds may be treated as trading income on first principles. However, if they are not, then this is a sale of a right to relevant receipts without the transfer of the underlying asset and C Ltd should include the payment for the right to the income as trading income by virtue of S753(1).