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HMRC internal manual

International Manual

UK residents with foreign income or gains: corporation tax: Intangible fixed assets

Measure of income from intangibles for double taxation relief purposes
Credit relief: other amendments to Part 2


Under the rules introduced in FA02/SCH29 and now in CTA09/Part 8 (CIRD10100 onwards) receipts, including capital items, derived from a company’s goodwill and ‘intangible fixed assets’ (and expenditure relating to those assets) come within a new code. These new rules apply for corporation tax only. Assets such as patents, trade-marks and other intellectual property rights fall with the definition of an intangible fixed asset.

The new rules apply generally only to intangible assets created or acquired on or after 1 April 2002 but royalty income from all such assets comes within the new code with effect from that date. See CIRD11720 for guidance on the detailed commencement provision for royalties.

The introduction of the new rules made it necessary to amend the general double taxation relief code on lines broadly similar to the amendments for companies’ loan relationships (INTM167120 onwards). These amendments are in FA02/SCH30/PARA5 and are described below.

Measure of income from intangibles for double taxation relief purposes

The rules in CTA 2009/Part 8 normally take priority over any other provisions which apply to the same subject matter for corporation tax. There are, however, specific exceptions which ensure that these rules do not override the rules in the double taxation code concerned with the treatment of foreign tax in measuring the related income for corporation tax purposes.

Firstly, for the purpose of credit relief for foreign tax foreign income within CTA 2009/Part 8 must not be reduced by the amount of that tax. This is achieved by TIOPA10/S31 (5).

Secondly, nothing in Part 8 prevents relief being given by way of deduction rather than credit. This is achieved by TIOPA10/S112 (5).

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Credit relief: other amendments to Part 2

Where the intangible assets are held for the purpose of a trade or property business, including an ‘overseas property business’ (defined in ITTOIA05/S265 - see PIM4705) the related incomings (‘credits’ in the language of Schedule 29) are brought to account as income from that source. Where such incomings have borne foreign tax which qualifies for relief the double taxation rules apply as they would to any other incomings brought to account in this way.

But where intangible assets are held for some other commercial purpose there are special rules for bringing into account the related incomings, referred to as ‘non-trading’ items in this paragraph. These rules are broadly similar to those for a company’s loan relationships (see INTM167120 onwards), but not identical to them. The special rules are in TIOPA10/S49B, S51 and S56.

Instead of bringing incomings (whether income or gains) into account separately in respect of each source or asset, all non-trading items (including non-trading outgoings - ‘debits’) are aggregated to arrive at a ‘non-trading profit’ or a ‘non-trading loss’. All or part of a non-trading loss may be set against a company’s total profits for the period, an excess surrendered as group relief or an unused loss carried forward to the next accounting period (see CIRD13530 onwards).

The effect of aggregation in this way is that the corporation tax which would otherwise be referable to a sum which has borne foreign tax may be reduced by relief given for expenditure which is unrelated to the source or asset from which it is derived. And the maximum foreign tax which can be relieved is reduced accordingly.

To avoid the loss of credit relief, compared with the previous rules, in this way what is now TIOPA10/S51 was introduced. This provides for the disaggregation of non-trading items within the intangibles rules in CTA09/Part 8 for the purpose of computing the corporation tax referable to those items which have borne foreign tax.

As a result, purely for this purpose, a company may allocate as it sees fit the non-trading outgoings it must otherwise set against its non-trading incomings. In practice, the company may be expected to set those outgoings as far as possible against income or gains from sources and against non-trading incomings which have not borne foreign tax. However, this is subject to the application of TIOPA10/S49B where there are non-trading debits in respect of the same intangible fixed asset as the non-trading credit - see INTM167475.

In making this allocation for an accounting period a company need not allocate non-trading outgoings which, instead of being set against non-trading incomings for the current period, are carried forward to the next accounting period. In other words the amount allocated is limited to the sum which reduces the company’s overall taxable profit for the accounting period.

Unlike the similar rules for loan relationships there are no special rules for:

  • sums surrendered as group relief (since under the intangible asset rules this is only possible once the corporation tax liability for the accounting period has been wholly eliminated),
  • sums carried back to the previous accounting period (since that is not permitted), nor
  • non-trading losses brought forward to the current accounting period from earlier periods (since, apart from a bar on surrendering brought forward losses as group relief they can be used in exactly the same way as non-trading outgoings of the period).

INTM167480 contains examples illustrating the rules explained above.