CA75210 - Patents: Sale of patent rights: Taxation of lump sum

ICTA88/S524 & ITTOIA/S587 - S590

The way in which a lump sum received from the sale of patent rights is taxed depends upon whether the recipient is UK resident or non resident.

A UK resident is normally taxed on one-sixth of the amount received for each of the six chargeable periods that begin with the chargeable period in which the capital sum was received. Alternatively, the UK resident taxpayer can elect to have the whole of the capital sum taxed in the chargeable period in which it was received.

The election is made by notice in writing. The notice must be given to the Inland Revenue within these time limits. For income tax, the time limit is 31 January after the end of the tax year next following the tax year in which the sum is received, that is 22 months after the end of the tax year in which the sum is received. For corporation tax the time limit is 2 years from the end of the chargeable period in which the sum is received.

Where a capital sum is received in instalments, each instalment is spread over the 6-year period that begins with the chargeable period in which that instalment is received. An election may be made to have any of the instalments taxed in the chargeable period in which it is received.

Example Gary is resident in the UK. In 2006/07 he agrees to sell patent rights for£9,000. Under the agreement he receives £6,000 in 2006/07 and £3,000 in 2008/09. Gary is assessable on:

• £1,000 = £6,000 / 6 for 2006/07 to 2011/12, and
• £500 = £3,000 / 6 for 2008/09 to 2013/14.

Gary can give notice to the Inland Revenue that the whole of the £6,000 he receives in 2006/07 is to be taxed in 2006/07. The election must be made by the 31 January 2009. He can also elect by the end of 31 January 2011 to have the £3,000 he receives in 2008/09 taxed in that year.

A non-resident who receives a capital sum from the sale of rights in a UK patent is normally taxed on the whole lump sum in the chargeable period in which it is received. Alternatively, the non- resident can elect to have the taxation of the payment calculated as if the capital sum were spread over six years beginning with the year in which the capital sum is paid unless the non- resident is a company chargeable to corporation tax.

The election is to be made to the Inland Revenue by notice in writing by 31 January after the end of the tax year next after the tax year in which the sum is paid. That is, the time limit is 22 months after the end of the tax year in which the sum is received. If you receive an election you should refer it to The Centre for non-residents, Bootle, to whom you should also refer any repayment claim in respect of the cost of the rights sold.

Where the non resident is a company chargeable to corporation tax the company can make an election to have the capital sum taxed over accounting periods which end not later than six years from the beginning of the accounting period in which the capital sum is paid. The election must be made by notice in writing to the Board within two years of the end of the accounting period in which the sum is paid.

The spreading election made by the seller has no effect on the amount of tax to be deducted by the buyer. Where the buyer is a UK resident company tax should be accounted for under the provisions of ICTA88/SCH16. Where the company does not do so, an assessment should be made under ICTA88/SCH16, or, where the payer is not subject to the Schedule 16 procedure, an assessment should be made under ICTA88/S350 to collect the tax deducted. Please see CA75230 and CTM35270 in relation to payments made by companies on or after 1 October 2002.