What is the purpose of section 357FA of the Corporation Tax Act 2010?

Section 357FA is an anti-avoidance rule that prevents companies from incorporating a qualifying intellectual property item, such as a patented component, into a larger product primarily to make the entire sale income eligible for the reduced Patent Box tax rate under United Kingdom corporation tax law.

When does the anti-avoidance rule in section 357FA apply?

The rule is triggered where the main purpose, or one of the main purposes, of incorporating a qualifying IP item into a larger product is to ensure the sale income qualifies as relevant IP income. Where it applies, the income is taxed at the standard corporation tax rate rather than the reduced Patent Box rate.

Does section 357FA prevent all incorporation of patented components into products?

No. Section 357FA only applies where the incorporation is driven primarily by a tax motive. If a qualifying item is included for genuine commercial or technical reasons and the tax advantage is merely incidental, the rule does not apply and the income may still qualify as relevant IP income.

What is a qualifying item under section 357FA?

A qualifying item takes its meaning from section 357BH of the Corporation Tax Act 2010. It broadly refers to items such as patented inventions or products that derive their value from qualifying intellectual property rights, including patents and similar protected innovations under United Kingdom law.

Corporation Tax Act 2010 section 357FA

Incorporation of qualifying items

Section 357FA is an anti-avoidance rule that prevents companies from incorporating a qualifying intellectual property item into a larger product mainly to make the sale income eligible for the Patent Box regime.

If a qualifying IP item (such as a patented component) is incorporated into a larger product, the income from selling that larger product is not automatically treated as relevant IP income.
The rule is triggered where the main purpose, or one of the main purposes, of incorporating the qualifying item is to secure that the sale income qualifies as relevant IP income.
Where the rule applies, the income from the sale of the larger product will not be treated as relevant IP income and therefore cannot benefit from the reduced Patent Box tax rate.
A "qualifying item" takes its meaning from section 357BH and broadly refers to items such as patented inventions or products that derive their value from qualifying intellectual property rights.

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