What does paragraph 55 of Schedule 2 to the Income Tax Act 2007 do?

Paragraph 55 modifies section 195 for shares issued before 6 April 2000 under the loss relief provisions of Chapter 6 of Part 4. It provides two carve-outs so that trades receiving substantial royalties or licence fees are not automatically treated as excluded activities, preserving eligibility for income loss relief.

How does the film production carve-out work under paragraph 55?

The film production carve-out applies where the company was engaged throughout the relevant period in producing films, or producing and distributing its own films. All royalties and licence fees received must relate to films it produced during that period, or to associated sound recordings and derived products. If both conditions are met, the trade is not excluded.

What is the research and development carve-out under paragraph 55?

The research and development carve-out applies where the company was engaged in research and development throughout the relevant period, and all royalties and licence fees received during that period are attributable to research and development the company itself carried out. Meeting both conditions prevents the trade from being treated as an excluded activity.

What is the relevant period referred to in paragraph 55 of Schedule 2?

The relevant period is the continuous period specified in section 134(3) of the Income Tax Act 2007. It defines the timeframe over which the company must satisfy the trading requirement for loss relief purposes. The company must meet the applicable carve-out conditions throughout the entirety of this period, not merely at a single point in time.

Income Tax Act 2007 Schedule 2 paragraph 55

Excluded activities: receipt of royalties and licence fees

Paragraph 55 modifies the rules on royalties and licence fees as excluded activities for shares issued before 6 April 2000 under the loss relief provisions of Chapter 6 of Part 4.

For shares issued before 6 April 2000, a modified version of section 195 applies when determining whether a trade constitutes excluded activities by reason of receiving royalties or licence fees.
A trade is not treated as an excluded activity merely because it substantially involves receiving royalties or licence fees, provided the company is engaged throughout the relevant period in film production (or film production and distribution) and all such fees relate to its own films, associated sound recordings or derived products.
Similarly, a trade escapes the excluded activities label if the company is engaged in research and development throughout the relevant period and all royalties and licence fees received are attributable to research and development it has itself carried out.
The "relevant period" is the continuous period referred to in section 134(3), which defines the timeframe over which the trading requirement must be met for loss relief purposes.

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