Income Tax (Trading and Other Income) Act 2005 section 194

Disposal of know-how as part of disposal of all or part of a trade

Section 194 deals with the tax treatment of payments for know-how when it is sold as part of the sale of all or part of a trade, providing the main exception to the general rule that such payments are treated as trading income.

• When know-how is sold as part of a trade disposal, the payment is generally treated as a capital receipt or payment for goodwill rather than as trading income, provided the relevant party is within the charge to income tax
• This capital treatment does not apply to the buyer if the trade was carried on wholly outside the United Kingdom before the acquisition
• Both parties may jointly elect within two years of the disposal for this capital treatment not to apply, which may allow the buyer to claim capital allowances or treat the payment as a trading expense instead
• Where an election is made under the corresponding corporation tax provision in section 178 of CTA 2009 and the buyer is within the charge to income tax, that election is automatically treated as also being made under this section