Section 85 Finance Act 1999

Here’s a breakdown of Section 85 of the Finance Act 1999, formatted in HTML:

Section 85 of the Finance Act 1999 in the United Kingdom significantly altered the tax treatment of intellectual property (IP) rights, particularly concerning the amortization and transfer of those rights. Its primary aim was to modernize the tax rules surrounding IP, recognizing the growing importance of intangible assets in the modern economy and bringing the UK into closer alignment with international practices.

Before Section 85, the tax treatment of IP, such as patents, copyrights, and trademarks, was often complex and inconsistent. Capital allowances, which allow businesses to deduct the cost of assets over their useful life, were typically not available for most IP assets. This created a disincentive for investment in research and development, as businesses couldn’t readily offset the costs of creating or acquiring IP against their taxable profits.

Section 85 introduced a new regime that allowed for the amortization of expenditure on certain IP assets over their useful economic life or, if that life was indeterminable, over a standard period of 25 years. This meant businesses could deduct a portion of the cost of acquiring or creating IP each year, reducing their taxable income. This applied to a wide range of IP rights, including patents, registered designs, trademarks, copyrights, and other intellectual property where value existed.

The legislation specifically addressed the tax treatment of transfers of IP between connected parties. It included anti-avoidance measures designed to prevent businesses from artificially inflating the value of IP transferred within a group to reduce their overall tax burden. Section 85 allowed the Inland Revenue (now HMRC) to challenge valuations of IP transfers if they were considered to be inflated or designed solely for tax advantage.

Furthermore, Section 85 contained provisions addressing the treatment of IP held by individuals. It allowed individuals who created certain types of IP, such as patents, to spread the taxation of any lump-sum receipts from the sale of those rights over a period of up to ten years. This aimed to alleviate the potentially high tax burden on individuals who received a large payment for their inventions or creative works in a single tax year.

The introduction of Section 85 of the Finance Act 1999 was generally welcomed by businesses and IP professionals. It provided greater clarity and certainty regarding the tax treatment of IP assets, making it easier for businesses to plan their investments in innovation and development. The ability to amortize the cost of IP over a defined period provided a valuable tax benefit, encouraging investment in intangible assets. While the anti-avoidance measures added complexity, they were considered necessary to protect the Exchequer from abuse of the new rules.

However, it’s important to note that subsequent legislation and court decisions have further refined the tax treatment of IP rights in the UK. The original provisions of Section 85 have been amended and expanded upon in subsequent Finance Acts. Businesses should always seek professional tax advice to ensure they are complying with the latest rules and regulations regarding the taxation of intellectual property.