Commentary on Sections Overview Overview Section 178: Disposal of know-how as part of disposal of all or part of a trade
667.This section sets out the main exception to the general rule in section 177. It is based on section 531 of ICTA. The corresponding rule for income tax is in section 194 of ITTOIA.
668.Subsection (2) provides that a payment for know-how as part of the disposal of a trade is generally treated as a capital receipt for goodwill. This rule applies only if the person making the disposal is liable to corporation tax. If that person is liable to income tax the rule in section 194 of ITTOIA applies, with the same result.
669.Subsection (5) allows the parties to the transaction to elect for the payment not to be treated as one for goodwill. The effect of an election for the purchaser is that the payment may qualify for capital allowances under Part 7 of CAA. Or, exceptionally, the purchaser may be able to treat the payment as a trading expense. As such an election may affect both parties to the transaction the election has to be made by both.
670.The question whether the election is made under this section or under section 194(5) of ITTOIA is decided by reference to the position of the person disposing of the know-how. If that person is liable to corporation tax this section applies; if the person is liable to income tax, ITTOIA applies.
671.This section does not specify that the election is to be made to “the inspector”. But the general rules about claims and elections in Schedule 18 to FA 1998 require elections to be made in a return or, if that is not possible, to “an officer of Revenue and Customs” in accordance with Schedule 1A to TMA.
672.Subsection (6) gives the time limit for the election. Most elections in this Act have to be made “not later than two years after the end of the accounting period …”. But in this case one of the persons making the election may be chargeable to income tax. So the time limit for an election is based on the date of the disposal.
673.Subsection (7) deals with a disposal by an income tax payer to a corporation tax payer. An election under section 194(5) of ITTOIA is treated as an election under this section. The corresponding rule for a disposal by a corporation payer to an income tax payer is in section 194(7) of ITTOIA.