Commentary on Sections Changes in partnership Section 1271: Sale of patent rights: effect of partnership changes
3243.This section sets out what happens when there is a sale of patent rights by a trader and there is change in the membership of any firm that carries on the trade. It is based on section 558 of CAA. The corresponding rule for income tax is in section 861 of ITTOIA.
3244.The rules for intellectual property are split:
	the rules that give capital allowances are in CAA;
	the rules that charge capital receipts from the sale of patent rights are in Chapter 3 of Part 9; and
	the special rules that apply to firms are set out in this section and section 1272.
3245.If a trader receives a sum from the sale of patent rights in the ordinary course of the trade the sum is a trade receipt. In that case, it is not a “capital sum” and section 913(1)(a) of this Act ensures that the special rules do not apply.
3246.If a trader receives a capital sum from the sale of patent rights, the sum is excluded from the calculation of the trade profits by the general rule that excludes capital receipts. Instead, the sum is separately charged to corporation tax under Chapter 3 of Part 9 of this Act. The profit on the sale is charged to tax over six years. But the seller may elect to have the sum charged in the year in which the proceeds of sale are received. Or the charge may be spread in accordance with section 916 or 917 of this Act.
3247.In the case of a taxpayer liable to corporation tax, Part 8 of this Act sets out rules for the taxation of gains and losses on companies’ intangible fixed assets. Those rules take priority over any other tax rules (see section 906(1)). So the Part 8 rules generally apply instead of the rule in this section. But Chapter 16 of Part 8 ensures that the Part 8 rules apply only to assets created or acquired on or after 1 April 2002.
3248.Subsection (1) sets out the conditions for the section to apply. In particular, there has to be:
	a charge (to income tax or corporation tax) on the proceeds from the sale of patent rights; and
	a change in the persons carrying on the trade during periods in which tax is chargeable.
3249.Subsection (4) determines the amount to be charged as income of each company in the period of change. That amount is in two parts:
	for the period up to the change, a time-apportioned part of the amount that would otherwise have been charged for the whole period; and
	for the period after the change, the company’s share of the amount still to be charged after the change, apportioned to the period on a time basis.
3250.Subsection (5) sets out the general assumption that all the current partners step into the shoes of the persons who were partners at the time of the original sale. The amount charged in each accounting period is arrived at by spreading the remaining charge evenly over the rest of the period for which tax would otherwise have been charged.
3251.One of the consequences of the current partners stepping into the shoes of the original partners is that an amount originally charged to income tax may become charged to corporation tax, and vice versa. This consequence was not explicitly acknowledged in ITTOIA. So Part 2 of Schedule 1 to this Act amends sections 861 and 862 of ITTOIA to clarify how the rule works for income tax. See Change 89 in Annex 1.