Revenue Note for Guidance
The section provides for a deduction against trading income of the cost of acquiring technical know-how for use in a trade. The allowance is not available in the case of know-how acquired for use in a profession. No relief is available where the seller and the purchaser are connected. The deduction is only available where the know-how is purchased for genuine commercial reasons.
The section also provides a deduction for expenditure on know-how in circumstances where a company acquires a trade and a connected company acquires know-how used in the trade. The deduction will cover the cost of the know-how acquired in the year it is incurred and will be allowed against profits of the trade, defined as a ‘relevant trade’, in which the know-how is then used by the company acquiring it. However, it will not be allowed against any other income or profits. Where a deductible amount exceeds the profits of the relevant trade before applying the deduction, any excess will be carried forward and allowed as an amount deductible for succeeding chargeable periods.
Anti-avoidance provisions are included to deal with contrived arrangements between connected persons and provision is made to withdraw relief which is subsequently found not to have been due.
The section allows the Revenue Commissioners to consult with an expert who in their opinion may be of assistance to them in ascertaining the extent to which the expenditure is incurred on know-how.
Finally, relief under this section is being discontinued for companies following the introduction, in the Finance Act 2009, of the scheme for the acquisition of specified intangible assets [see section 291A]. However, provision is made to allow a company to claim relief under this section, on making an election to this effect, for expenditure incurred by it on know-how after 7 May 2009 and before 7 May 2011.
(1) Know-how is defined as industrial information and techniques likely to assist in the manufacture or processing of goods or materials or likely to assist in agricultural, forestry, fishing or mining operations.
(2) Expenditure incurred by a person on know-how used in a trade carried on by that person can be deducted (unless it is otherwise allowed to be deducted) as an expense in calculating trading profits. The deduction extends also to expenditure on know-how which is incurred before the setting up of a business.
(3)(a) No deduction is allowed for the purchase of know-how as part of the purchase of a business.
(3)(b) However, the subsection provides a deduction for expenditure on know-how in circumstances where a person acquires a trade or part of a trade and a connected person acquires know-how used in the trade or the part of the trade. The deduction is provided for the cost of the know-how acquired in the year it is incurred and is allowed against profits of the trade in which the know-how is then used by the acquiring company – the relevant trade – but not against any other income or profits. In the absence of such a provision, expenditure on know-how would not be deductible for tax purposes since the expenditure is of a capital nature.
The subsection denies a tax deduction for any royalty or other payments made by the person who acquired the trade or part of the trade in respect of the know-how acquired by the connected person, and also disallows a deduction where the trade or part of the trade is transferred from the person who acquired it to the person who acquired the know-how.
(3)(c) Where a deductible amount exceeds the profits of the relevant trade before applying the deduction, any excess shall be carried forward and allowed as an amount deductible for succeeding chargeable periods. This means that any such excess cannot be used to claim loss relief against profits of the current or preceding chargeable period or for the purposes of obtaining group relief against profits of other companies in a group.
(4) There is no deduction for expenditure on know-how where the seller and purchaser are closely connected. This is to ensure that collusive arrangements are ruled out.
(5) The Revenue Commissioners may, in relation to a claim for a deduction, consult with an expert who in their opinion may be of assistance to them in ascertaining the extent to which the expenditure is incurred on know-how.
Before disclosing information to an expert, the Revenue Commissioners must make known to the claimant the identity of the expert who they intend to consult and the information that they intend to disclose to the expert.
Where the claimant shows to the satisfaction of the Revenue Commissioners, or on appeal to the Appeal Commissioners, that disclosure of such information to that expert could prejudice the claimant’s trade, then the Revenue Commissioners will not make such disclosure.
(6) Provision is made to withdraw relief claimed under this section which is subsequently found not to have been due.
(7) Subject to the transition period provided for in subsection (8) this section shall not apply to a company within the charge to corporation tax.
(8) Notwithstanding the discontinuance of relief under this section for companies, this subsection allows a company to claim relief, on making an election to this effect, for expenditure incurred by it on know-how after 7 May 2009 and before 7 May 2011. The election must be made on the company’s statutory return for the accounting period of the company in which the expenditure is incurred and must be made not later than 12 months from the end of the accounting period in which the capital expenditure, giving rise to the claim, is incurred.
Relevant Date: Finance Act 2021