Patent box—grandfathered rules—standard calculation of relief
Produced in partnership with Anne Fairpo of Temple Tax Chambers
Patent box—grandfathered rules—standard calculation of relief

The following Tax practice note Produced in partnership with Anne Fairpo of Temple Tax Chambers provides comprehensive and up to date legal information covering:

  • Patent box—grandfathered rules—standard calculation of relief
  • Step 1—calculate total gross trade income (TI) for the accounting period (non-streamed)
  • Step 2—calculate RIPI of the trade for the accounting period (non-streamed)
  • Head 1—income from sale of patented items
  • Head 2—licence fees or royalties
  • Head 3—proceeds of realisation
  • Head 4—infringement income
  • Head 5—damages, insurance and other compensation
  • Step 2—notional royalties
  • Step 2—excluded income
  • More...

The patent box is an elective regime that provides for an effective 10% rate of corporation tax on worldwide profits attributable to qualifying patents and similar intellectual property (IP) rights.

A company’s profits eligible for relief under the patent box are effectively charged to corporation tax at a lower rate (10%)—see Practice Note: Commencement and phasing in of patent box relief below. The legislation gives effect to this relief by allowing a deduction to be made in calculating the profits of the company’s trade for an accounting period. For more information on the patent box generally, see Practice Note: Patent box—key features of the regime.

It is important to note that the patent box calculation changed for new claims from July 2016, in order to comply with the framework for preferential IP regimes set out in the OECD BEPS project. The pre-1 July 2016 rules are grandfathered and continue to apply for qualifying claimants until 30 June 2021.

Under the grandfathered rules, the calculation of this deduction (and hence the patent box relief) involves six or seven steps, which can be broken into the following three stages:

  1. the first stage (steps 1 to 3) identifies profit by:

    1. starting with TI (total gross income of the trade, which includes revenue receipts and any profits from the realisation of trading intangibles or pre-2002 patent rights but excludes any

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