Calculating relevant IP profits ― new entrants

By Tolley
Corporation_tax_img

The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Calculating relevant IP profits ― new entrants
  • Application
  • The four-stage process
  • Overview of the eight steps
  • Step 1 ― relevant IP income
  • Step 2 ― relevant IP income sub-streams
  • Step 3 ― allocate debits
  • Step 4 ― routine return
  • Step 5 ― marketing assets return
  • Step 6 ― R&D fraction
  • Step 7 ― combine the sub-streams
  • Step 8 ― profits arising before the grant of patent rights
  • Practical points

Application

FA 2016 introduced numerous modifications to the way in which the patent box calculations are to be performed with effect for accounting periods beginning on or after 1 July 2016. This follows the OECD’s recommendations on preferential IP regimes as part of the wider base erosion and profit shifting (BEPS) project. Under the provisions of the new regime, the amount of profit that can qualify for the reduced patent box effective rate of tax depends upon the proportion of the asset’s development expenditure that has been incurred by the company. The company must have carried out the R&D that led to the IP which generated the income which is included in the patent box calculations.

FA 2016, s 64

The commentary in this guidance note applies to the calculation of relevant IP profits of a company that is a ‘new entrant’ to the patent box regime, being:

  • one which makes its first patent box election which takes effect on or after 1 July 2016, or
  • one which elects to be treated as a new entrant, if indeed it is already within the patent box regime. A company may wish to do this if, for example, it has only a small amount of grandfathered IP and wishes to avoid operating the two sets of rules in parallel.

Please refer to the following guidance notes for details of the calculation of relevant IP profits for existing claimants:

  • Calculating relevant IP profits ― existing claimants with no new IP rights
  • Calculating relevant IP profits ― existing claimants with new IP rights

The rules set out below will apply to all companies

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