Calculation of patent box profits ― streaming method

By Tolley
Corporation_tax_img5

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

  • Calculation of patent box profits ― streaming method
  • Changes to the patent box regime
  • Alternative method for calculating patent box profits
  • Calculating the relevant IP profits
  • Just and reasonable allocation
  • Mandatory streaming

Changes to the patent box regime

Major changes to the patent box regime were made by FA 2016, s 64 to bring it into line with the outcome of the OECD’s recommendations on tackling harmful tax practices and preferential IP regimes. See the Overview of the Patent Box guidance note for details.

The legislation provides an alternative method of calculating relevant IP profits, referred to as ‘streaming’ which applies for accounting periods beginning before 1 July 2021, where the company entered the patent box regime before 1 July 2016 and the IP profits are attributable to the pre 1 July 2016 IP rights. Accounting periods which straddle 1 July 2021 are treated for this purpose only as two separate accounting periods, the second of which starts on that date. The streaming method is not available to new entrants, which is those making their first patent box election for an accounting period which begins on or after 1 July 2016.

Alternative method for calculating patent box profits

The usual method of calculating the relevant IP profits (the formulaic method) comprises the seven steps set out in CTA 2010, s 357C. See the Calculating relevant IP profits ― existing claimants with no new IP rights guidance note for details.

CTA 2010, s 357D

However, a company may make a ‘streaming election’ which allows it to carry out an alternative method of calculating the relevant IP profits of the trade for the accounting period. Broadly, streaming requires a just and reasonable apportionment of a company’s expenses rather than adopting a simple pro rata approach. It is the relevant IP profits of the trade to which the reduced rate of corporation tax is applied. Once an election has been made, it applies to the accounting period for which it is first made and to each subsequent accounting period, subject

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