Patent box ― shortfall in research and development and other qualifying expenditure

By Tolley
Corporation_tax_img

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

  • Patent box ― shortfall in research and development and other qualifying expenditure
  • Changes to the patent box regime
  • Interaction with calculation of qualifying IP profits
  • Definitions
  • Calculating the shortfall

Changes to the patent box regime

Major changes to the patent box regime were made by FA 2016 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 commentary in this guidance note applies to the calculation of relevant IP profits where the company is not a new entrant, with no new qualifying IP rights for accounting periods beginning before 1 July 2021.

If the company is a new entrant making its first patent box election for an accounting period which begins on or after 1 July 2016, the calculations adjusting for research and development (R&D) expenditure are different. Please see the Patent box ― the R&D fraction guidance note for details.

Interaction with calculation of qualifying IP profits

The patent box legislation sets out seven steps that should be followed in order to calculate the qualifying IP profits to which the reduced effective rate of corporation tax may be applied. These steps are set out in the Calculating relevant IP profits ― existing claimants with no new IP rights guidance note, which should be read in conjunction with this note.

CTA 2010, s 357C

At step 3 of the qualifying IP profits calculation, the profits of the trade for the accounting period must be calculated, taking account of any adjustments required by CTA 2010, s 357CG.

CTA 2010, s 357C(1)

One such adjustment is for any shortfall in R&D expenditure for a ‘relevant accounting period’. If a shortfall exists, the amount of R&D expenditure to be brought into account for the period is increased by reference to a specific formula set out in CTA 2010, s 357CH(2) (see below), such that the step 3 profits of the trade will be

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