Patent box ― the R&D fraction

By Tolley

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

  • Patent box ― the R&D fraction
  • Calculating the R&D fraction
  • Cases where the company is party to a CSA
  • Dates of expenditure
  • Increase for exceptional circumstances
  • Transfer of a trade or part of a trade

There are several steps which must be carried out in order to calculate the amount of qualifying IP profits to which the reduced patent box rate of corporation tax can be applied. Please read the Calculating relevant IP profits ― new entrants guidance note in conjunction with this note for further details of these steps.

For new entrants to the patent box regime, broadly those making their first election for an accounting period beginning on or after 1 July 2016, Step 6 requires the calculation of an R&D fraction. This is sometimes referred to as the ‘nexus fraction’ and effectively limits the level of profits that are eligible for the patent box rate. This is a requirement arising from the OECD’s report on preferential IP regimes and was introduced by FA 2016, s 64.

CTA 2010, s 357BF(2)

This fraction is based on the amount of qualifying in-house R&D expenditure incurred by the patent box company on that particular patent (or other qualifying IP right) plus third party sub-contracted R&D, relative to overall R&D expenditure and any relevant IP acquisition costs. A separate nexus fraction will have to be calculated under this regime for each stream of qualifying patent box profits based on R&D expenditure incurred on the specific patent to which the income stream relates.

The way in which the R&D fraction is calculated for a relevant IP income sub-stream is set out below.

Cost-sharing arrangements (CSA)

Changes which impact the calculation of the R&D fraction have been introduced by F(No 2)A 2017, s 23. The amendments seek to ensure that companies sharing income and costs of R&D projects under CSA are neither advantaged nor disadvantaged for the purposes of the patent box. Commercial arrangements such as this had previously been excluded from the patent box legislation. The intended result of these changes is that the company’s own contribution

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