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

Produced by Tolley
Calculating relevant IP profits ― existing claimants with no new IP rights

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

  • Calculating relevant IP profits ― existing claimants with no new IP rights
  • Changes to the patent box regime
  • Three-stage process
  • Overview of the seven steps
  • Step 1 ― total gross income of the trade
  • Exclusion of finance income
  • Step 2 ― relevant IP income
  • Excluded income
  • Notional royalties
  • Step 3 ― adjustments in calculating profits of trade
  • More...

Changes to the patent box regime

FA 2016 introduced major changes to the patent box regime, following recommendations made by the OECD to implement an internationally developed framework for preferential IP regimes to address base erosion and profit shifting (BEPS). The commentary in this guidance note applies to the calculation of relevant IP profits of a company where:

  1. the accounting period begins before 1 July 2021

  2. the company is not a new entrant, ie the company made a patent box election for an accounting period beginning before 1 July 2016, or it has not elected to be treated as a new entrant, and

  3. none of the relevant IP income brought into account in calculating relevant IP income is attributable to ‘new’ qualifying IP, ie IP granted, assigned or licensed to the company on or after 1 July 2016

CTA 2010, s357C

The following guidance notes set out details of the alternative calculations of relevant IP profits:

  1. Calculating relevant IP profits ― existing claimants with new IP rights

  2. Calculating relevant IP profits ― from 1 July 2016

From 1 July 2021, the rules at CTA 2010, ss 357BF–357BNC (Pt 8A, Ch 2A) (those for ‘new entrants’) apply to all companies. Where an accounting period straddles these respective dates, the period is split into two national periods, with profits and losses being apportioned on a just and reasonable basis.

Three-stage process

The legislation sets out two alternative methods for calculating the amount of profit which qualifies for the patent box, known as the relevant IP profit:

  1. formulaic method (sometimes called the profit apportionment basis)

  2. streaming method

This guidance note deals with the profit apportionment method. See the Calculation of patent box profits ― streaming method guidance note for details of that method.

The legislation essentially sets out a three-stage process for calculating the relevant IP profit, broken down into six-key detailed steps. A seventh step applies in the case of patents which are pending formal grant.

The three-stages which summarise the detailed steps are:

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