Calculating relevant IP profits ― from 1 July 2016

Produced by Tolley

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

  • Calculating relevant IP profits ― from 1 July 2016
  • Changes to relevant IP profits calculations
  • The four-stage process
  • Overview of the eight steps
  • Step 1 ― relevant IP income
  • Exclusion of finance income
  • Step 2 ― relevant IP income sub-streams
  • Step 3 ― allocate debits
  • Step 4 ― routine return
  • Step 5 ― marketing assets return
  • More...

Calculating relevant IP profits ― from 1 July 2016

Changes to relevant IP profits calculations

Numerous modifications were made 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. The calculation is now streamed by reference to each IP right, with relevant R&D expenditure linked to the patent or patented item. As a result, the amount of profit that can qualify for the lower effective rate of tax applicable under the patent box regime, depends upon the proportion of development expenditure that has been incurred by the company. A greater level of detail is now needed as the calculations require the allocation of income and expenditure to each sub-stream.

The commentary in this guidance note applies to the calculation of relevant IP profits of a company that:

  1. makes its first patent box election to take effect on or after 1 July 2016, or

  2. elects to apply the post 1 July 2016 rules, if 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 (ie those that made an election prior to 1 July 2016):

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

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

The rules set out below will apply to all companies claiming patent box benefits from 1 July 2021.

Accounting periods which straddle these dates are split into two notional periods and profits and losses are apportioned between them on a just and reasonable basis.

The four-stage process

The legislation essentially sets out a four-stage process for calculating the relevant IP profits, broken down into several detailed steps.

The four stages

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