Corporation Tax

Calculating relevant IP profits ― new entrants and 1 July 2021 onwards

Produced by Tolley
  • 23 Mar 2022 10:51

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

  • Calculating relevant IP profits ― new entrants and 1 July 2021 onwards
  • Changes to relevant IP profits calculations
  • Summary of the patent box calculations
  • Step 1 ― identify relevant IP income
  • Exclusion of finance income
  • Step 2 ― relevant IP income sub-streams
  • Step 3 ― allocate debits
  • Step 4 ― deduct routine return
  • Step 5 ― deduct marketing assets return
  • Step 6 ― apply R&D (or ‘nexus’) fraction
  • More...

Calculating relevant IP profits ― new entrants and 1 July 2021 onwards

Changes to relevant IP profits calculations

Numerous modifications were made to the way in which the patent box calculations could be performed with effect for accounting periods beginning on or after 1 July 2016.

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

  1. that is a ‘new entrant’, ie its first patent box election, or its most recent election, takes effect on or after 1 July 2016, or

  2. where the accounting period begins on or after 1 July 2021

CTA 2010, s 357A

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 calculation now requires streaming of profits by reference to each IP right, with relevant R&D expenditure directly linked and allocated 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, which must be supported with evidence. HMRC expects that companies must be able to demonstrate the methodology by which R&D expenditure is allocated to individual sub-streams, at least in the first such period of calculation. Any significant adjustments to

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