Calculating relevant IP profits ― from 1 July 2016

Produced by Tolley
Calculating relevant IP profits ― from 1 July 2016

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...

Changes to relevant IP profits calculations

Numerous modifications were made to theway in which thepatent 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 thepatent or patented item. As a result, theamount of profit that can qualify for thelower effective rate of tax applicable under thepatent box regime, depends upon theproportion of development expenditure that has been incurred by thecompany. A greater level of detail is now needed as thecalculations require theallocation of income and expenditure to each sub-stream.

The commentary in this guidance note applies to thecalculation 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 thepost 1 July 2016 rules, if it is already within thepatent 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 thetwo sets of rules in parallel

Please refer to thefollowing guidance notes for details of thecalculation 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 therelevant IP profits, broken down into several detailed steps.

The four stages which summarise thedetailed steps are:

  1. 1)

    Streaming: create

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