Corporation Tax

Calculation of patent box profits ― streaming method

Produced by Tolley
  • 19 Oct 2021 22:54

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

  • Calculation of patent box profits ― streaming method
  • Alternative method for calculating patent box profits
  • Calculating relevant IP profits using streaming
  • Just and reasonable allocation for streaming
  • Mandatory patent box streaming

Calculation of patent box profits ― streaming method

Alternative method forcalculating patent box profits

The legislation provides an alternative method of calculating relevant IP profits, referred to as ‘streaming’, which applies foraccounting periods beginning before 1 July 2021, where the company entered the patent box regime before 1 July 2016 and the IP profits are attributable to the pre-1 July 2016 IP rights. Accounting periods that straddle 1 July 2021 are treated forthis purpose only as two separate accounting periods, the second of which starts on that date.

The streaming method is not available to new entrants, which are those making their first patent box election foran accounting period which begins on or after 1 July 2016.

The usual method of calculating the relevant IP profits (the formulaic method) comprises the seven steps set out in CTA 2010, s 357C. See the Calculating relevant IP profits ― not a new entrant and no new IP rights guidance note fordetails.

However, a company may make a streaming election which allows it to carry out an alternative method of calculating the relevant IP profits of the trade forthe accounting period. Broadly, streaming requires a just and reasonable apportionment of a company’s expenses rather than adopting a simple pro rata approach. It is the relevant IP profits of the trade to which the reduced rate of corporation tax is applied. Once an election has been made, it applies to the accounting period forwhich it is first made and to each subsequent accounting period, subject to CTA 2010, s 357DB (see below).

A company may wish to consider making the streaming election if the usual method of calculating relevant IP profits, ie using the ratio of RIPI to total gross income gives a disadvantageous result. This may arise where a company has relatively high levels of non-IP income with low profit margins but a smaller amount of relevant IP income which produces a

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