Patent box ― small claims treatment

By Tolley

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

  • Patent box ― small claims treatment
  • Interaction with calculation of qualifying IP profits
  • Eligibility for small claims treatment
  • Calculating the small claims amount
  • Practical considerations

Major changes to the patent box regime were made by FA 2016 to bring it into line with the outcome of the OECD’s recommendations on tackling harmful tax practices and preferential IP regimes. See the Overview of the Patent Box guidance note for details. The commentary in this guidance note applies to the calculation of relevant IP profits where the company is not a new entrant, with no new qualifying IP rights for accounting periods beginning before 1 July 2021.

Interaction with calculation of qualifying IP profits

The patent box legislation sets out seven steps that should be followed in order to calculate the qualifying IP profits to which the reduced rate of corporation tax may be applied. These steps are set out in the Calculating relevant IP profits ― existing claimants with no new IP rights guidance note, which should be read in conjunction with this note.

CTA 2010, s 357C

At step 5 of the qualifying IP profits calculation, a qualifying company is able to adopt a simpler, more formulaic approach to determine how much of the qualifying residual profit (QRP) represents profit from qualifying IP rights and how much relates to brand and marketing assets. The brand and marketing profit element (the small claims amount) must be removed from the QRP in arriving at the qualifying IP profits figure.

CTA 2010, s 357C(1)

This simpler approach is known as the ‘small claims treatment’ and is only available by way of election, provided certain eligibility criteria are satisfied. These are explained further below.

If these criteria are not satisfied, step 5 is ignored. Instead, step 6 must be carried out in order to remove the element of QRP which relates to brand and marketing assets (known as the notional marketing royalty) in accordance with CTA 2010, ss 357CN–357CP. See the Patent box ― marketing assets return

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