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HMRC internal manual

Corporate Intangibles Research and Development Manual

Patent Box: interim guidance on regime change


This guidance advises you about changes taking place from 1 July 2016


As part of the OECD-G20 BEPS (base erosion and profit shifting) project changes are being made to the UK Patent Box to link substantive R&D activity to any Patent Box deduction.

The draft legislation is at clause 60 of Finance (No 2) Bill 2016. The Bill will, subject to Parliamentary approval, become Finance Act 2016 later this year and full Guidance will follow once that legislation is in place. This interim guidance in the meantime is based on the draft legislation as it stood at 2 May 2016.

Draft legislation is subject to change as it passes through Parliament. HMRC will make every attempt to keep this guidance up to date but cannot guarantee that it reflects the current version of the legislation.

The modified Patent Box rules will apply from 1 July 2016, but grandfathering is available for periods before that date for current qualifying intellectual property (IP) assets. The definition of a qualifying asset has not changed.

Making Elections into the Patent Box

There is no requirement for a company, if already elected in to the Patent Box, to make an additional election into the modified rules and nor is there any requirement, if a company is not already elected in, to make an election by 30 June 2016 to ensure current assets are grandfathered.

The two year time limit to make an election will still apply. For example as long as an accounting period straddles 30 June 2016 so part of it falls before that date  any qualifying assets held on that date will be grandfathered as long as an election is made within two years of the end of the accounting period. For example:  a company with an AP ending 31 December 2016 has until 31 December 2018 to make an election.

Patents applied for before 1 July 2016 will, upon grant, be included as current assets. The relevant date is the Application date, not the Priority date.

Any new IP acquired or applied for after 30 June 2016 can only receive patent Box benefits under the modified rules, whether or not the current Patent Box rules apply to the company.

Preparing for the Modified Scheme

There are various preparations to be made, even for companies whose assets are all grandfathered.

Under the new rules, the benefit going to income from an IP asset is related to the cumulative  fraction of research and development spending done by the company itself or by unrelated subcontractors (compared with total R&D spending, which also includes acquisition costs and related party subcontracting). R&D spending, and corresponding income, therefore need to be recorded and this can be done at the level of IP assets, products/ processes reflecting IP assets or product families. This is referred to as “streaming” and builds on the current provisions, except that instead of there being only IP/ non IP income streams, there may be several streams.

A decision as to how the IP is to be streamed should be made early as the tracking and tracing of R&D relating to each stream should start on 1 July 2016. This is to ensure that when the grandfathering period is exited a fraction is ready to be applied.

If you are confident that your fraction will be 1 (for example all your R&D expenditure relates to in house or unconnected subcontract R&D and you have no IP acquisition costs)  you may not immediately need detailed records in order to calculate this fraction. However you should consider whether, if this situation changes in future, you might need more detailed records in which case you should maintain totals of expenditure to feed into the fraction should it change in future years.

Contact point

If you have a CCM please contact them to be put in touch with a Patent Box specialist in the Large Business location.

Otherwise please contact the Incentive and Relief Teams who all have Patent Box specialists

Policy and Legislative  queries should be directed to Jane James{.mailto} and David Harris{.mailto} at CTIS, 3/63 100 Parliament Street, London, SW1A 2BQ