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HMRC internal manual

Corporate Intangibles Research and Development Manual

Patent Box: reduced CT rate for profits from patents

The Finance Act 2012 introduced a new Part 8A in the Corporate Tax Act 2010 (‘CTA10’). Commonly known as the Patent Box, this new regime allows companies to elect to apply a 10 per cent rate of corporation tax from 1 April 2013 to all profits attributable to qualifying patents and certain other intellectual property rights. The full benefit of the regime will be phased in over the first four financial years with the full reduced rate applying from 1 April 2017 (CIRD260170).

A company that is a qualifying company (CIRD210000) can opt to elect into the Patent Box (CIRD201020). If, exceptionally, a company has more than one trade, an election applies to all of them.

Where a company makes an election under CTA10/S357A, the reduced rate of tax is delivered through an additional deduction in the corporation tax computation (CIRD201020). A company’s profits which benefit from the Patent Box are a proportion of the corporation tax profit of the company’s trade and are called its ‘relevant IP profits’.

Broadly, there are three stages to calculate the relevant IP profits:

  1. Identify the profits attributable to income arising from exploiting patented inventions - known as ‘relevant IP income’ (see CIRD220150).
  2. Remove a routine return - this reflects the fact that a business would be expected to earn a profit even if it had no access to patented technology or intellectual property. (See CIRD220430.)
  3. Remove the profit associated with intangible assets, such as brand or other marketing assets - the Patent Box is not designed to reward other forms of IP. In many cases this figure is nil and in others a simplified small claims treatment can be applied. (See CIRD220470+.)

There are two alternative methods for identifying how much profit qualifies for the Patent Box:

  • The first is ‘profit apportionment’ and involves the company working out the proportion of RIPI to the total gross income - see CIRD220110.
  • The second involves ‘streaming’ of expenses to RIPI on a just and reasonable basis. In some circumstances companies must use the streaming method. See CIRD230000+.