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HMRC internal manual

Corporate Intangibles Research and Development Manual

HM Revenue & Customs
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Patent Box: relevant IP profits: overview

In the normal course, there are three stages to calculate the profit to which the Patent Box tax rate applies - the ‘relevant IP profit’. These are broken down in the legislation into six steps. (See CIRD220110.)

Additionally, a seventh step may apply if profits were made previously from inventions awaiting grant of a patent if the patent is awarded in the accounting period - see CIRD220540.

Note that ‘RIPI’ is not an abbreviation for ‘relevant IP income’ (see definition at step 2 CIRD220110 and CIRD220160).

First stage

The first stage is steps 1 to 3 in CTA10/S357C. This:

  • starts with the ‘total gross income’ of the trade (CIRD220120), which includes revenue receipts; and any profits from the realisation of trade intangibles or patent rights, but excludes any finance income (CIRD220130);
  • works out the proportion of RIPI that forms part of total gross income to the total gross income of the trade; then
  • attributes the same proportion of the profits of the trade (adjusted by excluding finance returns and costs, and R&D additional deductions) to the RIPI.

Second stage

The second stage is the removal of a routine return (CIRD220430) on certain costs described at step 4 in the legislation, from the attributed profits to get a figure of ‘qualifying residual profit’(QRP).

Third stage

The third stage, steps 5 and 6 in S357C, removes a marketing assets return (CIRD220490) from QRP, or 25% of the QRP figure in small claims cases (CIRD220470). The remainder is then the ‘relevant IP profits’ which are subject to the reduced rate.

Note that as an alternative, the company can allocate profits to RIPI using the ‘streaming’ rules set out in Chapter 4 of the legislation and in some circumstances the company has to use this approach. See CIRD230000+.