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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: total gross income of a trade


The total gross income of the trade is the aggregate of amounts within five heads of income of the company for the accounting period.

These heads encompass taxable amounts recognised as revenues (turnover) in the accounts plus other receipts which may be recognised elsewhere in the accounts. Finance income is excluded from total gross income (CIRD220130).

Amounts not within any of these heads cannot be taken into account under S357C in calculating relevant IP profits, even if the amounts are taken into account in calculating taxable profits. For example, transfer pricing adjustments and reversals of provisions would not be taken into account unless reflected in turnover.

Head 1

Head 1 is amounts that are recognised as revenue under generally accepted accounting practice (GAAP) and taken into account as credits in calculating the corporation tax profits of the trade in an accounting period.

IAS 18 defines revenue as the gross inflow of economic benefits such as sales of goods and royalties.

Where a company does not draw up accounts for an accounting period in accordance with GAAP, it must still include under Head 1 any amounts that would have had to be recognised had GAAP principles been applied.

Head 2

Head 2 is any damages, insurance proceeds or other compensation which are brought into account in calculating the profits of the trade but are not, for whatever reason, included in Head 1 above.

Head 3

Head 3 is any amounts brought into account as receipts under CTA09/S181 in calculating the profits of the trade in an accounting period on a change of accounting basis, so far as these are not recognised in revenues under GAAP. These are adjustments that must be made on a change from one basis of accounting to another.


A company with a 31 December year end succeeds in principle in an action to obtain patent infringement damages on 1 November 2013. The patent is a qualifying patent. The amount of the damages is still in dispute but they are set at £1m on 1 April 2014. In the year to 31 December 2013 it uses a GAAP accounting basis which (for the purposes of this example) will not allow recognition of this £1m income in the profit and loss account until the year of quantification; but it changes its accounting basis in the next year to one that requires recognition in the year in which the action in principle succeeds: the year to 31 December 2013. The company makes an adjustment to reserves to reflect the change to the opening balances arising from the deemed adjustment to the prior period. However the £1m is not reflected in the profit and loss account for either period. Tax rules therefore require an adjustment to be made on the first day of the period of account in which the new basis is first adopted. The £1m is therefore to be treated for tax purposes as income of the APE 31 December 2014, even though it will not be treated as a receipt under GAAP for that year. It will fall into Head 3 in this year.

Head 4

Head 4 is any credits brought into account for tax purposes on realisation of intangible assets under the intangible fixed assets rules in CTA09/Part 8/Chapter 4 (sales proceeds less allowable asset costs if any), so far as these are not recognised in revenues under GAAP. Credits relevant for this purpose are all credits relating to intangible assets within CTA09/Part 8, not just patents or other qualifying IP rights.

The credit brought into account is the excess of the gross proceeds of realisation over the tax adjusted value of the IP rights. This follows from CTA09/Part 8/Chapter 4 - see in particular CTA09/S735(2).


A company owns a valuable patent which it has capitalised on the balance sheet at £1.5m and which it plans to sell after some use. It amortises the patent over its expected valuable life so that by the time the patent is sold it has a balance sheet value of £1.25m. Sale proceeds are £2m so the company brings into account in its income statement a single figure of £0.75m. In this case the total gross income would be £0.75m.

Head 5

Head 5 is any profits from the sale of pre-2002 patent rights charged to tax in the accounting period under CTA09/S912. Where the profit is spread under CTA09/S916 then the head 5 amount is the amount which is actually charged in the period.