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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: relevant IP income: notional royalties


Processes or tools may also be patented inventions. For something made by means of a process or using the tools to be patented, there has to be a granted patent following a patent claim for that thing. Claims for products defined in terms of a process of manufacture are allowable only if the products as such fulfil the requirements for patentability, for example that they are new and inventive. A product is not rendered novel merely by the fact that it is produced by means of a new process.

It follows that many products made as a result of a process patent, or as a result of process that incorporates a patented component, would not be patented inventions in their own right. Sales of such products could not qualify under any of the heads of S357CC (CIRD220160). In addition, any services supplied by the company that make use of such processes, or that employ patented tools, would not give rise to relevant IP income in their own right.

The key aim of the notional royalty provisions is to deliver Patent Box benefits to a company that uses its patented invention in a way that does not generate relevant IP income under the five heads defined at S357CC, but does result in the company deriving income and profits as a result of the exploitation of its patents (termed ‘IP-derived income’). The IP-derived income must form part of the company’s total gross income. As finance income cannot be included in total gross income, it cannot be IP-derived income and so no notional royalty can be calculated in respect of patents that produce such income.

The notional royalty is expected to cover patents used in processes that create non-patented products or in tools used to provide services.

Example 1

Company X manufactures widgets. It holds a patent over the machine that makes the widget but the patent does not cover the widget itself. The sale of the widgets does not fall within head 1. The income from sale of the widgets for the purposes of the notional royalty provision will be ‘IP-derived income’, to the extent that it is reflected in the company’s total gross income.

Example 2

An airline company develops a flight simulator using one or more patented components. The simulator is used both to train its own pilots, and also generates income by providing a training facility to pilots of other airlines. The airline’s own ticket sales and the direct income from the training facility provision are both non-relevant IP income that for the purposes of the notional royalty provision will be ‘IP- derived income’.

Example 3

Please refer to CIRD220305 for guidance on non-medical use claims.