Beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Corporate Intangibles Research and Development Manual

Patent Box: relevant IP profits: relevant IP income: notional royalties

CTA1 {#IDACJKRG}0/S357CD {#} and CTA10/s357BHA {#IDACJKRG}Process patents in the Patent Box

This section applies where a company holds qualifying IP rights or an exclusive licence in respect of any such rights and has income (which is not excluded or finance income), arising from things done by the company that involves the exploitation by the company of that right, and which is not included in the Heads of Income in CIRD220160. The most common example is where a company has a process patent.

Processes or tools may also be patented inventions.  A patented process or tool may be used to produce a product which is subsequently sold to generate sales income of a company.  A patent may have been granted for the product if it fulfils the requirements for a patent, for example if it is new and inventive.   However many products made as a result of a process patent, or as a result of a process that incorporates a patented component or that uses a patented tool, would not be patentable inventions in their own right.  Sales of products that have not been patented or are not specifically named in a ‘product by process’ patent could not qualify under any of the heads of S357BH/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 S357BHA/S357CD notional royalty provisions is to deliver Patent Box benefits to a company that uses its qualifying IP right or exclusive license in respect of a qualifying IP right in a way that does not generate relevant IP income under the five Heads of Income defined at S357BH/S357CC, but does result in the company deriving income and profits as a result of the exploitation of the IP right (termed ‘IP-derived income’).  The IP-derived income must form part of the company’s trading income and must not be finance income (CIRD220130) or excluded income (CIRD220280).

A company may elect that a notional royalty is to be treated as if it were relevant IP income.  The notional royalty is an appropriate percentage of the IP-derived income.The method of calculating this is explained in CIRD220251 with examples at CIRD220252.