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HMRC internal manual

Corporate Intangibles Research and Development Manual

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HM Revenue & Customs
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Patent Box: relevant IP profits: calculating profits or losses of a trade

CTA10/S357CG

Certain adjustments must be made to the taxable profits of the trade that are used for the purposes of the pro rata calculation of relevant IP profits. (The adjustments are also relevant to the alternative streaming method of calculating relevant IP profits.)

Items to be added back are:

  • R&D relief: the amount of any additional deduction provided by way of R&D tax credit relief is added back to the profits featuring in the Patent Box calculation. This ensures that relief for the amount is given at the full rate of CT, so that none of the benefits of the relief is diluted by the Patent Box; and
  • debits in respect of trading loan relationships and derivative contracts.

Items to be deducted are:

  • credits in respect of finance income (CIRD220130) taken into account in calculating the profits of the trade.

These adjustments are to be made before the profits are apportioned at step 3 for calculating relevant IP profits set out in S357C - see CIRD220110.

This is done only in order to compute relevant IP profits. The only adjustment that will be made to the actual taxable profits of the trade as a result of electing in to the Patent Box will be the Patent Box deduction referred to in S357A (CIRD201020).

So adding back the R&D additional amount and loan relationship debits increases the benefits of the Patent Box calculation while the deduction for finance income may reduce benefits.

Additionally, within the Patent Box calculation, companies may need to make a further deduction from the profits that will be apportioned at Step 3 in one of the first four years after electing into the Patent Box. This will be necessary if there is an ‘R&D shortfall’. S357CH determines whether there is a shortfall, and if so the amount of any additional deduction - see CIRD220410.