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HMRC internal manual

Corporate Intangibles Research and Development Manual

Patent Box: relevant IP profits: calculating profits or losses of a trade: shortfall in R&D expenditure: example


A company has ‘average R&D expenditure’ of £1000. 75% of this is £750.

Its results for the first four AP’s (each of 12 months) after electing in to the regime are:

AP 1 2 3 4
Total Gross Income £3000 £10000 £15000 £20000
R&D £1500 £800 £350 £200
Other costs £800 £5200 £11150 £15200
PCTCT £700 £4000 £3500 £4600

In AP1 actual R&D exceeds ‘average R&D expenditure’ by £500, so this £500 can be carried forward as an ‘additional amount’ in AP 2 (S357CH(8)).

AP2’s actual R&D is £800 which is less than ‘average R&D expenditure’ but greater than 75% of ‘average R&D expenditure’ so no adjustment is required. £500 continues to be carried forward as an additional amount in AP 3 (S357CH (11)).

In AP3 actual R&D is only £350, which is £400 below the 75% threshold of £750. The brought forward £500 is added to the actual amount so there is no need to make any adjustment. £400 of this cannot be carried forward further, but £100 can (S357CH(9)).

In AP4 actual R&D spend falls again to £200. The brought forward £100 can be treated as R&D spend of AP 4. As the total is £300 there is still a shortfall of £450, therefore this amount of R&D spend for patent box purposes in AP4 is increased by £450 to £650 (that is, £200 actual + £450 increase).

The profits of the trade for the purposes of step 3 of 357C for AP4 will become:

  Turnover 20000
  Less R&D (650)
  Less Other costs (15200)
  Step 3 profits 4150