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HMRC internal manual

Corporate Intangibles Research and Development Manual

Patent Box: relevant IP profits: elections for small claims treatment


The qualifying relevant profit (‘QRP’) is the figure of profit that remains after removal of the routine return (CIRD220430). It represents the part of the profits of the trade that relates to exploitation of qualifying IP rights and also to the ability to access other unique IP or intangible assets such as brand or marketing assets. The regime aims to exclude the profits attributable to these marketing assets IP from the Patent Box.

The legislation provides two possible methods for determining how much of the QRP of a company for an accounting period represents profit from qualifying IP rights and how much relates to brand and marketing assets.

The simpler of these two methods is the small claims treatment (Step 5 of S357C - see CIRD220110). Provided that the company is eligible, it allows the company to elect to adopt a formulaic approach.

In order to elect for small claims treatment a company must meet either condition A or condition B.

Condition A

The QRP of the company does not exceed £1,000,000.

Condition B

  • The QRP of all the company does not exceed the relevant maximum; and
  • In the previous four years the company has not calculated its Patent Box profits by following Step 6 in section 357C. That is, it has not in that period calculated its marketing asset return using arm’s length principles and deducted that figure in the calculation of its relevant IP profits (see CIRD220490).

The relevant maximum is:

1 + N

Where N is the number of associated companies for which a Patent Box election has effect for the relevant accounting period.

The relevant maximum is also proportionately reduced if the accounting period is less than 12 months long.

The reason for this limit in the ability to use small claims treatment is that without the restriction companies with significant QRPs would be able to claim £1,000,000 of relevant IP profits event though the QRP might derive wholly from their marketing assets.

Where the relevant maximum is exceeded the company cannot use the small claims treatment and must compute the notional marketing royalty (CIRD220500).

So, ignoring associated companies elected into the patent box;

  • A company with QRP up to £1m can always elect for small claims treatment.
  • A company with QRP in excess of £3m can in no circumstances elect for small claims treatment.
  • A company with QRP between £1m and £3m can elect for small claims treatment, if:

    • its QRP has never exceeded £3m and it has never chosen to compute and deduct a marketing assets return figure; or
    • although its QRP has exceeded £3m, and although in consequence it has been required to compute a marketing asset return figure, it has not in the last 4 years actually taken Step 6 in S357C (because the figure is nil or 10% or less of QRP).

This means that when a company has made a deduction for a marketing return in arriving at its relevant IP profit, it can only subsequently elect for small claims treatment if for 4 subsequent consecutive years it no longer takes Step 6 in S357C.