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HMRC internal manual

Corporate Intangibles Research and Development Manual

Patent Box: relevant IP profits: profits arising before grant of right

CTA10/S357CQ and CTA10/s357BM

A company holding a qualifying IP right or an exclusive licence in respect of a qualifying IP right can, for the accounting period in which the right was granted, elect under s357CQ(2) to obtain the benefit of the Patent Box on profits arising from exploiting the right prior to the right being granted.  This election must be made in writing within 12 months of the fixed filing date of the return for the accounting period in which the right is granted.

Profits can only qualify if they relate to periods during which the company was a qualifying company (CIRD210100) and for which an election under S357A(1) had effect (so a Patent Box ‘entry’ election (under s357A(1)) must have been made for these years and  time limits apply - see CIRD260100). For this purpose a company is treated as a qualifying company where it would have been one but for the fact that the right had not been granted at the relevant time.

The election is made on a right by right basis, and covers the whole of the period from the application for grant of the right (or date the licence is granted to the company) to the date the right is granted.  This period is limited to up to 6 years before the right is granted.

It is not possible for profits arising before 1 April 2013 to benefit from this look-back, because the regime as a whole only has effect in relation to accounting periods that begin after 1 April 2013 (accounting periods that straddle 1 April 2013 are treated for this purpose as two separate notional periods).

 Where a company has elected into the old regime and the qualifying IP right was applied for on or before 30 June 2016 it can be regarded as an old IP right and be grandfathered into the old regime for the relevant years (usually until 30 June 2021). In the year of grant, the relevant IP profits will be included within that year’s computation and no R&D fraction will be applied to the years in which grandfathering applies, even if that computation relates to a period after 30 June 2021.

Examples:

1.  A company applies for a patent on 1 May 2017 but the patent is not granted until 1 December 2020.  The company makes a s357A (1) election for its accounting period ending 31 December 2017 so that it becomes a new entrant to the Patent Box.  When the patent is granted, the company can obtain the benefit of the Patent Box on profits that have arisen from exploiting the patented invention from 1 May 2017 until 1 December 2020 (the ‘patent pending’ period) but all will be in the new regime.

  1. A company may also elect to obtain the benefit of the Patent Box on profits arising from exploiting a right or exclusive licence in respect of a right prior to the right being granted where the right or licence is disposed of before the right is granted.  The company is deemed to be a qualifying company in the accounting period in which the right is granted if it would be but for the right or license being disposed of.

  2. A company applies for a patent on 1 May 2017 in a qualifying country (CIRD210160) and subsequently files for a patent in the UK on 1 April 2018 claiming ‘priority’ on the earlier patent filing.  The qualifying country patent is granted on 1 June 2020 and the UK patent is granted on 1 December 2020.  The company makes a s357A (1) election for its accounting period ending 31 December 2017 so that it becomes a new entrant to the Patent Box.  When the qualifying country patent is granted, the company can obtain the benefit of the Patent Box on profits that have arisen from exploiting the patented invention from 1 May 2017 until 1 June 2020 (the period between application and grant of the patent).  If the company had originally filed in a non-qualifying patent jurisdiction then profits from 1 April 2018 until 1 December 2020 would be included in the Patent Box because of the UK filed patent.  It is the application date of a patent in a qualifying patent jurisdiction and not the priority date that determines from when Patent Box benefits can be obtained.

 

For information on how the relief is given see the next page: CIRD220550