CIRD220550 - Patent Box: relevant IP profits: profits arising before grant of right: how the relief is given
How the relief is given
The relief is given by adding an amount to the company’s relevant IP profits in the accounting period in which the right is granted. That amount is the difference between the aggregate of the relevant IP profit and the aggregate of what the relevant IP profits for that same period would have been if the right had been granted at the date of application, for accounting periods which ended in the period from the application for grant of the right to the date the right is granted. A s357A(1) election needs to have been made for each accounting period included. In addition the six year time limit applies (CIRD220540).
To calculate the relevant IP profits arising between the application for the grant of the right up until the grant of the right itself (so that these can be included in the accounting period in which the right is granted) the company will need to ‘track and trace’ the qualifying expenditure for each income sub-stream (CIRD272000). During these accounting periods prior to the grant of the qualifying IP right the R&D expenditure in relation to that right will not be included in calculating the R&D fraction.
Other Considerations
A company with patents pending has to consider the best time to bring the relevant income into the Patent Box including which stream or sub-stream the income may fall into, how best to track and trace the R&D expenditure and also whether the product is making losses (as they will be set against other Patent Box profits within the tax computation once in the Patent Box). The choices will be different for different companies, but remember that there is a two year time limit before the decision has to be made for each accounting period.
Note that once the relevant profit from earlier years has been added to the relevant profit in the year of grant that is the total amount which is included in the calculation to arrive at the Patent Box deduction. Only the main rate of corporation tax for the year of grant is applied, so previous rates are not brought into this calculation.
Example
On 05 October 2022 Company A applies for its first ever patent in accordance with the Patents Act 1977 which is granted without modification on 13 December 2025.
Company A is lossmaking in the year ended 31 December 2022 and therefore, although it could elect into the Patent Box regime for that accounting period, it chooses not to.
However Company A does not wait until 2025 to make an election because the legislation allows a company to take into account profits arising before grant of a patent. It makes an election under S357A and specifies that the first accounting period for which the election is to have effect is the year ended 31 December 2023.
Company A makes the following relevant IP profits (as defined under S357BM(2)):
Accounting period ended 31 December 2023
Pre-Grant Patent Profits £40,000
Total £40,000
Accounting period ended 31 December 2024
Pre-Grant Patent Profits £60,000
Total £60,000
Accounting period ended 31 December 2025
Pre-Grant Patent Profits £65,000
Total £65,000
Total for all periods £165,000
Note that the actual taxable profits of the trade for the accounting periods ended 31 December 2023 and 2024 are unaffected. It is just the Patent Box deduction that may be increased in the accounting period ended 31 December 2025.