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HMRC internal manual

Corporate Intangibles Research and Development Manual

Patent Box: streaming: determining relevant IP profits


If a company makes an election under S357D(1) or if a company is required to stream (CIRD230130), steps 1 to 4 of S357C are replaced with three alternative steps as follows:

Streaming step 1

All amounts brought in as taxable credits of the trade in the accounting period (excluding transfer pricing adjustments), excluding any finance income (CIRD220130), are divided into two ‘streams’ of income. This is done by identifying how much is relevant IP income (CIRD220150) (this will include any notional royalty allowed by S357CD (CIRD220250)) and how much is not relevant IP income.

Streaming step 2

Debits deducted in arriving at taxable trading profit, excluding any loan relationship debits or derivative contract debits, and any additional R&D tax deduction but including any amount brought in by S357CG(5) where there is a shortfall in R&D expenditure (CIRD220410), are then allocated against the stream to which they relate on a just and reasonable basis.

The aim is that debits that arise in generating the relevant IP income are allocated against the relevant IP income stream and debits that arise in generating the non-relevant IP income stream are allocated against the non-relevant IP income stream.

Clearly what is just and reasonable will depend on the specific circumstances. However, all debits must be allocated.

As current year R&D expenses (including any uplift arising under the shortfall of R&D expenditure rules) are taken as a proxy for past R&D expenses then, although they may of course relate to future income, they must still be fairly allocated to the current income streams. See the example in CIRD230150 for what is considered a fair way of allocating this type of deduction.

Streaming step 3

This requires the company to deduct the debits allocated against the relevant IP income stream from that income stream to give a figure to carry forward to step 4.

Streaming step 4

The company must now apply the 10% routine return percentage to any routine deductions included in the debits allocated against the relevant IP income stream and deduct the resulting figure from the figure produced by step 3 to give the figure of qualifying residual profit (QRP). ‘Routine deductions’ are covered at CIRD220440 and CIRD220450.

Streaming steps 5, 6 and 7

Steps 5, 6 and 7 follow the same approach as the same as for the normal calculation in S357C, the only difference is in the treatment of any actual marketing royalty in Step 6. The aggregate of all actual marketing royalty amounts allocated to the relevant IP stream is deducted from the notional marketing royalty in calculating what should be deducted from QRP. This is instead of deducting a pro-rata amount of such a royalty from the notional marketing royalty, as is required in S357CP for the non-streaming calculation.