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HMRC internal manual

Corporate Intangibles Research and Development Manual

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HM Revenue & Customs
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Patent Box: streaming: mandatory streaming: conditions

Condition A

Amounts taken into account in calculating trading profits include substantial amounts that are not fully recognised as revenue in accordance with GAAP.

This may include items such as transfer pricing adjustments made by virtue of TIOPA10/S147 or the release of a large accounting provision. Such amounts would not normally affect the pro-rata calculation even though they affect profit, and so make the pro-rata approach inappropriate.

Condition B

The total gross income of the trade includes not only relevant IP income but also a substantial amount of licensing income that is not relevant IP income.

Licensing income means generally any licence fee, royalty or other payment received in respect of intellectual property of the company which is not a qualifying IP right.

Condition C

The trade generates income that is not relevant IP income and the company receives a substantial amount of relevant IP income from licences it grants, if that licensing income is attributable to rights that the company itself holds through exclusive licences.

This is intended to deal with conduit arrangements. For example, a situation where a company holds an exclusive licence in respect of a qualifying IP right (‘licensed rights’) and then on-licences these rights to another party thereby generating substantial income that falls within head 2 at S357CC(6) (CIRD220200). Where the income received is broadly equivalent to the royalty payable for the licensed rights then such an arrangement will only give rise to little, if any, profit. However the relevant IP income of the company will be increased. Without this mandatory streaming rule, the trading profits derived from a non-qualifying trade in the company could benefit from Patent Box relief.

If the company receives licensing income from an agreement granting rights in respect of a combination of owned rights and licensed rights, the income must be apportioned between the owned and licensed rights on a just and reasonable basis to determine whether the amount attributable to the rights held through the exclusive licences is substantial.

Meaning of ‘substantial amount’

‘Substantial’ means the lower of £2 million or 20% of the total gross income of the trade for the accounting period.

However, if the lower of these two amounts is £50,000 or less, then the mandatory streaming condition is not met.