This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Corporate Intangibles Research and Development Manual

Patent Box: streaming: example 1

Example 1

  • A company develops, manufactures and sells a range of branded patented products in the UK. It also licenses out the right to manufacture the products in other countries using its patented technology, know-how and brand.
  • In addition, the company uses its excess manufacturing capability to provide manufacturing services on a contract basis to other group companies.
  • The company allocates its cost of goods on a direct basis.
  • The company determines that other manufacturing costs are incurred equally whether patented or non-patented goods are being manufactured. It therefore determines that these costs should be allocated based on the number of units produced.
  • The company allocates all its R&D department costs to the RIPI stream. NB: This will not always be the case but depends on the facts. In this example, it does not matter how these costs are allocated to manufacturing and licensing within this stream as both produce fully qualifying income.
  • All ‘other manufacturing costs’ are ‘routine deductions’, while none of the cost of goods are. R&D costs are outsourced.

The company’s streamed P&L may look like this:

  Full-risk manufacturing Licensing Contract manufacturing    
  Income 10,000 6,000 1,000 3,000
  Cost of goods (4,000) (2,900) - (1,100)
  Gross profit 6,000 3,100 1,000 1,900
  Other manufacturing costs (1,300) (600) - (700)
  Profit before R&D costs 4,700 2,500 1,000 1,200
  R&D costs (2,700) (2,700)    
  PCTCT 2,000 800 1,200  

Streaming calculation

Step 1: RIPI is calculated as £7,000

Step 2: Total debits of £6,200 are allocated against RIPI (£2,900 + £600 + £2,700)

Step 3: Deduct debits from RIPI leaving stream profits of £800

Step 4: Apply routine return of 10% to routine expenses of £600 included in RIPI stream. Deduct this £60 from the £800 to give £740 QRP

Step 5: The company elects for small claims treatment, so its RIPP is 75% of QRP, or £555

The company’s Patent Box tax deduction is therefore £555 x (22-10)/22 = £303

The company’s corporation tax profit is therefore reduced to £1,697; and its corporation tax payable is reduced from £440 to £373.34.