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HMRC internal manual

Corporate Intangibles Research and Development Manual

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HM Revenue & Customs
Updated
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Patent Box: streaming: example 4

Example 4

A company has a trading turnover of £1,000, half of which is from the sale of products that incorporate a qualifying patented item and half of which is from the sale of other products. Column A shows the company’s total income and tax deductible expenses while column B identifies the relevant IP income stream within total income and apportions the tax deductible expenses on a just and reasonable basis. The company as a whole has no marketing assets. The main rate of corporation tax is 22 per cent.

  Column A Column B
     
  Total company  
£ RIPI stream
£      
  Sales 1,000 500
  Less trading expenses:    
  - Cost of raw materials (700) (100)
  - Loan relationship debits (50) (50)
  - Marketing (all marked up) (80) (80)
  - R&D costs (100) (80)
  - R&D additional deduction (30) (24)
       
  Taxable profit without Patent Box 40  
       
  Patent Box profit before adjustment   166
  Less routine profit:    
  Total trading expenses used as basis for mark-up = £80    
Mark up rate @ 10 percent   (8)  
      158
  Add:    
  - Loan relationship debits   50
  - R&D additional deduction   24
  Relevant IP profit*   232
  Patent Box deduction    
232 x (22-10) /22 (127)    
  Corporation tax loss (87)  

The corporation tax loss arises as a result of the company having relevant IP profits. The loss is a normal trading loss which may be group-relieved or carried forward at the full corporation tax rate in the usual way. This is to be distinguished from a ‘relevant IP loss’ (CIRD240100).

*Where there is a ‘relevant IP loss’ instead of a ‘relevant IP profit’, the loss reduces the relevant IP profits of other group members. Any balance is carried forward to reduce future relevant IP profits in the same company. (See CIRD240110 to CIRD240140)