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

HMRC internal manual

Corporate Intangibles Research and Development Manual

Patent Box: relevant IP losses and inheritance of R&D fraction: transfer of a trade or part trade

CTA10/S357EE and s357GCA

There are special rules when there has been a transfer of a trade or a part trade. These have been gathered into one section for convenience.

For relevant IP losses when a trade has been transferred between group members (old and new regimes):

where a company:

  • has a set-off amount in relation to a trade of the company for an accounting period,
  • is a member of a group, and
  • ceases to carry on the trade,

then where another company (‘the transferee’) that is a member of the group begins to carry on that trade, then an amount equal to the set-off amount is to become, or be added to, the set-off amount in relation to the trade of the transferee for the accounting period in which the transferee begins to carry on the trade.


New regime considerations on the transfer of a trade or part trade.

This is not restricted to connected parties.

Is the acquirer company regarded as a new entrant when existing qualifying IP rights are transferred to it as part of a transfer of a trade or part trade?

In certain circumstances it can be treated as not being a new entrant, and these are listed below. All of the following conditions must apply for the transferee to be able to grandfather the transferred asset within the old regime :

 1. A trade which exploits a qualifying IP right is regarded as having been transferred (for the purposes of this section only) when the transferor has ceased to carry on that trade, assigned the relevant qualifying IP rights or grants; or transferred the exclusive licence in respect of them and the company receiving these rights begins to carry on that trade.


This will include a trade within a business where there is more than one trade and those other trades are continuing. It also includes part of a trade. However, because patents pending and nascent IP are not defined as qualifying IP rights in s357BB, companies which have no qualifying IP rights will not be able to take advantage of the transfer of trade provisions. As long as there is at least one qualifying IP right, the provisions can apply to the  transfer of the trade or part trade in its entirety and any nascent IP or patents pending will be included.

 The legislation requires that the transferor assigns the relevant qualifying IP right, or grants or transfers an exclusive licence in respect of it, to the transferee. However, where a company exploits qualifying IP rights as the holder of an exclusive licence it is unlikely to assign qualifying IP rights (as it does not own them) and as a licensee it would not transfer the licence - the licence holder would either reassign or transfer the licence, or extinguish that licence and provide a new licence to the company which takes over the trade. These actions do not meet the requirements of the legislation so the ‘transfer of trade’ provisions in this section will only apply in these circumstances if the transferor did actually grant or transfer the exclusive licence. If an equivalent sub licence was created by the transferor this would be regarded as new qualifying IP, within the new Patent Box regime, but the other transfer of trade provisions (inheriting the R&D fraction components instead of using acquisition costs from the transfer) could still apply.

  2.  The transferor held a s357A(1) Patent Box election applying to those IP rights which had been made relating for an accounting period beginning before or straddling 30 June 2016.

 3.  Those IP rights were old qualifying IP rights in relation to the transferor.



What happens to the R&D fraction for transferred IP rights within transferred trades?


The status of being a qualifying company holding qualifying IP rights is independent of making a s357A(1) election. The implication of this is that the transferee will have to use the transferor’s R&D/acquisition expenditure to inform their own fraction, whether or not the transferor had themselves elected into the Patent Box. If there had been no election into the old regime the qualifying IP rights are regarded as being in the new regime from the date of transfer and will not be grandfathered.

As it is a transfer of trade, rather than an acquisition or purchase of the qualifying IP rights there is an expectation that the relevant records detailing the type of R&D expenditure and any acquisition costs made by the transferor will form part of that transfer. Even if the transferor has not elected into the Patent Box and therefore not undertaken any formal tracking and tracing exercises it is expected that available records will allow the transferee company to be able to obtain figures to identify an initial fraction to use.

In cases where even this element of record keeping has not happened there should be some evidence of whether the R&D took place within the company or whether the R&D had been acquired or subcontracted out to a related party and this should be used to ascertain an estimate of the fraction.

Should there be no information at all, despite undertaking due diligence exercises  required in a transfer or merger of trades from one company to another the supposition has to be that the inherited fraction should be 0, explaining why this is so, and the transferee is in effect starting from scratch.

Consideration of how to stream

Regardless of whether the qualifying IP right is regarded as new or old, the tracking and tracing of R&D expenditure and acquisition costs from the relevant date which has been obtained will feed into the transferee’s fraction, but this could relate to a qualifying IP right, a product or a product family and to that extent this may inform the way the transferee themselves choose to stream.


Acquisition payment for the trade

Payments made to the transferor by the transferee are to be excluded even though the payment for the transfer of the trade will incorporate the acquisition of the qualifying IP rights.



Company A had been working on a project and held a variety of qualifying IP rights. When the project funding ceased Company A ceased work on that particular project. Company B regarded the project as having potential so company A sold that part of its trade to company B including qualifying IP rights, the scientists employed by company A moved to B to stay with their project and the lab rental and project management were transferred to company B. Because the whole project has been taken over, and company A has ceased to work on this project, this can be regarded as a transfer of all or part of company A’s trade.

As long as company A applied for the patents before 1/7/16 and had elected into the Patent Box for an Accounting Period straddling 30/6/16 or earlier, the IP rights can be regarded as old assets by company B and the R&D fraction will not apply until the grandfathering provisions end.

Company B will not include the amount it pays for the project as an acquisition cost, as the IP rights are an intrinsic part of the purchase.

Company B will however need details of the R&D expenditure incurred by company A relating to each term of the R&D fraction for the qualifying IP rights in order to commence its own R&D fraction in preparation for entry into the new regime, with details of any acquisition costs. This information should be obtained at the time of transfer.