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

HMRC internal manual

Corporate Intangibles Research and Development Manual

Patent Box: new regime : when to start tracking and tracing R&D expenditure CTA10/s357BLF

The date from which R&D expenditure and acquisition costs should be tracked and traced will depend upon the facts, and there are a number of different situations. All companies must use data from tracking and tracing relevant R&D expenditure and acquisitions in their Patent Box calculations from 1 July 2021. However, tracking and tracing that data is likely to be needed from earlier periods for most companies in order to be prepared for the new regime.

The ’relevant period’ in which they should track and trace relevant R&D expenditure and acquisitions ends with the last day of the accounting period and begins on the relevant day described below, or an earlier day if the company elects to do so.

New entrant companies where the accounting period begins before 1 July 2021: From 1 July 2013

A new entrant company elects into the Patent Box. Subject to any exemptions, it must track and trace its expenditure from 1 July 2013 if possible. However, because this date was before the legislation was enacted, the company may not have required this information at the time and may not have the records in the detail needed for the different fraction terms. HMRC will accept that if the company explains this it may commence tracking and tracing records from 1 July 2016.

Alternatively, R&D expenditure may have occurred prior to these dates, in which case, in order to achieve an accurate R&D fraction, the company may elect to include earlier R&D expenditure for any particular IP asset as long as they elect to do this within the Patent Box calculation. The earliest date that can be included is 20 years before the last day of the accounting period.

New entrant companies, new qualifying IP rights in accounting period starting after 1 July 2021: From 1 July 2016

 For accounting periods starting after 1 July 2021, a new entrant company will be tracking and tracing existing new qualifying IP rights from 1 July 2013, as above,  but any new qualifying IP rights applied for or acquired in that period or later need only be tracked and traced from 1 July 2016 (or the commencement of the R&D expenditure) to ensure consistency after the end of the grandfathering period. There is still the option to include earlier expenditure if required.

Old regime companies , old and new qualifying IP rights: From 1 July 2016

Companies who have elected into the old patent box regime for periods ending before 1 July 2016, or periods straddling that date, will need to track and trace R&D expenditure from 1 July 2016 on their old qualifying IP rights to use in their patent box calculations from 1 July 2021. They will only not need to track and trace if they will not generate any IP income falling within the Patent Box after 1 July 2021. The legislation allows companies elected into the old regime to use the same date (1 July 2016) for new qualifying IP assets. These companies also have the choice of electing to use earlier R&D expenditure as described above. The earliest date that can be included is 20 years before the last day of the Accounting Period.

Examples:

Company A elected into the Patent Box for the year ended 31 December 2014. Subject to any exemptions, it must track and trace its relevant R&D expenditure and any acquisition from 1 July 2016. However because the qualifying IP right was developed in 2010 and this was in-house expenditure it wishes to include this in the fraction in case there is subsequent related party development within that product stream. This is acceptable because it is within 20 years of the last day of the accounting period. It can include the election within the Patent Box calculation.

Company B elected into the Patent Box for the year ended 31 December 2019. It had applied for a qualifying patent in that year, which had not yet been granted. It needs to track and trace its relevant R&D expenditure from 1 July 2013 if possible, ready to be included in the R&D fraction once the patent is granted.

 

CTA10/S357BLG Insufficient information within pre-enactment years

An exception to the above requirements to track and trace R&D expenditure in years before these requirements were enacted is that when there is insufficient information to enable the company to calculate the R&D fraction accurately, the company may use the following criteria as an alternative.

  • If the accounting period begins on or after 1 July 2019, the company may elect to start to track and trace expenditure from 1 July 2016
  • If the accounting period begins before 1 July 2019, the company may elect to track and trace for the three year period ending with the last day of the accounting period

 

There will be occasions where a company wishes to include R&D expenditure relating to an existing IP product which was carried out many years before.

When to stop tracking and tracing

Patents have limited lives. When a qualifying IP right falls out of patent protection within an accounting period the related expenditure will also fall out of the fraction.

If a qualifying IP right has been acquired through a series of instalments or stage payments, all of these payments may be excluded from the fraction from the year that the patent expires as income from that patent will no longer be included in the Patent Box.