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HMRC internal manual

Corporate Intangibles Research and Development Manual

Patent Box: new regime: terms of the fraction: Acquisition of relevant qualifying IP rights CTA10/s357BLE

S357BLE CTA10

A represents the company’s qualifying expenditure on the acquisition of relevant qualifying IP rights – that is the cost of acquiring the IP right or an exclusive license in respect of the IP right.

The following kinds of payment will fall into this category:

  • Payment in respect of an assignment of a relevant qualifying IP right
  • Payment in respect of a grant or transfer of an exclusive licence in respect of a relevant qualifying right
  • Payment made in respect of disclosure of any item or process, and in respect of which the company subsequently  applies for and is granted a relevant qualifying IP right in respect of that item or process (or any item or process derived from it)

For example, annual (or other) fees in respect of an exclusive licence made in respect of exploiting a qualifying IP right will be treated as acquisition costs and so cumulatively increase term A and could reduce the fraction, unless on-going R&D falling within terms D or S1 (in house or unconnected subcontracting R&D expenditure) continues to be undertaken incurring expenditure which will increase the numerator.

When IP is acquired and the cost relates to a wider value than the Qualifying IP right, then the cost should be apportioned on a just and reasonable basis as only the cost relating to the Qualifying IP right should be included. However, when IP is acquired as part of a transfer of trade (or part of a trade) the R&D fraction is inherited from the vendor instead of identifying a separate acquisition cost relating to the qualifying IP right. More details are provided at CIRD240160

Where the company has incurred expenditure in making a series of stage payments relating to a single Qualifying IP right, subsequent stage payments are included within the fraction in the year that they are incurred. However, when considering whether these payments should be included in relevant expenditure or ‘drop out’ of the sub-stream (such as when the patent right expires or after 20 years, whichever is the shorter), each payment is to be treated as having been made on the date the first payment in the series was made.

Income related payments are those which an obligation to make the payment arises under an arrangement linked to the amount of income the company has accrued which is properly attributable to the right or licence, or where the amount of the payment is determined by reference to the amount of income the company has accrued – for example the payment is a percentage of related sales of a product containing a Qualifying IP right.  In these cases, the relevant amount needs to be included in term A and will make the fraction less each year, but there is an adjustment to be made within the streaming calculation to avoid a ‘double hit’ of a reduced fraction and increased expenditure costs effectively linked to  the success of the Qualifying IP right.  CIRD275200 explains how the adjustment should be incorporated into the streaming calculation.