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HMRC internal manual

Corporate Intangibles Research and Development Manual

Patent Box: new regime: Calculation steps preparation CTA10/s357BF as modified by s357BQ

 Patent Box : New Regime : calculation for all companies with new assets, whether in the old or new regime


Once a company has new qualifying IP rights, the proportional or formulaic method of calculating relevant income at CIRD220110 should not be used, and streaming is mandatory for all such companies because they are regarded as being in the new regime.

All companies electing into the Patent Box for periods after 1 July 2016 will need to use this method because they are in the new regime. Any companies in the old regime with qualifying IP rights acquired or applied for on or after 1 July 2016 will also need to use this method even if they still have grandfathered IP rights.

If the company is in the new regime because it has applied for a qualifying IP right after 1 July 2016 which has not yet been granted (and so will not yet be included in the computation) and all other relevant IP income is grandfathered, then there will not be a sub-stream for the new regime in the years prior to the granting of the patent. But in the computation for the year of grant, the previous years will need to be included and a sub-stream will need to be identified then so it would be more consistent if the streaming method is adopted from the year that the new qualifying IP right is applied for.



Tracking and Tracing R&D expenditure

Companies should follow the Guidance for tracking and tracing R&D expenditure which is at CIRD272000 even if the IP is currently grandfathered into the old regime ready for when the assets are brought into the new regime.

Income streams and their R&D fraction

Companies will need to divide their qualifying IP rights into streams of income as soon as they hold new qualifying IP rights. It is an OECD requirement to stream at the lowest level possible. If streaming at the level of income and expenditure for individual qualifying IP rights is possible that is the level of streaming which should be chosen, but this will clearly not be practical for many companies and this is recognised by allowing alternatives. Guidance is set out in detail at CIRD271500 for allocating income to streams and CIRD274100 for identifying how an R&D fraction should be applied to a relevant sub-stream. A company needs to consider these together in order to decide the most appropriate streaming level in advance of preparing the Corporation Tax computations.

Changes to streaming levels can be made but it is expected that these will be in response to a change in circumstances and should be explained in the computation.


The Calculation

Having prepared the company’s calculation ‘structure’ the steps at CIRD275200 should be followed to arrive at the deduction to be used. CIRD275000 contains a flowchart which should also be helpful.