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HMRC internal manual

Corporate Intangibles Research and Development Manual

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

S357BF, as modified by s357BQ

Streaming step 1 (set up streams)

All amounts brought in as taxable credits of the trade in the accounting period (excluding  RDEC credit and any finance income (CIRD220130)), are divided into two ‘streams’ of income. This is done by identifying how much is relevant IP income (CIRD220150) (this will include any notional royalty allowed by S357CD (CIRD220250)) and how much is not relevant IP income. The two streams are the ‘standard income stream’ and ‘relevant IP income stream’ and should total the company turnover excluding excluded income and finance income.

Any amount which is not relevant IP income is not part of the Patent Box and expenses relating to this income should be set against that stream for completeness.

If a company qualified for Small Claims Treatment (CIRD273200) and has elected for global streaming to apply, then omit step 2. This requires electing all qualifying IP rights into the new regime, so there will be no grandfathered stream.



Stream A   Stream B

Non RIPI      RIPI



Streaming step 2 (allocate income to sub-streams)

The company will need to have considered the points made in CIRD271500 relating to streaming income and CIRD272000 regarding how to track and trace related R&D and acquisition expenditure to ascertain what is ‘reasonably practicable’ for its own requirements before attempting to follow the calculations described below.

Divide the relevant IP income stream into relevant income sub-streams. Sub-streams should be separated in the following ways:

  • Relevant income from old qualifying IP items and/or processes should be placed in one sub-stream (grandfathered stream)


  • as many other sub-streams as are needed which should each consist of new relevant income arising from either a particular qualifying IP right, or if this is not reasonably practicable, income proper to a particular kind of IP (known as product or product family sub-streams).

If using a product or product family sub-stream method, any notional royalty arising from derived IP income calculated under s357CD (such as from a process patent for example) should be in a separate sub-stream from other relevant IP income arising from Heads of Income within s357CC (for example sales, licence royalties, compensation, infringement rights or disposals) unless both relate to a particular kind of IP, which means that they are intended to be, or are capable of being, used for the same or substantially the same purposes.

A product or process sub-stream can include a particular kind of IP item or IP process which are intended to be or capable of being used for the same or substantially the same purpose. They can incorporate one or more items or processes

It can be considered that it is not reasonably practicable to stream by IP asset if it is not possible to identify or reasonably allocate income from that IP asset between separate streams, or if the R&D expenditure cannot be divided between the different streams.



A company has Product A with patents 1,2 and 3 and Product B with patents 1 and 4. Patent 1 is old and the others are new.


The company must consider whether it can stream at qualifying IP right level, which would be streams allocating income and R&D and acquisition expenditure to 1,2,3 and 4. Stream 1 would be a grandfathered stream until 2021.Any continued R&D or acquisition expenditure for each patent would be restricted to that stream. If the company is able to stream at this level then it must do so.


If it is not ‘reasonably practicable’ to reach a just and reasonable apportionment of either income or R&D expenditure between these streams, the company may use product streaming. In this case there would be 2 streams, A and B. As each product contains both old and new patents, products A and B are regarded as ‘mixed’ products and either the ‘core value’ or ‘numeric’ tests (whichever is most appropriate for the product) described in CIRD271600 need to be used to ascertain how the streams are to be treated. This needs to be reconsidered each year if additional qualifying IP rights are incorporated into either product, and any additional R&D or acquisition expenditure on an individual qualifying IP right will affect the income for that stream.


There will be different considerations depending on the type of qualifying IP right and the way that they are used in different sectors. HMRC does not intend to be prescriptive on this in order to allow companies to operate the Patent Box in the most effective way possible, as long as they have regard to the OECD requirement to stream at the lowest level if possible.


Streaming step 3 (allocate deductions to sub-streams)

Debits deducted in arriving at taxable trading profit, excluding any loan relationship debits, derivative contract debits and any additional R&D tax deduction , are then allocated against the stream to which they relate on a just and reasonable basis.


Clearly what is just and reasonable will depend on the specific circumstances. However, all debits must be allocated. The aim is that debits that arise in generating the relevant IP income are allocated against the relevant IP income stream and debits that arise in generating the non-relevant IP income stream are allocated against the non-relevant IP income stream.


Streaming step 4 (make deductions including routine return deduction for each sub-stream)

This step requires the company to deduct the debits from step 3 allocated against the relevant IP income streams and sub streams from those income streams and sub streams.

There is one exception to this. A deduction should not be made in respect of an ‘income related payment’ if the payment is included as an acquisition cost in the R&D fraction for the sub stream as described in CIRD274500. An income related payment is one where there is an obligation to make a payment by reason of an amount of income which is properly attributable to the right or licence, or determined by reference to the amount of income the company has accrued which is so attributable. (s357BIA) For example, this would include licence fees which are related to the percentage of sales containing the relevant qualifying IP right which are adversely reducing the R&D fraction in proportion to their success.

The company should then calculate the routine return figure for each substream (s357BJ CIRD220440 ) by applying the 10% routine return percentage to any routine deductions included in the debits allocated against each relevant IP income stream. ‘Routine deductions’ are covered at CIRD220440 and CIRD220450 and have not been changed by the new regime. The resulting deduction should then be made.


Streaming step 5 (marketing assets return deduction)

Deduct from each relevant IP sub stream which is greater than nil the appropriate marketing assets return for that sub stream. (s357BK CIRD220490)

If the company qualifies for Small Claims Treatment and has made an election for the small claims amount to apply, deduct 25% of the balance at the end of step 4.

This calculation has not been changed by the new regime.

Streaming steps 6 (applying the R&D fraction)

Multiply the resultant amount of each sub stream by the R&D fraction for that sub stream. This excludes the standard stream, and the old stream for which no R&D fraction is required.


Streaming step 7 (combine the sub-streams)

Add together the amounts of the relevant streams and sub streams following step 6, apart from the standard stream.

Streaming step 8 (include any patent pending periods)

If the company has made an election relating to profits arising before the grant of a right, and that right has now been granted, add to the amount given in step 7 any amount determined in accordance with those calculations at CIRD220540.

Have regard to whether

  • The application was made before 1 July 2016 and the qualifying IP right can be regarded as being in the old regime and grandfathered in any years. There should only be an R&D fraction applied to the years where the IP right is not grandfathered, even if the grant of the right occurs in accounting periods after 1 July 2021.
  • If the company is not streaming at qualifying IP right level, the R&D and acquisition expenditure relating to the newly granted IP right will need to be included in the R&D fraction for the relevant sub-streams.
  • If the company is not streaming at qualifying IP right level, the calculations relating to mixed products containing old and new qualifying IP rights (core value and numeric methods described at CIRD271600) will need to be recalculated.


 It is possible that the company will need to change its previous years’ streaming methodology as a result of the grant of the qualifying IP right. This should be made as an overall adjustment at step 8 in the computation in the year of grant rather than making amendments to previous years’ calculations.



The resultant profit is the relevant IP profits of the trade. If the figure is less than nil it is the resultant IP loss of the trade.

The relevant profit is then fed into the equation as described in CIRD201020 to create the deduction to be used in the computation, which results in the Patent Box reduction to the corporation tax due.

The treatment of the loss is described in CIRD240100. It has not changed as a result of the new regime.