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The Streaming Calculation is used for new entrants in to the Patent Box regime for accounting periods that commenced after 1 July 2016.
It also applies in some other cases and, from 1 July 2021, will apply to all companies that have elected in to the Patent Box.
The first point to make is that there are more similarities than differences when comparing the Standard Calculation and Streaming Calculations.
The concepts are the same. However, the Streaming Calculation incorporates certain amendments in order to make it compliant with BEPS.
As a result, under the post 2016 rules, we need to strip out each individual IP Income source which are usually referred to as ‘streams’. The expenses must then be allocated to those income streams on a just and reasonable basis.
The other major change is the requirement to apply something called the R&D or nexus fraction.
Firstly, we divide the Company’s trading income in to two parts or ‘streams’:
We then further divide the RIPI into sub-streams – this is generally on a right by IP right basis.
Calculate and allocate the expenses relating to the standard income stream and each of the various sub-streams. This is done on a just and reasonable basis.
We then deduct these expenses from each sub-stream:
The result is the Qualifying Residual Profit or QRP
Divide the RIPI into subs-streams according to whether the income is attributable to a particular:
Where possible one should use the individual IP right sub-stream. One should only use the others where it is not reasonably practicable to split on a right by right basis.
It is possible to make a ‘global streaming election’ where meet qualification of a small claim. This effectively omits Step 2.
We then bring in expenses and allocate them to:
These should be allocated on a just and reasonable basis.
We then deduct the expenses allocated in Step 3 and the ‘routine return’ from the sub-streams.
The Routine return seeks to remove profits which a business would have made in the absence of the intellectual property.
The routine return is 10% x specific deductions:
This leaves us with the Qualifying Residual Profit for each sub-stream.
If the QRP is nil or a negative then we don’t go any further.
If QRP is positive then we move on to Step 5
Again, this is the excess of the Notional Marketing Royalty over Actual Marketing Royalty.
This should be done on a sub-stream by sub-stream basis.
We use transfer pricing principles to determine the amount of the NMR.
If the excess is less than 10% of the sub-stream QRP then no need to adjust.
As for the standard calculation, a small claim can be made to ease administration but usually restricts relief.
We must apply to each sub-stream
The fraction is capped at 1 (ie RIPI is not increased by the result)
No requirement to have made an R&D claim
Expenditure etc relates to the relevant period – as such must review the fraction at least annually.
R&D fraction is:
(D + S1) x 1.3
D+ S1 + S2 + S3 = X (capped at 1)
D = company’s expenditure on relevant R&D undertaken in house
S1 = the Company’s qualifying expenditure on relevant R&D subcontracted to unconnected persons
S2 = the Company’s qualifying expenditure on relevant R&D subcontracted to connected person
A = Company’s expenditure on acquisition of relevant IP rights
Relevant R&D – broadly must relate to the qualifying IP
It is the expenditure for relevant period is included in the R&D fraction.
The relevant period is:
|Case||Relevant period starts|
|New entrant and AP begins before 1 July 2021||1 July 2013|
|All other cases||1 July 2016|
The relevant period ends on last day of accounting period.
As such, the test is cumulative. In other words, the data is updated each year to take account of the latest data / AP.
Where a company makes patent related profits before the grant of the patent then it can elect in to the regime to receive benefit from the Patent Box.
However, to prevent companies from gaining the benefit for products which are not patentable, the benefit of the Patent Box is not received until the patent is granted.
When the patent is granted – the accumulated profits for the pending period are then included in the calculation.
Once we have gone through the steps set out above, we have calculated RIPP or patent box profit.
We now deduct any Patent Box losses.
If, after deducting those losses, we are left with an excess, we can then apply the patent box deduction
The RIPP / patent box profit x ((19%-10%) / 19%)
This deduction is the deducted from the trading profits to give a revised profit figure that is to be subjected to corporation tax.
If you have any queries about this article or Patent Box in general, then please do get in touch.