The Government has produced a calculation flowchart to help you determine how to do your calculations.
1. Work out your Relevant Intellectual Property Income (RIPI)
This refers to global income generated through various avenues, namely:
- the licence fees and royalties generated by each of your patents
- any income generated by the sale of each of your patents or the relevant products or processes
- any damages and compensation received as a result of patent infringement
Originally, companies were required to calculate proportionally the income generated by their patents as a percentage of their total income and make the necessary adjustments to the IP-generated profits to derive their RIPI. Companies could choose to calculate their RIPI by conducting an income-expenditure analysis for each patent or each product involving a patent. This is called streaming.
An update in July 2016 requires all companies to make streamed calculations by July 2021 but as of now, companies are free to choose between the two methods.
2. Deduct your Routine Return from your RIPI to get your Qualifying Residual Profit (QPR)
Your Routine Return is a notional 10% return on operating expenses, which include capital allowances, personnel and premises costs etc. However, expenses covered by the R&D tax relief and costs of raw materials are excluded.
3. Deduct the Marketing Asset Return (MAR) from your QPR to get your Relevant IP Profits (RIPP)
MAR refers to any profit attributed to the brand rather than the invention itself. To work out the MAR, you need to reduce the actual marketing cost from the notional brand’s value.
You will only need to deduct the MAR from your QPR if the brand is worth more than the amount your company has paid for marketing. Where the cost of marketing is higher than the brand, no further deduction is required.
If your company’s QPR is less than £1 million, you can apply for Small Claims Treatment where your MAR will be assumed to be 25% of your QPR. Although this may be simpler, it may be more beneficial to do your own calculations because sometimes it may result in no MAR deduction hence enhancing the benefit from the Patent Box.
Under the original rules, you’ve reached your taxable profit. However, the new rules introduced an additional step.
4. Apply your R&D fraction to your RIPP
This step is compulsory for any companies that elected into the Patent Box after 1 July 2016 or any participating companies that created new IP since 1 July 2016.
The formula for working out the fraction is: (D + S) x 1.3/ (D+S+A+R)
- D is the in-house R&D expenditure on the particular IP
- S is the costs of R&D subcontracted to third parties
- A is the relevant patent acquisition cost
- R is the costs of R&D subcontracted to connected parties (eg other companies within the group)
These figures refer to the total costs your company has spent over the life of the patent for up to 20 years.
The fraction would be 1 if there’s no acquisition cost or all R&D is taken by your company alone or by third parties.