Introduction Details of the Schedule Part 1: Amendments of CTA 2010 Chapter 3: Relevant IP profits
41.New section 357C sets out the Steps necessary to determine the relevant IP profits of the trade.  The relevant IP profits of the trade are the profits that are used in the formula in new section 357A to calculate the appropriate amount of the deduction from the profits of the trade which gives effect to the lower rate of corporation tax.
42.New section 357C(1) outlines the six Steps involved in the computation of the relevant IP profits of a trade.
43.Step 1 specifies that the total gross income of a trade must be calculated.  Total gross income of the trade is defined in new section 357CA.
44.Step 2 determines the percentage of the company’s total gross income that is relevant IP income, denoted as X per cent.  Relevant IP income includes not only the income identified under the various Heads in new section 357CC, but also any notional royalty identified under new section 357CD.
45.Step 3 apportions the total profit or loss of the trade between that attributed to activities of the trade involving the exploitation of qualifying IP rights and other matters.  This is achieved by applying the percentage, X per cent, computed at Step 2 to the total profit or loss of the trade for corporation tax purposes adjusted as required by new section 357CG.
46.Step 4 determines any qualifying residual profit figure by deducting an amount representing a routine return, calculated under new section 357CI, from the result of Step 3.  Where this is a positive figure, this is the qualifying residual profit, which represents the additional profit over and above a routine return attributed to the exploitation of the all of the company’s intangible assets.  If the routine return figure is greater than X per cent of the total profit, then subject to Step 7, there will be a relevant IP loss for the period.  No further adjustment is necessary under Steps 5 and 6 where there is a loss at this stage in the calculation.
47.Companies with a qualifying residual profit now make a decision regarding how to calculate the amount of this qualifying residual profit that is attributed to the qualifying IP rights.  Step 5 sets out that where the company has not made an election for small claims treatment, it should proceed to Step 6; alternatively if the company has made such election, it should use the simplified procedure set out in new sections 357CL and 357CM.
48.Step 6 deducts from any qualifying residual profit an amount to be attributed to marketing assets.  Whilst it is possible that the result of deducting the marketing assets return figure from the qualifying residual profits creates a loss, in practice a company in that position will always be better off making a small claims election and using the alternative method set out in new sections 357CL and 357CM so long as they meet one of the conditions in new section 357CL(2) or (3).
49.Step 7 is the point at which a company includes in its relevant IP profits for the period any additional amount in respect of profits arising in the period where grant of a patent is pending when the patent is granted.  The way in which this amount is calculated is set out at new section 357CQ.
50.New sections 357C(2) and (3) specify that any positive sum determined from the Steps set out above is the relevant IP profit for the period, whilst any negative amount will be the relevant IP loss for the period.
51.New section 357CA sets out the calculation of the total gross income of the trade for Patent Box purposes.
52.New section 357CA(1) specifies that total gross income of the trade includes any amounts falling within 5 Heads each of which is further explained in new sections 357CA(3) to (8).
53.New section 357CA(2) specifies that total gross income of the trade excludes any finance income, as defined in new section 357CB.
54.New sections 357CA(3) to (4) define income within Head 1 which includes amounts that are both recognised as revenue in the company accounts, and brought into account in computing the profits of the trade for corporation tax purposes.  GAAP is the standard to be used for recognition of revenue items, even where accounts are not drawn up in accordance with that standard.
55.New section 357CA(5) defines income within Head 2 as including amounts received as damages, insurance receipts or other compensation, to the extent that these have not been recognised as revenue in the accounts (and therefore included under Head 1).
56.New section 357CA(6) ensures that any adjustments that are necessary on a change of a company’s accounting basis which are treated as receipts for tax purposes are included under Head 3, to the extent that these are not recognised as revenues in the accounts (and therefore included under Head 1).
57.Sections 357CA(7) and (8) set out amounts included in Heads 4 and 5 as any taxable credits from the realisation of intangible fixed assets, and any profits from the sale of pre-2002 patent rights, held for the purposes of the trade which arise during the accounting period.
58.New section 357CB defines finance income as credits arising from financial assets, any amounts treated as a receipt of the trade arising from loan relationships or derivative contracts by virtue of sections 297 and 573 of CTA 2009 respectively, and other amounts economically equivalent to interest which a company receives as a consequence of any arrangement to which it is a party.  Income from financial assets includes dividends and other income from shares that forms part of the income of a financial trader.
59.New section 357CC sets out the amounts included in the total gross income of the trade which are to be regarded as relevant IP income. The aggregate of these amounts, together with any notional royalty identified under new section 357CD, will form the relevant IP income used in Step 2 of new section 357C(1).  The measure of the income under the Heads of relevant IP income for any accounting period will be the amount that is brought into account for tax purposes in the period.  Thus where recognition of the income from a disposal is spread over several accounting periods, then only the part recognised in the current period is treated as relevant IP income.
60.Relevant IP income must fall under one of the Heads identified in new section 357CC(1).
61.Any income which falls within Heads 1 to 5 (see new sections 357CC(2) and (6) to (9) below) will nevertheless not be relevant IP income to the extent that it is excluded income by virtue of new section 357CE.
62.New section 357CC(2) outlines income falling within Head 1. This is not limited to income from the sale of qualifying items which are items protected by a qualifying IP right.  It also includes the income from the sale of items either incorporating the qualifying item, or wholly or mainly designed to be incorporated into it.  Thus income from sales of products incorporating a patented component and from the sale of spare parts for such a product will be included under Head 1.  Qualifying items are items in respect of which a qualifying IP right held by the company has been granted.
63.For these purposes an item is defined in new section 357GE in chapter 7 as including any substance.
64.New sections 357CC(3) and (4) deal with the distinction between a qualifying item and its packaging.  These are treated separately unless the packaging performs an essential function relating to the use of an item.  The requirement to treat packaging separately is subject to a de minimis exception in new section 357CF(6) and it should not be relevant for most companies.  Companies selling qualifying items will not generally be required to separately identify the value attributable to its packaging.  The principal exception, where separate treatment is necessary, is the sale of an item that is not a qualifying item but which is sold in patented packaging.  The effect of the rule in such a case is to prevent the income from the sale of the item being regarded as part of the company’s relevant IP income.
65.New section 357CC(5) extends the meaning of items incorporating one or more qualifying items in subsection 2(b) to include the situation where a qualifying item and an item designed to incorporate that item are sold together for a single price.
66.New section 357CC(6) provides that income falling within Head 2 is income consisting of any licence fee or royalty received by the company under an agreement which only grants to another person:
	a right in respect of a qualifying IP right held by the company;
	a right in respect of a qualifying item or process; and
	a right granted for the same purposes as the right granted in respect of such qualifying IP right.
‘Qualifying process’ means a process in respect of which the company holds a qualifying IP right.
67.Licence fees or royalties that exclusively relate to the qualifying IP rights, qualifying items or processes are included in Head 2 income.  If a licence agreement provides for the receipt of royalties and / or fees for any other matter, then the rules for a mixed agreement in new section 357CF must be applied to determine the amount of relevant IP income.
68.New section 357CC(7) outlines income falling within Head 3. This is any income arising from the disposal of a qualifying IP right or an exclusive licence.
69.New section 357CC(8) outlines income falling within Head 4. This is any amount received by the company arising from infringement or alleged infringement of any qualifying IP right held by the company.  At the time of the infringement the company must have held the qualifying IP right.
70.New section 357CC(9) outlines income falling within Head 5. This covers other amounts of damages, insurance proceeds or compensation that do not fall within Head 4 (infringement of qualifying IP rights) but which nonetheless arise in respect of the sale of qualifying items or the loss of income which would have been relevant IP income.
71.Examples of amounts that would fall within Head 5 are:
	insurance proceeds received in respect of stocks of qualifying items lost or destroyed by fire, and
	damages in respect of lost income from the sale of qualifying items as a result of the infringement of rights that are protected by IP rights other than qualifying rights.  Such rights might relate to trademarks relating to the qualifying item, or a patent that protects features of protected items that are sold only outside of the EU and for which no qualifying IP rights exist in the UK or EU.
72.New sections 357CC(10) and (11) stipulate that income cannot be treated as relevant IP income under new sections 357CC(8) or (9) unless, at the time of the event in respect of which the income is received the company was a qualifying company for which an election under new section 357A in chapter 1 had effect.  Where the damages etc. received for the infringement relate partly to periods when the company was a qualifying company and partly to periods when it was not, then a just and reasonable apportionment is to be made to determine the amount which is relevant IP income.
73.Income will be treated as relevant IP income within Heads 4 and 5 even where it is received at a time when the company no longer holds a qualifying IP right, provided that it relates to an infringement which occurred at a time when the company did hold the qualifying IP right and was a qualifying company to which an election under new section 357A had effect.  New section 357B(3)(b)
74.New section 357CC(12) specifies that any reference in new section 357CC to a qualifying right held by the company is taken to include a reference to any qualifying IP right in respect of which the company holds an exclusive licence.
75.New section 357CD provides a mechanism for determining the amount of a company’s total gross income of the trade which is not relevant IP income but which arises as a direct result of the company’s exploitation of a qualifying IP right under any of the heads of new section 357CC.  Such income is identified as IP-derived income.  An example of this might be the sale of non-patented goods that are produced using a patented process.  The aim of this section is to arrive at a further amount of the total gross income that will be treated as relevant IP income.  This is achieved by establishing a notional royalty that reflects what the company would pay out of the income generated by the exploitation of the IP in the accounting period to a third party for use of those qualifying IP rights.  This amount will be added to the relevant IP income of the trade for use in Step 2 of the calculation of relevant IP profits in new section 357C.
76.New sections 357CD(1) and (2) provide that relevant IP-derived income arises to a company if it holds any qualifying patent (or any exclusive licence in respect of such a patent) and the total gross income of the trade includes an amount arising from the company’s exploitation of those qualifying IP rights which is neither relevant IP income under new section 357CC nor excluded income under new section 357CE.
77.New section 357CD(3) allows a company to elect to treat a notional royalty in respect of its IP-derived income as if it were relevant IP income.  Where a company has negligible amounts of income that would fall within this section it may decide not to carry out a calculation of any national royalty.  Where the company wishes to calculate a notional royalty, no formal election procedure is set down, and the company may simply include the notional royalty election by way of a note to the computations in its corporation tax return (or an amended return) for the period.
78.New sections 357CD(4) and (5) set out how to determine the notional royalty. This is the appropriate amount of any IP-derived income for the accounting period that the company would pay to a third party for the right to exploit any qualifying IP rights used for that accounting period, assuming that the company were not otherwise able to exploit it.
79.New sections 357CD(6) and (7) set out the assumptions that are to be made in arriving at the appropriate percentage of the IP derived income for an accounting period. These are:
	the royalty will be payable at arms length;
	the company, or the company and persons authorised by it, will have the exclusive right to exploit the qualifying IP;
	the rights deemed to be granted are only those that the company actually has in relation to the qualifying IP right. This is most likely to be relevant in cases where, for the example, the company holds a right or licence of limited duration or which is restricted to a particular country or territory;
	the rights are conferred on the later of the start of the accounting period or the date when the company acquired the IP right;
	the percentage is determined at the start of the accounting period; and
	will continue at an unchanged level for subsequent accounting periods.
These assumptions ensure that the notional royalty relates to relevant IP-derived income generated during the accounting period.  The amount of the notional royalty cannot exceed the amount of the IP-derived income because it is calculated as a percentage of that income, and any amount in excess of 100 per cent would clearly not be a commercial arrangement.
80.Thus, where there is no significant change in the company’s circumstances, the actual percentage used in one accounting period should also be used in the following accounting period.  Only if there is a significant change in the company’s circumstances would a company need to reassess the appropriate amount in accordance with the above assumptions for a subsequent accounting period.
81.New section 357CD(8) requires that the amount of the royalty must be determined in accordance with article 9 of the OECD model and the transfer pricing guidelines.  Both these terms are defined in new section 357CD(9).
82.New section 357CE specifies that two types of income, which could otherwise fall within one of the Heads of relevant IP income outlined at new section 357CA, will not be relevant IP income under any circumstances.
83.New sections 357CE(1) to (3) specify that ring fence income, from UK Continental Shelf oil and gas trades as set out in part 8 of CTA 2010 (see sections 272 and 273), and income arising to a licensee that is attributable to any licence in respect of an item or process, but which is not an exclusive licence is excluded from being relevant IP income.
84.Where it is necessary to attribute an amount of income to a non-exclusive licence in respect of a qualifying IP right as set out in new section 357B(4), then this is to be done on a just and reasonable basis.
85.New section 357CE(4) ensures that where a company has been granted a mixture of exclusive and non-exclusive rights over the invention under a single licence, the licence is to be treated under Part 8A as comprising two separate licences; one an exclusive licence which confers only the exclusive right or related rights and the other a non-exclusive licence covering the non-exclusive rights.  Income in respect of the deemed non-exclusive licence is excluded income by virtue of new section 357CE(3).
86.New section 357CF requires a company to make a just and reasonable apportionment of income which includes elements of both relevant IP income and other income, for the purposes of determining the company’s relevant IP income.
87.New section 357CF(1) provides that the section will apply to mixed income, and income paid under a mixed agreement.
88.New section 357CF(2) defines mixed income.  This is income from the sale of qualifying items together with non-qualifying items as a single unit and for a single price.  A qualifying item is one whose sale would produce relevant IP income under new section 357CC(2).
89.New sections 357CF(3) and (4) define a mixed agreement.  This is any agreement that provides for any of:
	the sale of a qualifying item, as set out in new section 357CC(2);
	the granting of rights in respect of a qualifying IP rights held by the company under new sections 357CC(6)(a) or (b); or
	a sale or disposal falling within new section 357CC(7);
and also
	the sale of any non-qualifying item, the granting of any rights other than in respect of a qualifying IP right or the supply of any service.
90.New section 357CF(5) requires the amount of relevant IP income to be determined using a just and reasonable apportionment of the mixed income or the income received under mixed agreement.  This is subject to a de minimis rule in new section 357CF(6).  A company may need to determine appropriate apportionments where none are provided within the agreement, or override the terms of an agreement for tax purposes where it is necessary to do so to arrive at a just and reasonable result.
91.For example, an agreement provides a single price for the sale of a single unit, where the sale includes 50 hairdryers with a patented motor (with the protected IP item (see new section 357CC) owned by the vendor), and 70 curling tongs where the vendor has no interest in any protected IP rights.  The vendor’s basic wholesale price of the hairdryer is £10 per unit, and the curling tongs £6 per unit.  Income from the sale which relates to the hairdryers falls within new section 357CC(2)(b), whereas that relating to the curling tongs does not fall within new section 357CC.  A just and reasonable amount of relevant IP income from the sale of the hairdryers could be calculated as:
92.New section 357CF(6) allows a company to disregard trivial amounts of income that can be attributed to the sale of non-qualifying items, the grant of other rights or the supply of services arising from a sale that generates mixed income, or under a mixed agreement, when calculating relevant IP income.  Where there are several non-qualifying amounts it is the aggregate amount which must be considered to determine whether the income is trivial.
93.New section 357CG sets out the adjustments that a company needs to make to its taxable profits from a trade in order to determine its relevant IP profits from that trade.
94.New sections 357CG(2) to (4) provide for the profits of the trade to be adjusted for two amounts, relating to research and development (R&D) tax relief, and financial income or expenses as follows.
95.Adding back any additional deduction for R&D expenditure obtained under part 13 of the CTA 2009 ensures that the company retains the full benefit of this tax relief even though its IP profits are taxed at a lower rate.
96.Removing any debits in respect of the trading loan relationships or derivative contracts, and any credits in respect of finance income ensures that the method of financing the company’s trade will not affect its relevant IP profits, and therefore the amount of tax relief it receives from the reduced rate of tax on those profits. Finance income is defined in new section 357CB.
97.New section 357CG(5) requires a company to use a greater amount of R&D expenditure in computing the profits of its trade in a relevant accounting period where there is a shortfall in R&D expenditure in relation to the trade of the company.  The provision operates in situations where a company’s R&D expenditure has predominantly been incurred in earlier periods while it was not within the Patent Box regime, and income from the results of that expenditure is mainly received in later periods at a time when it is within the regime, but its R&D expenditure has significantly reduced.  It only applies in the four years after a company makes an election under new section 357A.
98.Where there is a shortfall in R&D expenditure in relation to the trade of the company for a relevant accounting period, the provision requires a company to increase the amount of R&D expenditure taken into account in calculating relevant IP profits for that accounting period by the amount mentioned in new section 357CH(2).
99.New section 357CG(6) defines terms used in new section 357CG(5).
100.New section 357CH describes when and how the calculation of a company’s relevant IP profits for a relevant accounting period must take account of a greater amount of expenditure on R&D than that which has been incurred in the accounting period.  A relevant accounting period is defined in new section 357CG(5) and covers any accounting period beginning within four years of the date that an election into the Patent Box has effect for a qualifying company.
101.New section 357CH(1) specifies that there is a shortfall in R&D expenditure for a relevant accounting period where the actual R&D expenditure in the accounting period is less than 75 per cent of the average amount of R&D expenditure.  The actual R&D expenditure for an accounting period is defined in new section 357CH(3), although this is subject to any adjustment through a ‘smoothing’ procedure described in new sections 357CH(8) to (11).
102.New section 357CH(2) sets out the amount of the adjustment required when there is a shortfall in R&D expenditure for a relevant accounting period.  It is to be increased by the difference between 75 per cent of the average R&D expenditure in the relevant period before the company started to use the Patent Box and the actual R&D expenditure for that accounting period.
103.New section 357CH(3) defines the actual R&D expenditure, and specifies that R&D expenditure and relevant accounting period have the meanings given by new section 357CG(6).
104.New section 357CH(4) sets out how to calculate the average amount of R&D expenditure. This is the total amount of R&D expenditure incurred by the company for the relevant period (as defined in new section 357CH(4)) divided by the number of days in that period. This daily figure is then multiplied by 365 to give an annual amount.
105.New section 357CH(5) defines the relevant period for the purposes of new section 357CH.  This will generally be the four years prior to the accounting period in which an election under new section 357A by a qualifying company first had effect (or the time since the trade commenced if this is less than four years).
106.New section 357CH(6) directs that where a relevant accounting period is less than 12 months, the average amount of R&D expenditure used to compare with the actual expenditure is proportionately reduced.
107.New sections 357CH(7) to (11) address the circumstance where a company has fluctuating levels of R&D expenditure for different relevant accounting periods.  They allow a degree of ‘smoothing’ which will reduce the frequency and amount of any adjustments required under new section 357CH(2).
108.New section 357CH(8) provides that where, for any relevant accounting period, actual R&D expenditure is greater than the average calculated under new section 357CH(4) the excess can be added to the actual amount of R&D expenditure for the next relevant accounting period. That augmented amount of R&D expenditure is then compared with the average amount to determine whether there is a shortfall in R&D expenditure.
109.New sections 357CH(9) and (10) apply where it is the only additional amount of R&D expenditure included for an accounting period by virtue of new section 357CH(5) that causes there not to be a shortfall for that period.  In such a case, any remaining part of the additional amount over and above that which is necessary to increase the actual R&D expenditure for an accounting period to 75 per cent of the average R&D expenditure may be carried forward for use in the next period.
110.New section 357CH(11) specifies that where an additional amount of R&D expenditure is included for an accounting period by virtue of subsection (8), but it is needed to make up for a shortfall in R&D expenditure for that period then it may be carried forward to the next period, in addition to any excess of R&D expenditure over the average that arises in that period.
111.New section 357CI sets out how to compute a routine return figure for the purposes of Step 4 of the calculation of relevant IP profits.  Step 4 aims to exclude an amount of profit which represents a routine return.  A routine return is the return which could be expected from the business if the company was not able exploit its qualifying IP rights and other intangible assets.
112.New sections 357CI(1) outlines the three Steps for calculating the routine return figure.
113.Step 1 identifies the total of the routine deductions made by the company in computing the profits of the trade.  Routine deductions are those identified in new section 357CJ, and not excluded by new section 357CK.
114.Step 2 applies a mark-up of 10 per cent to the amount identified in Step 1.  A cost-plus methodology is a used to determine the arms-length return expected from a trader that does not use unique intangible assets in its trade. The 10 per cent rate reflects the fact that only a proportion of the actual expenses of the trade are used when estimating a routine return figure.
115.Step 3 determines how much of that routine return is to be attributed to profits from the company’s relevant IP income.  This is achieved on a pro-rata basis using the ratio of relevant IP income to the total gross income figure, as in Steps 1 and 2 of the computation under new section 357C, denoted as X per cent
116.New sections 357CI(2) and (3) ensure that the deductions taken into account for the purposes of determining a routine return also include any expenses incurred on a Patent Box company’s behalf by other members of the group, irrespective of whether or not these have been reimbursed, for example by way of a service fee or adjustment to intercompany balances.  Where necessary, a just and reasonable apportionment of expenses incurred by the other company should be made to determine the amount to be included in calculating the Patent Box company’s routine return.
117.New section 357CJ sets out the meaning of routine deductions for the purposes of new section 357CI.  These are the deductions to which a mark-up is applied to determine the routine return from the trade.  A number of costs related to financing and the development of IP rights are specifically excluded by virtue of new section 357CK.
118.New section 357CJ(1) sets out six general heads of expenditure, each of which is further explained in new sections 357CJ(2) to (7).
119.New section 357CJ(8) defines various terms used in the descriptions under the six Heads.
120.New section 357CJ(9) permits the Treasury to amend the list of items included in relevant deductions and their descriptions by way of an Order.
121.New sections 357CK(1) to (7) define deductions which are not to be marked up as routine deductions.  Any loan relationship or derivative contract amounts are excluded from the routine deductions, as well as certain costs associated with the development of the company’s qualifying IP rights.  The exclusion of any amounts that have qualified for R&D tax relief, including any additional deduction under part 13 of CTA 2009 at this stage ensures that there is no incentive for Patent Box companies to outsource their R&D activities to other group companies.  Capital allowances related to R&D expenditure and patent allowances are excluded, as are certain tax deductions for employee share schemes.
122.New section 357CK(8) permits the Treasury to amend the list of items excluded from being relevant deductions and their descriptions by way of an Order.
123.New sections 357CL and 357CM provide a simpler method for calculating the relevant IP profits of a company where its profits are small.  In this circumstance, the company may make an election under new section 357CL(1) and use a formulaic approach in the computation of their relevant IP profits instead of Step 6 as set out in new section 357C.  No formal election procedure is set down, and a company may simply include the election for small claims treatment by way of a note to the computations in its corporation tax return (or an amended return) for the period.  The rule is intended to relieve companies with smaller profits from the administrative burden of carrying out a full analysis of its marketing assets return as is required under Step 6.
124.New section 357CL(1) sets out that a company can elect for small claims treatment where either of conditions A or B are met.  Condition A is the basic rule which will apply to most companies including all those with small profits.  Condition B will apply to companies that have larger amounts of profits in some years, and is intended to ensure that such a company does not only use the small claims treatment for years when it provides a beneficial result compared to calculating a marketing assets return in accordance with Step 6 of Condition A is the basic rule which will apply to most companies including all those with small profits.  Condition B will apply to companies that have larger amounts of profits in some years, and is intended to ensure that such a company does not only use the small claims treatment for years when it provides a beneficial result compared to calculating a marketing assets return in accordance with Step 6 of Condition A is the basic rule which will apply to most companies including all those with small profits.  Condition B will apply to companies that have larger amounts of profits in some years, and is intended to ensure that such a company does not only use the small claims treatment for years when it provides a beneficial result compared to calculating a marketing assets return in accordance with Step 6 of
125.New section 357CL(2) specifies condition A. This is that the total amount of qualifying residual profit of all of the company’s trades taken together does not exceed £1,000,000. In determining this total amount any negative amount of QRP in respect of any of the company’s trades is disregarded by virtue of new section 357CL(7).
126.New section 357CL(3) specifies condition B. This is that the total amount of qualifying residual profit of all of the company’s trades taken together does not exceed the relevant maximum, and that the total company has not followed Step 6 of new section 357C(1) for the purpose of calculating RIPI (deducting a marketing assets return figure under new section 357CN) for any accounting period commencing within the previous 4 years.
127.New section 357CL(4) gives the relevant maximum amount for a company with no associated companies. This is £3,000,000.
128.New sections 357CL(5) and (6) specify that the relevant maximum is to reduced proportionately where a company has one or more associated companies in relation to which an election under new section 357A has effect and where its accounting period is less than 12 months long.
129.New section 357CL(8) specifies that when determining whether two companies are associated for the purposes of the small claims threshold the rules used for claims to the small profits rate of corporation tax are to be followed.
130.New section 357CM(2)(a) provides that where an election for small claims treatment is made by a company with just one trade, the amount of relevant IP profits is the lower of 75 per cent of the qualifying residual profit of the trade or the small claims threshold.
131.Where a company has more than one trade, the qualifying residual profit of each of the trades is aggregated to determine whether the small claims limit has been exceeded.  Any negative amounts of qualifying residual profit in a trade are ignored, by virtue of new section 357CM(4).
132.Where the total does not exceed £1,333,333, the relevant IP profits are 75 per cent of the qualifying residual profit in each trade.  Otherwise the relevant IP profit figure is the small claims threshold – this is a total figure rather than an amount per trade.
133.New section 357CM(5) sets the small claims threshold for a company which has no associated companies that have made an election under new section 357A at £1 million for an accounting period of twelve months.
134.New sections 357CM(6) and (7) reduce the small claims threshold proportionately where a company has one or more associated companies that have made an election under new section 357A, or where the accounting period is less than twelve months respectively.
135.New section 357CM(8) specifies that when determining whether two companies are associated for the purposes of the small claims threshold the rules used for claims to the small profits rate of corporation tax are to be followed.
136.New section 357CN details the method that is to be used to arrive at the marketing assets return figure required for a deduction from qualifying residual profit at Step 6 of new section 357C(1).
137.New section 357CN(1) specifies that the marketing assets return figure is the difference between notional marketing royalty in respect of the trade (NMR) for the accounting period and the actual marketing royalty in respect of the trade (AMR) for the accounting period. The NMR and the AMR are defined by new sections 357CN and 357M.
138.New section 357CN(2) states that the marketing assets return figure is taken to be nil where:
	AMR is greater than the NMR; or
	NMR is less than 10 per cent of qualifying residual profit (see new section 357GE(2) in Chapter 7).
139.New section 357CO outlines the principles to be used in determining the notional marketing royalty figure to be used in new section 357CN.
140.New sections 357CO(1) and (2) specify that the notional marketing royalty is to be determined as the amount of its relevant IP income for the accounting period that the company would pay to a third party for the right to exploit its relevant marketing assets, assuming that otherwise it would have no such right.  This is the appropriate amount of the relevant IP income.
141.New section 357CO(3) provides that relevant marketing assets are those marketing assets that are used to generate relevant IP income of the trade in the accounting period.
142.New section 357CO(4) details the assumptions used for deriving the amount of the notional marketing royalty. These are:
	the royalty will be payable at arms length;
	the company, or the company and persons authorised by it, will have the exclusive right to exploit the relevant marketing assets;
	the royalty will be paid only in respect of rights that the company actually holds;
	the right will be granted on the relevant day;
	the appropriate percentage is calculated at the start of an accounting period;
	the same percentage will apply for succeeding accounting periods; and
	the only benefits the company will derive from the exploitation of the rights will be in respect of relevant IP income during the accounting period.
These assumptions ensure that the notional marketing royalty relates only to relevant IP income generated during the accounting period.  They will exclude the use of assumptions based on other market practices such as front- or rear-loaded payments, lump sums covering longer periods, etc.
143.New section 357CO(5) defines the relevant day for the purposes of the assumptions made about the appropriate amount.
144.New section 357CO(6) requires that the amount of the royalty must be determined in accordance with article 9 of the OECD model and the transfer pricing guidelines.
145.New section 357CO(7) defines the term marketing asset.
146.New section 357CP sets out how to determine the actual marketing royalty of a trade for an accounting period.
147.New section 357CP(1) states that the actual marketing royalty is X per cent of the total amount paid by the company for the acquisition of, or the right to exploit, any relevant  marketing assets, and which are debited in the calculation of the corporation tax profits of the company’s trade for the accounting period.
148.New section 357CP(2) provides that in new section 357CP(1) relevant marketing assets has the same meaning as that given in new section 357CO, and X per cent is the proportion of total gross income of the trade that is relevant IP income, as computed under Step 2 of new section 357C(1).
149.New section 357CQ provides that an amount of profits arising between the date of application to register a patent and the date of grant may be included in the calculation of relevant IP income in the period in which that right is granted. This provision does not apply to qualifying IP rights other than patents.  Registration of a patent may take a number of years; the intervening period is generally known as the patent pending period.  A maximum of six years’ additional profits may be brought in for the period when the right is granted.  New section 357BB defines relevant IP rights, and, other than in a case where the exception for patents that affect national security or public safety in new section 357BB(2) applies, requires the right to have been granted.  Without this section any income received from the innovation which is the subject of the application, prior to grant, would not be relevant IP income.
150.New section 357CQ (2) provides for a company to elect to include an additional amount in its calculation of the relevant IP profits of the accounting period in which a patent is granted.  No formal election procedure is set down, and a company may simply include the election by way of a note to the computations in its corporation tax return (or an amended return) for the period.
151.New section 357CQ(3) sets out how the additional amount is calculated.  It includes IP profits arising after the relevant day, in any relevant accounting period, that have not otherwise been included in relevant IP profits of the period. Relevant day and relevant period are defined in new sections 357CP(6) and (4) respectively.
152.New section 357CQ(4) ensures that any relevant IP profits that have been the subject of a set-off of relevant IP losses are disregarded for the purposes of calculating the additional amount.
153.New sections 357CQ(5) and (6) give the conditions which determine which accounting periods will be a relevant accounting periods. A relevant accounting period is any accounting period in which the right is granted, and any earlier accounting period, ending on or after the relevant day, for which the company is a qualifying company and has made an election under new section 357A.
154.New section 357CQ(7) defines the relevant day for the purposes of the section. This will be the later of:
	6 years prior to the date of grant; and
	either the date of application for the qualifying IP; or
	where a company holds an exclusive licence, the date the licence was granted.
155.New section 357CQ(8) allows a company to be treated as if it was a qualifying company for the purposes of new section 357CQ if the only reason it would not be a qualifying company is that the right had not yet been granted.
156.New section 357CQ(9) allows a company to be treated for the purposes of new section 357A as if it was a qualifying company for the accounting period in which the right is granted if the only reason that it would not qualify is that the company disposed of the right, or the licence to that right before it was granted.  This allows a deduction under new section 357A to be made by a company that would not otherwise be a qualifying company for that accounting period.