Corporation Tax Act 2010 section 357BLA

The R&D fraction

Section 357BLA sets out the formula for calculating the R&D fraction, which determines what proportion of a sub-stream of patent box profits qualifies for the reduced corporation tax rate based on the company's own R&D activity.

• The R&D fraction is the lower of 1 and the result of the formula: (D + S1) × 1.3 ÷ (D + S1 + S2 + A), where D is in-house R&D spend, S1 is R&D sub-contracted to unconnected parties, S2 is R&D sub-contracted to connected parties, and A is expenditure on acquiring IP rights.
• The formula rewards companies that carry out R&D themselves or outsource it to unconnected parties, by giving greater weight to those costs in the numerator, with a 30% uplift applied.
• Expenditure on R&D sub-contracted to connected persons and on acquiring IP rights appears only in the denominator, which reduces the fraction and therefore reduces the profit eligible for the patent box benefit.
• The R&D fraction may be increased beyond the formula result in exceptional circumstances under separate provisions.