Corporation Tax Act 2010 section 357CH

Shortfall in R&D expenditure

Section 357CH sets out the rules for determining when a company using the Patent Box regime has a shortfall in its research and development expenditure, how that shortfall is calculated, and how a smoothing mechanism allows excess R&D spending in one period to be carried forward to offset shortfalls in later periods.

• A shortfall arises when a company's actual R&D expenditure in a relevant accounting period (after adjustments) is less than 75% of its average annual R&D expenditure from the period before it entered the Patent Box
• Where a shortfall exists, the company must add the difference between 75% of the average R&D expenditure and its actual (adjusted) R&D expenditure to its costs when calculating relevant IP profits, which reduces the Patent Box benefit
• The average R&D expenditure is calculated by taking the total R&D spending during the relevant period (generally the four years before the Patent Box election took effect, or the period since the trade began if shorter), dividing by the number of days, and multiplying by 365 to produce an annualised figure
• A smoothing mechanism allows excess R&D expenditure above the average in one relevant accounting period to be carried forward and added to the actual R&D expenditure for the next period, reducing the likelihood and size of future shortfall adjustments