How is expense relief under section 600 of ITTOIA 2005 applied against patent income?

Under section 601 of ITTOIA 2005, qualifying patent expenses claimed under section 600 must be deducted from the claimant's patent income in the tax year the expenses were incurred. This deduction takes effect at Step 2 of the income tax calculation set out in section 23 of ITA 2007, reducing the person's taxable patent income for that year.

What happens if qualifying patent expenses exceed patent income for the tax year?

If qualifying expenses exceed patent income for the tax year, the surplus automatically carries forward to the next tax year and continues into subsequent years until fully relieved. No additional claim is required for these carry-forwards. However, the excess cannot be used to create an allowable loss — it can only reduce patent income.

What counts as patent income for the purposes of section 601 of ITTOIA 2005?

Patent income includes royalties or payments for patent use, amounts taxable on the sale of patent rights under section 587, amounts arising on a seller's death under section 593 or corporate winding up under section 594, and balancing charges under section 472(5) and Schedule 3 paragraph 100 of the Capital Allowances Act 2001.

How do capital allowances interact with section 601 patent expense relief?

When calculating patent income for section 601 purposes, any capital allowances already deducted under section 479 of the Capital Allowances Act 2001 must be taken into account first. Patent income means the income remaining after those capital allowances have been set off. Only then are the section 600 qualifying expenses deducted from that resulting figure.

Income Tax (Trading and Other Income) Act 2005 section 601

How relief is given under section 600

Section 601 explains how expense relief claimed under section 600 is applied against a person's patent income, including how any excess is carried forward to future tax years.

Qualifying patent expenses must be deducted from patent income in the tax year the expenses were incurred, applied at Step 2 of the income tax calculation under section 23 of ITA 2007.
If the expenses exceed patent income for that year, the surplus carries forward automatically to the next tax year and continues into subsequent years until fully used, with no further claim needed.
Patent income for this purpose includes royalties for patent use, amounts taxable on the sale of patent rights, and balancing charges on patent allowances — but only after any capital allowances under section 479 of CAA 2001 have already been deducted.
Excess expenses cannot be used to create an allowable loss under this section; they can only be set against patent income in the current or future years.

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