In the context of the UK Patent Box scheme, “streaming” refers to the process of identifying and separating the specific profits derived from qualifying intellectual property (IP), such as patented products or processes, to calculate the portion of a company’s income eligible for the reduced 10% corporation tax rate.

It’s a method used to allocate profits accurately, ensuring only the income directly linked to patented IP benefits from the tax relief.

     →  Think of it as drawing a clear line between profits from your patented innovations and the rest of your business activities.

Why Is It Needed?

The Patent Box scheme only applies to profits from specific IP, like patents granted by the UK Intellectual Property Office or the European Patent Office. Streaming ensures you’re only claiming the reduced tax rate (10% instead of the standard 25%) on the right portion of your income. It’s about fairness and compliance – HMRC wants to see that you’re not overclaiming by attributing unrelated profits to your patents.

How Does It Work?

Here’s how streaming typically plays out:

1 |  Identify Qualifying IP Income

Start by working out which profits come from your patented products, services, or licensing fees. For example, if you sell a product with a patented component, the entire profit from that product can often qualify, not just the part directly tied to the patent. This includes worldwide sales, royalties, or even damages from IP infringement.

2 |  Allocate Costs and Income

You’ll need to separate the revenue and costs related to your patented IP from other business activities. This might involve breaking down your sales into streams—say, one for patented products and another for non-patented ones. HMRC allows flexibility here, but your method must be reasonable and defensible.

3 |  Apply the R&D Fraction

Since 2016, the Patent Box rules require an “R&D fraction” to link your tax relief to your research and development efforts. Streaming helps you calculate this by showing how much of your IP profits are tied to your own R&D (or group R&D) rather than acquired IP or subcontracted work. A higher fraction (closer to 1) means a bigger tax benefit.

4 |  Calculate the Tax Benefit

Once you’ve streamed your qualifying IP profits, you use HMRC’s formula to work out a deduction that effectively reduces the tax on those profits to 10%. This involves subtracting relevant costs (like marketing or production) and applying the R&D fraction to arrive at the taxable profit eligible for relief.

Example in Action

Imagine your company, TechTrend Ltd, makes a gadget with a patented sensor, generating £1 million in profit.

• Through streaming, you identify that £800,000 of that profit comes from sales of the patented gadget.
• You allocate costs (say, £200,000 for materials and labour) to calculate a net IP profit of £600,000.
• If your R&D fraction is 0.9 (because most R&D was done in-house), you apply the Patent Box formula to claim relief on that £600,000, effectively taxing it at 10% instead of 25%.

Questions about streaming or Patent Box in general?

Streaming can be complicated, but it’s crucial for maximising your Patent Box benefits. Without it, you risk underclaiming (missing out on savings) or overclaiming (inviting HMRC scrutiny). Contact the ABGi Team to ensure your calculations are robust and compliant.