From 1 July 2021, some of the most fundamental changes to the Patent Box in recent years will apply to companies elected into the regime. The changes will align with the relief available to all new claimants and those with new intellectual property (IP) from 1 July 2016.
The effect of the changes means that all companies, if not already, will move over to the “new” rules and the steps for making a claim, regardless of when the company elected into the regime, will be consistent.
Claims for accounting periods which straddle 1 July 2021 will require a notional split of the period for Patent Box purposes and this potentially makes the calculation of relief much more complex.
Changes from 1 July 2021
The key changes under the new regime are:
1. Mandatory streaming
It will be compulsory for companies to calculate their relevant IP profits using a streaming method rather than a simpler formulaic calculation. This means that IP income and expenditure will need to be allocated to separate streams for each IP asset, if possible (or by product or family of products).
Previously, a company could calculate the relief based on total profits from relevant IP. The change is likely to make some claims more complex and companies will need to maintain sufficient accounting records in order to be able to identify income and costs for each patent or product.
2. The R&D fraction
An additional step is added into the Patent Box calculations to calculate an R&D or “Nexus” fraction. The effect of the fraction is to link the tax relief available to a company to its R&D expenditure. For companies which have not undertaken significant R&D activity in developing their IP (e.g. if IP is acquired from a third party), this could restrict their relevant IP profits and therefore Patent Box relief.
The R&D fraction is calculated by an algebraic formula, including in house R&D costs, amounts subcontracted to third parties and connected persons, and expenditure on the acquisition of IP (including patent application costs).
The fraction must be calculated for each IP stream and generally requires the company to track its R&D expenditure from 1 July 2016, even where the new rules first apply to the claimant from 1 July 2021.
The above changes reinforce the complexity of the relief, albeit it can be one of the most beneficial regimes for some companies to reduce their corporation tax payable. HMRC statistics last published in September 2020 suggest the number of companies claiming Patent Box relief and the total value of relief claimed is increasing, however it is an area where professional advice is recommended to assist with a company’s decision to elect into the regime and calculate the tax benefit available.
This post was written by Gemma Thake, Senior Tax Manager. Price Bailey has significant experience with the Patent Box. If you have any questions on the changes being introduced from 1 July 2021 or related to making Patent Box claim, you can contact Gemma using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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