The Patent Box regime was introduced in the UK in 2013 as a tax incentive to businesses to make profits from their patents, by reducing the tax paid on those profits. The aim of the scheme is to promote innovation and research and development (R&D) across UK businesses, encouraging them to commercialise their patents and R&D in the UK.
Those businesses which qualify for the scheme will benefit from an effective Corporation Tax rate of 10% on income deriving from the commercial exploitation of patents. The reduced rate applies to profits earned after 1 April 2013 from a company’s patents and other innovations. The relief has been phased in over four years, so full relief on all Patent Box profits finally came into force in 2017.
How do businesses qualify for the Patent Box scheme?
A company will qualify for the relief if it owns patent licences in intellectual property (IP) rights, or exclusively licences the rights to those patents, and has undertaken qualifying development on them.
If your company is a member of a group, it may also qualify if it or another company in the group has undertaken qualifying development for the patent, by making a significant contribution to either the creation or development of the patented invention, or a product incorporating the patented invention.
Companies who are part of a group must also meet an active ownership requirement – so although your company doesn’t have to make all the decisions regarding the portfolio, it must undertake a significant amount of the management.
So we don’t have to be making profit from our own inventions to qualify?
No – patent holders often license their inventions for others to develop, and if your company holds licenses to use someone else’s technology, you may still benefit from the Patent Box regime, as long as you meet certain conditions. You must have:
- rights to develop, exploit and defend rights in the patented invention
- one or more rights to the exclusion of all other persons (including the licensor)
- exclusivity throughout at least an entire national territory – rights to manufacture or sell within part of a country, for example, would not qualify as exclusive.
What income qualifies for the reduced tax rate?
Not all income qualifies for the Patent Box scheme. To be eligible for the effective Corporation tax rate of 10%, the income will need to be derived from:
- the sale of patented items or those that incorporate a patent, such as the sale of spare parts.
- the licensing of patent rights.
- the sale patent rights.
- any compensation income or damages from the infringement of owned rights.
There is also specific income which does not qualify for the Patent Box reduction, including:
- income from regular activities, earned regardless of patent rights.
- income from marketing asset return (ie income earned from branding, rather than from technological innovation itself).
How to claim Patent Box CT relief?
You have to make an election to benefit from the reduced rate of Corporation Tax that applies to the Patent Box within two years after the end of the accounting period in which the relevant profits and income arose. You can do this in the computations accompanying your Company Tax Return or separately in writing, but there is no special form of words for this election.
The calculations for determining the qualifying expenditure for Patent Box tax relief are complex, and have become increasingly so since a new step was added into the calculations in 2016, in an effort to make sure the scheme isn’t open to abuse. So it’s important to seek expert professional advice on the Patent Box scheme as early as possible.
The basic principle is that routine company profits are deducted from total profits to arrive at a ‘qualifying residual profit’. Companies are then able to make a further reduction for marketing asset return (a different calculation depending on whether you are deemed a large company or an SME), with the remaining profit attracting the Corporation Tax rate of 10%.
A more detailed description of the calculation required can be found on the HMRC’s How to claim Patent Box tax relief page.
The changes introduced in 2016 have added to the complexity of the calculations, by introducing a requirement for every individual IP right, patented product or product family to be separately ‘streamed’ – meaning that a company with five patented products will need to carry out five separate calculations, allocating income and expenses to each – and also adding a new ‘Nexus Fraction’ to the calculations, in a bid to link the Patent Box benefit more closely to a company’s R&D activities. You can find out more details about the new Nexus Fraction calculations here.
What to do next?
The Patent Box involves complex calculations and provides a real tax benefit for companies that qualify and generate profit from patents. It is therefore advisable that you seek professional advice as early as possible. If you would like to find out more about how you could benefit from the Patent Box scheme, contact us using the form below.
This post was produced by Gemma Thake of the Price Bailey Tax team. To contact her about any of the points raised in the article above, feel free to get in touch using the form further 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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