Patent Box - a new 10% tax rate for companies

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That good idea could save you tax! A new tax relief was introduced from April 2013 which allows companies to apply a 10% tax rate to profits arising from patents and certain other types of intellectual property. 

The new relief sits alongside the current Research and Development (R&D) Tax Credits relief, so innovative companies will be able to benefit under both regimes if they meet the qualifying criteria. The regime is being phased in over a four year period commencing on 1 April 2013, so in 2013 only 60% of the relevant patent box profit will be eligible for the 10% rate moving to 100% from April 2017.

Will this apply to my company?

To qualify for the regime a company must meet one of the following criteria:

It must hold and derive income from a qualifying patent interest, this can be:

  • its own patent granted by the UK Intellectual Property Office or the European Patent Office
  • an exclusive right to exploit a patent:
    • or have patents pending
    • sell goods with patented products embedded

If your company does not currently fall into any of these categories, you should ask yourself whether your company could claim R&D tax credits on development expenditure which is patentable, or could it secure a patent for an invention used in the business to bring itself within the regime?

Your company must make a significant contribution to the development of its qualifying patent or a product it sells incorporating a patented invention. Passive ownership of acquired patent rights will not qualify.

So How Does It Work?

The 10% beneficial rate of tax will apply to worldwide profits derived from patents. Patent box income can arise in numerous ways, it can be licence and royalty fees, income from infringements, income from the sale of patented products as well as products that comprise patented inventions within them. So long as the new product is covered by at least one qualifying patent the profits from it should fall within the new regime.

Entry into the regime is by election only and once the company has elected into the regime it remains under it until the election is withdrawn.

With regards to patents pending, a company will only be within the regime once the patent has been granted, although it will be possible to apply the new rate to profits arising whilst the patent is pending for a period of up to 6 years from the initial application.

Note however that the company must have elected itself into the regime and be a qualifying company during these earlier periods.

How do you calculate the Patent Box profits?

The profits that can be subjected to the beneficial tax rate are arrived at by a complex formula. The formula is designed to strip out routine profits that the company would make anyway without the patents. There are different calculations that can be performed depending upon the specific circumstances of the case.

What should I be thinking about now?

With this new relief available businesses should be thinking about whether they can benefit from the relief and maybe considering the company’s policies concerning patents. Should patents be applied for? Should the company’s IP assets now be located in the UK? Do the company’s licensing agreements need reviewing in light of the exclusivity requirements. Is the group structure correct to secure eligibility etc.

The new relief will certainly pose some issues for company directors over the coming months as they seek to review their position under the new rules.

For further information and advice on claiming patent box tax relief please email tax@streetsweb.co.uk