Patent Box Tax Relief Overview
The Patent Box is part of the UK Government’s growth agenda with the aim of providing an additional incentive for companies to retain and commercialise existing patents and to develop new innovative patented products.
This should encourage companies to locate the high-value jobs associated with the development, manufacture and exploitation of patents in the UK and maintain the UK’s position as a world leader in patented technologies.
The Patent Box allows companies to elect to apply a 10 percent rate of corporation tax to profits attributable to qualifying patents, whether received as a royalty or embedded in the sales price of products.
In addition to patented products the scheme also allows for a taxation saving to be made on the sale of products made by a patented process even if the product itself is not patented.
What you need to know:
I have a UK Granted patent but sell my products world-wide can I benefit?
Yes – if you have a UK granted patent (or one from a number of European countries) then you can claim the relevant taxation saving on profits wherever your products are sold in the world, even if they are sold into a country for which you do not have a granted patent. Unfortunately, USA patents do not qualify so if you only have a USA patent you will not benefit.
I am profitable but do not pay corporation tax because I have a large R&D claim?
The Patent Box tax calculation is determined after your R&D tax credit claim – if you are profitable but your R&D claim eliminates your corporation tax liability then you are still able to benefit from Patent Box although the interaction is complex and the benefit will not be immediate.
I have a patent but it only covers a small part of my sales?
The tax saving can be simply calculated on an apportionment basis (sales of the patented products to non-patented products) – however, for larger claims it is compulsory (and for smaller claims it can be beneficial) to calculate the ratio of patented profits to non-patented profits. Hence if you have a wide range of products and the patent only covers a small part of the product range than the taxation saving based on the ratio of patented to non-patented products might be small.
However, if your patented product forms a small but integral part of a much larger system (headlamp bulb in a car is the widely used example) then the profits from the larger system would be considered as part of the apportionment calculation.
For more complex areas such where the patented part is more loosely connected with the sales of a larger system specialist advice is required (e.g. replacement printer cartridges sold with/for use in a patented printer would qualify even if they themselves are not patented).
Timing of 'electing in' to the Patent Box.
Careful consideration of when to ‘elect in’ to the Patent Box needs to be calculated – based on the level of expenditure in R&D spent on developing the patented product/process and the timing of profits obtained from the patented products/products made by a patented process.
This is a complex area and ‘electing in’ too early can reduce the benefit of a claim and so financial calculations are required to determine the optimum point in the R&D and commercialisation lifecycle to ‘elect in’ to the Patent Box. This is a specialist area not well understood by non-specialist accountants/tax advisors.
Changes to the scheme 30th June 2016
As part of the OECD-G20 BEPS (base erosion and profit shifting) project changes are being made to the UK Patent Box to link substantive R&D activity to any Patent Box deduction
Specifically, the modified Patent Box rules will apply from 1 July 2016, but grandfathering is available for periods before that date for current qualifying intellectual property (IP) assets.
Under the new rules, the benefit going to income from an IP asset is related to the cumulative fraction of research and development spending done by the company itself or by unrelated subcontractors (compared with total R&D spending, which also includes acquisition costs and related party subcontracting). R&D spending, and corresponding income, therefore need to be recorded and this can be done at the level of IP assets, products/ processes reflecting IP assets or product families.
A decision as to how the IP is to be streamed should be made early as the tracking and tracing of R&D relating to each stream should start after 1 July 2016. This is to ensure that when the grandfathering period is exited a fraction is ready to be applied.
The two-year time limit to make an election will still apply. For example, as long as an accounting period straddles 30 June 2016 so part of it falls before that date any qualifying assets held on that date will be grandfathered as long as an election is made within two years of the end of the accounting period. For example a company with an Accounting Period ending 31 December 2016 has until 31 December 2018 to make an election.
Patents applied for before 1 July 2016 will, upon grant, be included as current assets. The relevant date is the Application date, not the Priority date.
Any new patents acquired or applied for after 30 June 2016 can only receive patent Box benefits under the modified rules, whether or not the current Patent Box rules apply to the company.