What is the Patent Box?
The Patent Box enables companies to apply a lower rate of Corporation Tax to profits earned after 1st April 2013, from its patented inventions. The relief was phased in from 1st April 2013, and the lower rate of Corporation Tax is 10%.
Are You Eligible for Patent Box Tax Relief?
You can only benefit if your company is liable for Corporation Tax and makes a profit for exploiting patent inventions. In addition, your company must also own or exclusively licence in the patents and must have undertaken qualifying development in them.
How to Elect Into the Patent Box Regime
A company may elect into the patent box regime for profits earned in a particular accounting period within 2 years of the end of the project. If a company elects into the regime all of its trade will be subject to the Patent Box .It is possible for the company to elect out of the Patent Box regime. It will then be barred from re-entering the Patent Box regime for 5 years.
It is possible to make a Patent Box loss on a particular product, for example a product with a low profit margin. A Patent Box loss occurs when the calculation of relevant IP profits is a negative number. Any Patent Box loss made in previous accounting periods in which the company has elected in will need to be set off against Patent Box profits made in subsequent periods.
Although it is not possible to claim a Patent Box benefit until after qualifying IP right – typically a patent – has been granted, relief can then be claimed for profits made up to 6 years prior to grant, so long as the company has elected in for the accounting period in which those profits were made.
For qualifying IP rights which were applied for (but not granted) before 1st of July 2016, it is possible to elect into the Patent Box regime after this date within the normal time limits and benefit from the pre-1st of July 2016 Patent Box rules
(until 30 June 2021), provided the conditions for election into the Patent Box regime are met prior to 1st July 2016.
Key Timing Considerations When Electing Into the Patent Box
As it is possible to make a Patent Boss loss, it is important that careful consideration is given as to whether to elect into the Patent Box at all, and to plan the timing of any such election.
It is not uncommon for profits to be low or non-existent during the early exploitation of a patent. It may therefore be appropriate to elect into the Patent Box at a point in the business life cycle when a Patent Box profit is available on the product(s)| covered by a company’s patents. Any Patent Boss loss will need to be off-set against the Patent Box profit, so the Patent Box benefit may be greatly reduced or even eliminated as a consequence of having elected into the regime too early.
For companies or groups where a proportion of any R&D relating to Relevant IP Income is carried out by another company in the same group, or who have acquired their Qualifying IP Rights, there will likely be a benefit in electing into the pre-1st July 2016 Patent Box rules. This is because no nexus fraction reduction is required under the
post-1 July 2016 Patent Box rules will need to be applied which might reduce any Patent Box saving under the circumstances.
How Do Businesses Qualify for Patent Box Relief?
A company will qualify for the relief of its own patent licences in intellectual property (IP) rights, Or exclusively licences the rights to those patents, and has undertaken 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 a 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.
Can You Claim Patent Box Relief Without Profiting From Your Own Inventions?
No – patent holders often license their invention 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 sale within part of a country, for example, would not qualify as exclusive
What Income Qualifies for the Patent Box 10% Corporation 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 licencing of patent rights
-The sale of 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 Bo reduction, including:
-Income from regular activities, earned regardless of patent rigjhts
Income from marketing asset return (i.e. income earned from branding, rather than from technological innovation itself)
How to Claim Patent Box Corporation Tax 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, its 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%.
These 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.
