The Patent Box. Will your company benefit from 10% tax on its profits?
The Patent Box rules are designed to improve Britain’s competitiveness on the international stage and were first announced in 2009. After prolonged consultation, Finance Bill 2012 gives the rules in what is hopefully their final form; these should be effective from April 2013.
Companies can now see the effect of the new rules on their tax liability and can plan any action that may be required.
- Companies will be able to elect into the new Patent Box regime; it is not automatic or compulsory. The election must be made before the income arises.
- The 10% rate of tax will apply to profits arising from exploiting qualifying intellectual property (IP), or an exclusive licence in respect of such IP, and will be known as ‘relevant IP profits’.
- Qualifying IP includes patents (both new and existing) granted in the UK, EU or certain EEA countries, a supplementary protection certificate, and plant breeders’ rights granted in the UK or EEC. Also included are medicinal and veterinary products with marketing authorisations and marketing or data protection.
- The relief will be phased in over 5 years from April 2013.
- The company must also meet the ‘development condition’; broadly that the company (or in some cases a member of the group) must have carried out work to develop the IP. Companies that buy patents as investments will not benefit from the new rules.
- Income eligible for the Patent Box (relevant IP income) includes:
- Worldwide income from sales of patented items, items incorporating the patent, or items that are designed to be incorporated into such items. Packaging is excluded unless it performs an essential function for the use of the item.
- Worldwide licence fees and royalties from granting rights to others out of qualifying patents or over patented items or processes. This includes licences in territories outside the protection of the patents, and other non patent rights granted for the same purpose as patent rights.
- Income from the sale or disposal of qualifying IP rights.
- Any amount of damages, compensation or insurance proceeds received for infringing qualifying IP rights, or representing a loss of income which would have been relevant IP income. The infringement must have occurred when the company was a qualifying company and had elected into the Patent Box.
- A just and reasonable apportionment is made for mixed income. This is income arising from the sale of a patented item, or where an item incorporating a patent is sold together or as part of a single unit with an item which is not so patented for a single price.
- Relevant income arising from sales and royalties whilst a patent is pending can be included in the relevant IP income of the first period when a patent is granted.
- Where a company derives income from patented inventions in a way that does not generate relevant IP income, it may still benefit from the Patent Box. This may be where patents are used to create non-patented products or to provide services. An example might be where a patented tool or machine is used to produce non-patented products or to generate income from the sale of other services. A ‘notional royalty’, calculated as the amount that would be payable to a third party for the right to use that patent, is included in relevant IP income.
- Companies will normally have a choice of method to arrive at relevant IP profits.
- Apportion its total profits in the ratio of relevant IP income to total gross income, or
- Allocate its expenses on a just and reasonable basis to the two streams of income (relevant IP income and non-qualifying income), to arrive at the profits from the relevant IP stream.
Streaming is mandatory: (a) where taxable profit includes substantial amounts which are not recognised in the accounting profit, e.g. transfer pricing adjustments, (b) if gross income includes relevant IP income and a substantial amount of licensing income that is not relevant IP income, (c) where the trade generates income that is not relevant IP income and it receives substantial amounts of relevant IP income from licences it grants deriving from exclusive licences held by itself.
The first method specifies detailed calculations to remove routine profits and profits from marketing assets held by the company so that only the extra profits deriving from relevant IP (‘relevant IP profits’) go into the Patent Box.
The Patent Box works by giving an extra deduction so that relevant IP profits bear an effective tax rate of 10%, assuming that the company is taxable at the main rate of Corporation Tax.
Where the company has income from its qualifying IP rights, but no taxable profits, or, any profit is less than a routine return, the calculations will produce a relevant IP loss. Rules specify how this must be offset or used if there are other relevant IP profits elsewhere in the company or group, and this may restrict other claims.
Action required now
You should take action now to be in a position to maximise the benefits offered by ` the new rules from April 2013. In particular:
- Review operations to establish if the company has qualifying IP and so may be able to benefit from the new Patent Box rules.
- Identify qualifying IP income.
- Determine if there is scope to bring further income within the scope of the new rules; for example by applying for qualifying patents or exclusive licences where these do not currently exist.
- Review accounting systems to determine if these are robust enough to be able to adopt a streaming method if this gives a better result, or if these rules are mandatory.
Ensors are available to review the opportunities given by the Patent Box, and to identify and quantify the scope for claims.
For further information please speak to your usual Ensors contact or, alternatively, one of our tax specialists Robert Leggett
or Henry Wood
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