It was all change for the UK’s Patent Box tax relief on 1 July 2016, although many features of the previous rules have been retained.
Patent Box is a corporation tax relief that can result in a rate of 10% for eligible profits. Even with the UK’s historically low rates of corporation tax, this can translate into valuable tax savings for companies with the right fact pattern. Broadly that means income generated from:
UK, European Patent Office or certain European patents (granted or pending), or
Exclusive licences over eligible patents, or
UK plant breeders and European plant variety rights
The company must have created or significantly developed the patented invention, or if the invention was developed elsewhere in a group of companies, the patent holder must be actively managing the IP rights.
Of course, this being tax legislation it goes without saying that there are some complex areas that affect the calculation of the profits arising from the patents. This means that the company should not elect into the Patent Box without first reviewing whether the costs of preparing the calculation will outweigh the benefits, but for companies who derive a significant part of their profits from their patented IP it is certainly worth exploring, particularly if the patent applications were made before 1 July 2016.
For companies that held eligible patents at that date it is still possible to elect into the old Patent Box regime. This permits the allocation of costs between patent and non-patent profit streams based on the percentage of total income that is derived from the patents. This clearly saves administration time as it is only the patent income that needs to be recorded separately. Under the old regime there is also no restriction on the amount of the relief available where a group company other than the claimant developed the IP, even if that company is outside the UK.
It was that last provision in particular that drew the attention of the European Commission, resulting in a ruling that the Patent Box was anti-competitive and should be redesigned. As a result, if a company elects into the Patent Box for an accounting period beginning on or after 1 July 2016, or if it is claiming in respect of a patent filed on or after that date, the amount of the relief is restricted to reflect the proportion of the development costs that the company bore in-house. This means that the new Patent Box is realistically only going to be of interest to companies that carry out all or substantially all of their IP development in-house.
On top of that, the new Patent Box does not permit the proportional allocation of costs between patent and non-patent profits streams. Instead the profit (or loss) for each individual patent or family of patents is calculated by reference to the actual income and costs related to that patent. For many businesses with a single patent developed in-house these changes make little difference to the attractiveness of the relief, but for companies with more than one patent the record keeping requirements became considerably more onerous from 1 July.
With this in mind, Ensors’ advice is that companies with eligible patents should give serious thought to electing into the old Patent Box for an accounting period that commenced before 1 July 2016 as that will continue to give relief under the old regime until 30 June 2021. All claimants at that date will be transferred into the new Patent Box, barring any changes to the legislation in the meantime.
Where it is not possible to elect into the old regime (perhaps because the patent application was not filed until after 1 July 2016) we would suggest modelling the likely benefits of electing into the new Patent Box. How do they compare to the costs of identifying income and costs on a patent by patent basis. For some companies it may be possible to introduce new cost recording practices to reduce the administrative burden, but it is important to plan ahead.
Whether you are looking at the old rules or the 1 July 2016 regime, the Ensors’ Corporate Tax team has a wealth of relevant experience and is here to help you unlock the Patent Box for your company.