Lovin’ this article, but need more advice on your tax affairs?
Get in touch today.
Zeeshan Khilji discusses the Patent Box rules and how companies should ensure that they comply with the recent changes in rules to benefit from this generous relief.
The UK patent box regime was originally introduced in 2013. It is a generous tax incentive regime that enables companies to pay an effective 10% corporate tax rate on profits derived from certain qualifying patents.
The patent box regime will become even more beneficial with the proposed increase in the UK corporation tax rate to 25% from 1 April 2023.
The aim of the patent box regime is to provide additional incentives for companies to:
Broadly, a company qualifies for the UK patent box regime if:
Assuming that a company qualifies, it must elect into the patent box regime and carry out calculations that identify ‘relevant IP profits’, which are essentially the company’s taxable profits relating to its exploitation of qualifying IP, subject to a number of specific adjustments.
The taxable profits allocable to qualifying IP are taxed at an effective rate of 10%, as opposed to the main rate of corporation tax (currently 19%). The relief is given via a deduction from total taxable trading profits for the respective accounting period.
Certain changes were introduced to the patent box regime from 1 July 2016. The five-year transition into the new rules came to an end on 30 June 2021 and companies that have ongoing claims under the old pre-1 July 2016 rules will now have to apply the new rules to all claims.
While the new regime is mostly based on the old patent box regime, the two main changes are to the calculation of a company’s relevant IP profits.
Briefly, these changes are:
We look at the above in further detail.
Streaming requires a company to calculate patent box profits by allocating costs to patented income sub-streams. Under the old regime, the default approach was to apply the percentage of patented turnover to total turnover to apportion profits.
The legislation permits sub-streams to be defined on a ‘product family’ basis. This enables the grouping of IP item or IP process sub-streams, taking into account the purposes for which the IP items or processes are intended to be used.
This essentially requires the application of an ‘R&D fraction’ to each sub-stream. This fraction takes a value between 0 and 1 and is defined as the lower of 1 and:
(D+S1) x 1.3
D + S1 + S2 + A
The categories of expenditure within the R&D fraction are:
With the UK corporation tax rates set to increase from 19% to 25% from 1 April 2023, it couldn’t be a better time for companies to take appropriate advice and ensure that correct methodologies are in place to benefit from this generous relief.
Companies that are eligible make patent box claims do not necessarily have to develop sophisticated systems to identify the qualifying profit streams that relate to their IP. Whilst the first claim might require effort and time commitment, with our assistance and with appropriate planning of the design of processes, subsequent year claims should become less complex.
Given the significant tax savings which can be achieved by electing into the patent box regime, qualifying companies should consider the following points in respect of their patent box claims:
Call or email us any time or, simply fill out the contact form below and a member of our team will be in touch.