1. What is Patent box?
The government wants to encourage high-value growth in UK plc. through a competitive tax regime that supports UK R&D from conception to commercialisation. The Patent Box forms a key part of this strategy by encouraging companies to commercialise their Research and Development in the UK, whilst the R&D Tax incentives encourage companies to carry out their R&D in the UK. As of Apr 1st 2013, a new piece of legislation designed to help innovative, profitable companies to reduce their Corporation Tax, is being introduced. It will enable companies to apply a lower rate of Corporation Tax (10%) to profits earned after Apr 1st 2013 from their patented inventions and certain other innovations.
2. Who can benefit?
Companies that commercialise patents and develop new innovative patented products will be eligible for Patent Box. This encompasses a surprisingly large range of industries but is likely to exclude financial services, retail, hotel and leisure, and real estate.
3. What are the qualifying criteria?
For a company to be within the Patent Box scheme;
- It must actively hold a patent that’s been granted by the UK or European Patent Offices, and receive income relating to that patent. It excludes anything granted by the ‘U.S. patent office’ .The definition of “holding a patent” is drawn widely and includes legal ownership, an exclusive licence to exploit a patent, partnership, joint venture and cost-sharing arrangements and income from the sale of a patent.
- It must also be actively involved in the decision-making connected with exploiting the patent AND must have performed significant activity to develop the patented invention or its application. If it is a member of a group, it must also actively own the patented invention by taking a significant role in managing its whole portfolio of eligible patents. While the company doesn’t have to make all the decisions regarding the portfolio, it must undertake a significant amount of the management.
4. How are profits attributable to Patents calculated?
Broadly speaking there are 3 stages to calculate the profit which can benefit from the Patent Box. These are:
- Identify the profits attributable to income arising from exploiting patented inventions – known as ‘relevant IP income’.
- Remove a routine profit – this reflects the fact that a business would be expected to earn a profit even if it had no access to patented technology or intellectual property.
- Remove the profit associated with intangible assets, such as brand or other marketing assets – the Patent Box is not designed to reward other forms of IP.
5. What is the Formulaic approach?
Identifying the profits attributable to income arising from exploiting patented inventions
Step 1: Calculate the total gross income of the trade. This includes revenue receipts and any profits from the sale of intangible fixed assets or patent rights, but excludes any finance income.
Step 2: Establish the percentage of the total gross income that is relevant IP income: i.e. Relevant IP income divided by the total gross income multiplied by 100.
Step 3: Adjust the total profits of the trade by excluding finance income and finance deductions and any additional deduction for research and development (R&D) expenses that qualify for the R&D tax credit relief.
Step 4: Removal of routine return from value obtained in Step 3. A routine return refers to the profit a business might be expected to make if it did not have access to unique IP and other intangible assets. The routine return is calculated by:
- Aggregating routine deductions (as defined below); deducted in calculating the taxable profits of the trade and taking 10% of that figure.
- Applying the percentage (as calculated in step 2) to that 10% figure.
The amount given by this step is referred to as the ‘qualifying residual profit’ (QRP) and represents the part of the profits of the trade relating to exploitation of patented technology and other unique IP or intangible assets such as brand or other marketing assets.
Company’s routine deductions are its tax deductible trading expenses that fall within one of the following categories:
- capital allowances
- premises costs
- personnel costs
- plant and machinery costs
- professional services
- miscellaneous services
This excludes the following tax deductible expenses which are not routine deductions even if they’re included in any of the above categories:
- Deductions in respect of loan relationships or derivative contracts debits
- Any deductible expenses qualifying for the R&D tax credit. This includes any additional tax deduction given by the R&D tax credit regime
- R&D allowances and patent allowances
Steps 5 and 6 refer to the removal of the profits attributable to marketing assets (‘marketing asset return figure‘) – from QRP calculated in Step 4. Marketing asset return figure may be treated as nil, if company’s business has minimal marketing activities associated with it, and the marketing activities do not contribute significantly to profit.
If the company has QRP of ≤ £3 million and has not previously had to calculate a marketing asset return figure, it can elect to apply the small claims treatment. The company can use a formulaic approach to remove the profits attributable to marketing assets. By electing to apply the small claims treatment in step 5, firms need not make the same calculation in step 6. The formulaic approach sets out that the profits that remain in the Patent Box after removing those attributable to marketing assets are the lower of either:
- 75% of the QRP
- the small claims threshold (£1 million)
The amount calculated in step 5 is the relevant IP profit (RP) or loss. This amount of the company’s profit will be taxed at the reduced rate (10%), and is used in calculating the appropriate Patent Box deduction. If the company has generated a relevant IP loss then none of its profits will be taxable at the reduced rate.
If the company has QRP > £3 million or decides not to elect for small claims treatment, it may need to calculate a marketing assets return figure which is deducted from the QRP calculated in step 4.
Two situations where the company may assume the marketing asset return is nil:
- Company’s Annual Marketing Royalty (AMR) >Notional Marketing Royalty (NMR), or the difference between the two is < 10 % of QRP for the accounting period. Where,
NMR – The % of relevant IP income that a company pays a third party for the exclusive right to exploit the relevant marketing assets, if the company were not otherwise able to exploit them.
AMR - The proportion of the aggregate amounts paid in order to use the relevant marketing assets and brought into account as debits in the corporation tax computation for the accounting period.
- Company’s marketing activities are minimal and its marketing assets make no significant contribution to the generation of profit.
Marketing asset return (MAR): NMR – AMR
6. How and When to Claim?
Election to the Patent box scheme must be made in writing within 2 years after the end of the accounting period in which the relevant profits and income arose. The full benefit of the regime will be phased in from 1st April 2013. Apply the reduced 10% rate by subtracting an additional trading deduction from corporation tax profits. Claim formula for corporation tax rate (CTR) is calculated as below
RP x FY% x ((MR – IPR)) / MR
RP – profits of a company’s trade relevant to Patent Box
FY% – appropriate % for each financial year
MR – main rate of Corporation Tax
IPR – reduced rate of 10 %
The appropriate % to the profits of the company’s earnings from its patented inventions will need to be applied as follows.
|1st Apr 2013 – 31st Mar 2014||
|1st Apr 2014 – 31st Mar 2015||
|1st Apr 2015 – 31st Mar 2016||
|1st Apr 2016 – 31st Mar 2017||
|From Apr 2017||