By Barry Lewis, Harris Lipman
What is ‘Patent Box’?
The Patent Box legislation enables companies to apply a lower rate of Corporation Tax to profits earned after 1 April 2013 from its patented inventions. By 2017, the tax rate for such profits will be as low as 10% and HM Treasury has calculated the cost of the relief to be £1bn per year.
Why have we got it?
This legislation was introduced to encourage innovation by providing an incentive for companies to locate their jobs associated with the development, manufacture and exploitation of patents within the UK. As companies qualifying for the Patent Box are likely to be undertaking significant research and development, they should also qualify for research and development tax credits. The Patent Box legislation has been designed to complement this relief.
What do I have to do?
For a company to be within the Patent Box, it must own or exclusively license-in the patents and must have undertaken qualifying development on them. That is to say it creates or significantly contributes to the creation of the invention or an item or process incorporating the invention.
The patent must have been granted by the UK Intellectual Property Office, the European Patent Office or equivalent IP offices in certain other countries in the EEA. These include:
Sometimes, patent holders may wish to license their inventions for others to develop. If your company holds licenses to use the technology of others, it may still be able to benefit from the Patent Box. To do so, your company has to meet all of the following conditions. It 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
How does it work?
The Patent Box legislation takes a formulaic approach to simplify what could otherwise be an arduous process. The starting point is GAAP revenue (gross income). You must then identify how much of that income is earned from patents by mapping patents to products so that only qualifying income streams are identified as relevant. Here, relevant income includes income from the sale of the patented product, royalties, infringement compensation and income from the sale of a patent. When these figures are established, it’s possible to calculate the patent income as a percentage of gross income. The next step is to apply the percentage to your relevant profits (broadly taxable profits subject to certain adjustments). This assumes that if a percentage of income is derived from patents, it’s likely that roughly the same percentage of profits will also be derived from patents. Alternatively, if this does not give a true position of the profits from the patented item, you can choose to calculate actual profits.
The final stage aims to strip out profits not arising as a direct result of the patents. The routine return is eliminated (broadly calculated as 10% of routine costs such as general admin and sales). Routine return is intended to represent the profits that anyone could make from selling a non-patented version of the product, process or service. The marketing return is then excluded. This is to eliminate the effect of brands on profits, but note that no effort is made to exclude profits deriving from IP other than brands so there is no adjustment for design rights, copyright, or know-how. The result is the profit falling into the Patent Box. This is converted into the deduction necessary to give an effective 10% tax rate on the Patent Box profits.
By Harris Lipman LLP, Chartered Accountants, barry@Harris-Lipman.co.uk, 020 8446 9000