The Patent Box enables companies to apply a lower rate of Corporation Tax to profits earned after 1 April 2013 from its patented inventions and certain other innovations. The relief will be phased in from 1 April 2013 and the lower rate of Corporation Tax to be applied will be 10 per cent. The company can only benefit from the Patent Box if the company is liable for Corporation Tax and makes a profit from exploiting patented inventions.
The company must also own or exclusively license-in the patents and must have undertaken qualifying development on them.
An enterprise can benefit from the Patent Box if the company owns or exclusively licenses-in patents granted by:
- UK Intellectual Property Office
- European Patent Office
The company or another group company must have also undertaken qualifying development for the patent by making a significant contribution to either:
- the creation or development of the patented invention
- a product incorporating the patented invention
Watch out for transfer pricing issues, see my blog on this.
Patent holders may wish to license their inventions for further development. If the company holds licenses to use others' technology it may still be able to benefit from the Patent Box. But to do so it must meet all of the following conditions:
- 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 - rights to manufacture or sell within part of a country, for example, would not qualify as exclusive
- The licensee must either be able to bring infringement proceedings to defend its rights or be entitled to most of the damages awarded in successful proceedings relating to its rights.
The exclusive licensing conditions are relaxed for groups of companies. This recognises that one company in the group may own a portfolio of patents while another exploits them.
The company has to make an election to benefit from the reduced rate of Corporation Tax that applies to the Patent Box.
The election must be made within two 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 1 April 2013. You will need to apply an appropriate percentage to the profits your company earns from its patented inventions.
The appropriate percentages for each financial year are:
- 1 April 2013 to 31 March 2014: 60 per cent
- 1 April 2014 to 31 March 2015: 70 per cent
- 1 April 2015 to 31 March 2016: 80 per cent
- 1 April 2016 to 31 March 2017: 90 per cent
- from 1 April 2017: 100 per cent
Just for the nerds, there is no box on the Company Tax Return for making the election. Instead apply the reduced 10 per cent rate by subtracting an additional trading deduction from your Corporation Tax profits.
If a company has trade Corporation Tax profits of £1,000 in the financial year from 1 April 2015 which qualify in full for the Patent Box, and the main rate of tax is 22 per cent, then instead of arriving at a tax charge of £100 by multiplying £1000 by 10 per cent, the calculation is:
|Profits chargeable to Corporation Tax||£1,000|
|Patent Box deduction = £1000 × 80% x ((22 - 10) ÷ 22)||£436|
|Profits chargeable to Corporation Tax||£564|
|Tax payable = £564 × 22%||£124|