Patent box in a nutshell
Qualifying companies can elect for a reduced rate of corporation tax to apply to the income generated from certain patents.
This overview provides brief details of the types of patents which may qualify and how patent box profits are calculated. Some of the administrative aspects are also covered.
What is the reduced rate of corporation tax?
Companies that elect to be within the patent box regime can claim an additional deduction in calculating taxable profits, which gives the effect of a reduced rate of corporation tax, rather than by applying a reduced rate of tax to the relevant patent profits.
Patent and non-patent profits are therefore not separated and taxed at different rates in the corporation tax computation.
Relevant profits are taxed at an effective rate of 10%.
Which patents qualify?
The types of qualifying intellectual property that the patent box applies to include patents granted by the UK Intellectual Property Office (IPO) and the European Patent Office (EPO), certain rights granted under the law of specified EEA states, UK and EU supplementary protection certificates, regulatory data protection, and certain plant variety rights.
The regime requires a development condition to be met and consequently simple ownership of patents will not be enough.
How are patent box profits calculated?
The patent box rate of corporation tax is applied to the ‘relevant IP profits’ generated by the company. The calculations set out in the legislation are detailed but broadly cover three key stages:
- calculate the qualifying trading income generated from the exploitation of qualifying patents
- remove a ‘routine return’ which reflects the notional profits the company would have achieved without the use of patented technology
- remove a ‘marketing assets return’ for profits generated from the use of the company’s brand, so that only patented IP profits receive the benefits of the regime
Major changes were made to the patent box regime by Finance Act 2016, resulting in differences in the calculation of relevant IP profits for new entrants to the patent box, or existing claimants generating income from new IP on or after 1 July 2016.
Additional changes were introduced for companies working in collaboration under a cost-sharing arrangement, with effect from 1 April 2017. It is important to ensure that the correct rules are applied to the company or activities in question.
What if the company is loss making?
If the result of the calculations performed in arriving at the relevant IP profits is negative, a relevant IP loss is created. In these circumstances, there are no profits from which the deduction can be made to give effect to the reduced patent box rate of corporation tax.
A loss-making company that has not already elected into the patent box regime (see below) is unlikely to make such an election. This is because the IP losses can only be relieved in a more restrictive and less tax efficient way than other types of losses, such as trading losses.
Where a patent box election has already been made, the relevant IP losses are treated as a ‘set-off’ amount. The set-off amount may either reduce IP profits of other group members or be carried forward to reduce IP profits of future accounting periods. This has the effect of reducing the amount of IP profits eligible for the reduced rate of corporation tax.
Is a claim required to benefit from the patent box regime?
The patent box is an optional regime which companies can choose to elect into if the relevant conditions are satisfied.
The election must be made by giving notice to HMRC in writing. The notice must state the first accounting period it relates to and it applies to all subsequent accounting periods unless revoked. The notice must be submitted on or before the last day on which the company could make an amendment to its corporation tax return for the period. This is usually 12 months after the filing deadline applicable for the first accounting period in which the election is to have effect.
The company may not elect back into the regime for five years after a revocation.