A company subject to UK Corporation Tax can opt into the Patent Box regime and pay a lower rate of Corporation Tax (10%) on profits resulting from certain intellectual property rights.
The Patent Box is relevant to all companies paying UK Corporation Tax, including UK subsidiaries of overseas groups. For overseas groups in particular, consideration will need to be given to ownership, development and/or management of IP rights to ensure that they are classified as relevant IP rights and so capable of being included in the Patent Box.
The initial Patent Box rules introduced in 2013 (the pre- 1 July 2016 Patent Box rules) were criticised by the Organisation for Economic Cooperation and Development for being unjustifiably generous in allowing companies to benefit from the UK Patent Box where there is little or no economic activity in the UK. As a result, post- 1 July 2016 Patent Box rules have been introduced which use R&D expenditure as a proxy for substantial economic activity and thereby link the benefits of the Patent Box to a requirement to have undertaken R&D expenditure to develop the IP rights. This is referred to as the nexus approach.
We give here an overview of the pre- and post- 1 July 2016 Patent Box legislation. Separate Briefings are directed to the main themes:
The pre- and post- 1 July 2016 Patent Box rules have many similarities. The main difference is the introduction of the nexus approach. For some companies this new approach will change the potential benefit achieved through the UK Patent Box, possibly eliminating the benefits altogether. For all companies there are likely to be advantages to electing into the Patent Box regime under the pre- 1 July 2016 Patent Box rules, which can then be the relevant rules for that company until 30 June 2021.
For qualifying IP rights which were applied for (but not granted) before 1 July 2016, it is possible to elect into the Patent Box regime after this date within the normal time limits and benefit from the pre- 1 July 2016 Patent Box rules (until 30 June 2021) provided the conditions for election into the Patent Box regime are met prior to 1 July 2016. The Briefing “Patent Box - When should you Elect In to the Patent Box?” high-lights some of the considerations in deciding whether to elect in to the pre- or post- 1 July 2016 Patent Box rules and how your patenting strategy might change depending on which Patent Box rules apply. Briefly the change for a company which conducts its own R&D and generates its own IP under the post- 1 July 2016 Patent Box rules compared to the pre- 1 July 2016 Patent Box rules is a greater accounting burden. For a company which acquires much of its qualifying IP and/or sub-contracts R&D to a connected company e.g. in the same group of companies, the post- 1 July 2016 Patent Box rules will reduce the tax saving available. Such companies may benefit from seeking advice from their accountants regarding the possibility of restructuring the group structure to maximise the tax benefit available through the UK Patent Box.
Both sets of Patent Box rules permit a claim to be made by a qualifying company liable to pay Corporation Tax in the UK to reduce the effective rate of Corporation Tax on profits arising from IP. The Briefing “Patent Box - Are you a Qualifying Company?” deals with the requirements of a qualifying company.
A qualifying company must hold or be an exclusive licensee of a relevant IP right. But merely owning a patent will not be enough to qualify the patent as a relevant IP right. A development condition and, in certain circumstances, a separate active ownership condition must be met. The most common form of relevant IP right is a patent. Trade marks, designs and copyright are not relevant IP rights. The Briefing “Patent Box - Do you Hold Qualifying IP Rights?” deals with the conditions that must be met for an IP right to qualify for the Patent Box.
To calculate the deduction in UK Corporation Tax, relevant IP income needs to be calculated. Relevant IP income is income from activity associated with qualifying IP rights. Only profits arising from relevant IP income can be included in the Patent Box calculation to reduce the Corporation Tax payable. The worldwide income associated with the qualifying IP rights is deemed as relevant IP income and so the low rate of Corporation Tax can be claimed for that income, even if all or part of the income is generated without the benefit of IP protection (e.g. in a country in which no patent protecting the product exists). The Briefing “Patent Box - What is Relevant IP Income?” deals with what income streams can be classified as relevant IP income and therefore taken into account in calculating a Patent Box benefit.
In order to benefit from a reduction in UK Corporation Tax the qualifying company must have elected in to the Patent Box in the relevant accounting period. The Briefing “Patent Box - When should you Elect In to the Patent Box?” deals with this issue.
The legislation defines how to calculate a Patent Box deduction which is subtracted from the total profits of trade to arrive at a figure on which UK Corporation Tax is payable at the normal rate. The Patent Box deduction is effective to reduce the UK Corporation Tax payable on relevant IP profit to 10%, after deductions have been made to account for a routine return and marketing and in the case of a claim under the post- 1 July 2016 Patent Box rules, reduced by the nexus fraction. The Briefing “Patent Box – How to calculate the Patent Box Benefit” explains the calculation and gives a simple example using both sets of rules.
The chart below sets out the steps for determining whether a company is able to take advantage of the Patent Box regime and the extent to which they could benefit from it.
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