Boxing clever - Patent Box

Finance Act 2012 introduced new legislation at Part 8A, Corporation Tax Act 2010, governing profits arising from the exploitation of patents, known as the ‘Patent Box' regime.

The aim of the Patent Box is to provide an additional incentive for companies to retain and commercialise existing patents and to develop new innovative patented products.

The Patent Box allows companies to elect to apply a 10% of corporation tax to all profits attributable to qualifying patents (relevant profits), whether paid separately as royalties or embedded in the sales price of products.

The regime will also apply to other qualifying intellectual property rights such as regulatory data protection (also called ‘data exclusivity’), supplementary protection certificates and plant variety rights.

In order to qualify for the Patent Box, a company must also own or exclusively license-in the patents and must have undertaken qualifying development on them.

If a company is a member of a group, it may qualify if another company in the group has undertaken the qualifying development.

A company may only benefit from the Patent Box if the company owns or exclusively licenses-in patents granted by:

• the UK Intellectual Property Office
• the European Patent Office
• the following countries in the European Economic Area: Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia and Sweden.

Income from ‘patents pending’ will also be eligible.

To qualify as relevant intellectual property (IP) income, it must come from at least one of the following:

• selling patented products – ie sales of the patented product or products incorporating the patented invention or bespoke spare parts
• licensing-out patent rights
• selling patented rights
• infringement income
• damages, insurance or other compensation related to patent rights.

A company has to an make an election to benefit from the reduced rate of corporation tax that applies to the Patent Box.

You can do this in the computations accompanying your company tax return or separately in writing; there is no special form of words for this election.

You must make your election within two years after the end of the accounting period in which the relevant profits and income arose.

There is no box on the company tax return for making the election.

Instead, you apply the reduced 10% by subtracting an additional trading deduction from your corporation tax profits.

The full benefit of the 10 per cent rate will not be until 1 April 2017, with the new rate being phased in over a number of tax years, as follows:

To calculate the corporation tax liability of a company with relevant profits from the exploitation of patents, one must first calculate the liability using normal corporation tax rates and then apply the Patent Box deduction using the following formula:

RP × FY% × ((MR - IPR) ÷ MR)

In the formula:

• RP is the profits of a company's trade relevant to the Patent Box
• FY% is the appropriate percentage for each financial year
• MR is the main rate of corporation tax
• IPR is the reduced rate of 10%.

As with normal corporation tax rates, one must apportion the tax rates if the company’s accounting period straddles 1 April.

The following example illustrates how the calculation should look:

Michu Ltd makes a profit of £3,000,000 for the year ending 31 December 2013, of which £1,000,000 are relevant profits from the exploitation of patents.

Michu Ltd’s corporation tax liability for the year ended 31 December, assuming a main rate of corporation tax of 20%, will be as follows:

HMRC’s specialist R&D units will assist with any questions regarding the Patent Box.

These units enjoy the reputation of being knowledgeable and helpful in their specialist area.

If the company is a larger company, whose tax affairs are handled by a customer relationship manager or customer co-ordinator in the HMRC Large Business Service (LBS) or in the Large and Complex teams (L&C), the company should contact its LBS or L&C office direct.

HMRC manuals contain a new section on the Patent Box.

The Intellectual Property Office is the government body that deals with patents and intellectual property and has a useful website.

More information

Find out more about the Patent Box.

Access resources from the Intellectual Property Office.