The Patent Box: key facts

This factsheet is designed as a general overview of the Patent Box regime that came in this year and provides valuable tax benefits to companies profiting from their patents.

For more specific information and advice on how the Patent Box could benefit you, please contact Helen Coombes on 01926 422292 or email helen.coombes@hboltd.co.uk

v2 - 11/6/2013

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When does the

Patent Box begin?

From 1 April 2013, the Patent Box regime

means that corporation tax payable on profits

earned from patented inventions and certain

other innovations has been reduced to

10 per cent.

It applies to worldwide profits from existing

as well as new patents. Companies can

benefit from the Patent Box however they use

their patents and a product needs only one

patented component for the Patent Box to

apply to all its revenue.

The regime is now being phased in. It will

apply to a gradually increasing percentage

of the profits the company earns from its

patented inventions until it applies to

100 per cent of the profits from 1 April 2017.

The 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

To be eligible to elect (opt) into the Patent Box regime, a company must:

• pay corporation tax• hold interests in (own or exclusively license-in) the patents or certain other intellectual property rights• have undertaken qualifying development on the patents. It may also qualify if it is a member of a group and another group company has carried out the qualifying developments.

Electing into the regime is a one-off process so a company choosing to do so will remain in Patent Box until it revokes the election.A qualifying development is defined as a significant contribution to:

• creating or developing the patented item• or a product incorporating the patented item.

There is also an active ownership condition for companies that are members of a group. This requires the company to have either developed its IP portfolio itself or be actively managing it.

Who benefits from the Patent Box?

What does the Patent

Box apply to?

The Patent Box applies to patents granted by:

• the UK Intellectual Property Office

• the European Patent Office

• certain countries in the European Economic

Area (Austria, Bulgaria, Czech Republic,

Denmark, Estonia, Finland, Germany, Hungary,

Poland, Portugal, Romania, Slovakia, and

Sweden).

Intellectual property income is eligible for the

Patent Box in certain circumstances, including

selling the patented product or the sale or

licensing out of patent rights

A company can also benefit from the Patent Box

if it uses a manufacturing process that is patented

or provides a service using a patented tool.

If a company has applied for a patent that has

not yet been granted and elects into the Patent

Box regime, it may be eligible for Patent Box

benefits for the patent pending period

when the patent is granted.

Does the Patent Box affect research and development tax credits?

Businesses already claiming research and development (R&D) tax credits for developing new processes or products that advance science or technology will also be able to benefit from the Patent Box.

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How are profits eligible for Patent Box calculated?

The process is complex and the steps below are a simplified version of how it works:

MGI is a worldwide alliance of independent auditing, accounting and consulting firms. Neither MGI nor any member firm accepts responsibility for the activities, work, opinions or services of any other members.

Email: support@hboltd.co.uk • Web: www.hboltd.co.uk

LEAMINGTON OFFICE

Highdown House11 Highdown RoadLeamington SpaCV31 1XT

Tel: 01926 422 292Fax: 01926 456 999

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Step 2: Calculate the percentage given by RIPI x 100

This gives the total amount of profit to be taken into account.

Step 5: Calculate the Patent Box deduction from corporation tax – the calculation is:

Residual profit x main rate of corporation tax – Patent Box rate

Main rate of corporation tax

Step 1: Calculate total gross trading income (TI) and the relevant IP income (RIPI) e.g. sales income, licence fees and royalties

Step 3: Deduct from this the routine return figure (10 per cent of certain trading expenses, e.g. employee costs, premises)

to produce the qualifying residual profit.

Step 4: Deduct from this the marketing assets return (profits attributed to brand rights) to determine the residual profit.

TI