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The Patent Box is a UK tax incentive designed to encourage companies to make profits from their patents by reducing the UK tax paid on those profits.

History

The UK Patent Box went live in April 2013. The UK government wants to encourage high-value growth in UK plc through a competitive tax regime that supports UK R&D from conception to commercialisation. The Patent Box forms a key part of this strategy by encouraging companies to commercialise their patents and R&D in the UK. Other countries (eg.Belgium, Luxembourg, the Netherlands) already operate schemes to provide incentives for companies to retain and commercialise existing patents

The scheme was first proposed in the 2009 Pre-Budget Report and went through various iterations and public consultations until final legislation was passed in the Finance Act 2012. The legislation is now formally a new Part 8 of the Corporation Tax Act 2010

The Patent Box initiative is complementary to the R&D tax incentives which encourage companies to undertake their R&D in the UK

Overview

The Patent Box allows a 10% tax rate on profits derived from any products that incorporate patents. The net benefit for claiming companies is likely to be several percentage points of their corporate earnings, given that the main rate of UK corporation tax is currently 23 per cent and decreasing to 20 per cent from April 2015.

The steady state cost, after the initial phasing- in period, of the Patent Box is forecast to be approximately £1.1 billion in terms of corporation tax revenues foregone by HM Treasury

How it works

The claim process is as follows:

• calculate qualifying income by identifying revenue streams from qualifying patents,
• calculate the profit generated from this qualifying income,
• then calculate residual profit by deducting routine profit made from routine business activities,
• then calculate the Patent box profit by deducting any profits derived from branding or marketing attributes
• then use the HMRC formula to calculate the corporate tax deduction.

How to claim

Companies must calculate their qualifying Patent Box profit and then apply a specific formula in their tax computation to calculate the deduction in their tax liability. Then they can take the tax deduction as a benefit in their CT600 tax return. The formula to calculate the amount of the tax deduction is

$\mathbf {P} \mathbf {B} *\left({\frac {MR-PBR}{MR}}\right)$

where

• PB is the Patent Box profit for the company,
• MR is the main rate of corporation tax, and
• PBR is the special Patent Box tax rate (10 per cent)

Qualifying Patents

Qualifying patents must have been granted by an approved patent-granting body, including the UK Intellectual Property Office, the European Patent Office, and designated European territories: Austria; Bulgaria; the Czech republic; Denmark; Estonia; Finland; Germany; Hungary; Poland; Portugal; Romania; Slovakia; and Sweden

Currently, the Patent Box excludes patents registered in territories such as the USA, France, and Spain because of differences in the search and approval process for patent applications.

The Patent Box excludes products that only have copyright or trademark protection.

Qualifying Income

There are five categories (“heads”) of qualifying income:

• head 1: worldwide income from the sale of products incorporating at least one embedded patent (and including income from sale of integral spare parts)
• head 2: licence fees or royalties from qualifying IP
• head 3: sale or disposal of qualifying IP and rights over qualifying IP
• heads 4 & 5: damages/compensation income from infringement/loss of sales of qualifying IP rights

Income generated from exclusive licenses will be qualifying income on both sides of the agreement – i.e. for the licensor and the licensee – subject to specific conditions concerning the meaning of exclusivity.

“IP-derived income”, where patented products or processes are used in the manufacture or delivery of non-patented products or services, will be qualifying income to the extent of a notional royalty which values the specific patented product or process as a proportion of the value of the non-patented product or service.

Qualifying Company

• must hold qualifying IP rights
• must elect into the scheme
• must fulfil “development” and/or “active ownership” conditions

Details in the legislation to look out for

• notional royalty
• notional marketing royalty and marketing intangibles (including transfer pricing)
• streaming
• meaning of exclusivity
• R&D shortfall

Anti-avoidance

The following situations will be against the law:

• where a functionally irrelevant patent is incorporated into a product with the sole purpose of achieving Patent Box eligibility
• commercially irrelevant grant of exclusivity with the sole purpose of achieving Patent Box eligibility
• any scheme designed to inflate artificially qualifying IP income or qualifying Patent Box profits.

Reasonable and commercially appropriate steps to restructure corporate arrangements to take advantage of the Patent Box will be considered legitimate.

Other technology tax reliefs

• Research and Development Tax Credit
• Research and Development Expenditure Credit
• Above the Line R&D Tax Relief
• Research and Development Capital Allowances
• Creative Sector Tax Reliefs including Video Games Tax Relief, Animation Tax Relief, High-end TV Production Tax Relief, and Film Tax Relief

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) give generous income and capital gains tax relief to individuals who invest in small early stage businesses.

Government Working Group

The Government established a Working Group to complement wider consultation on the Patent Box and to discuss options and proposals in more detail. Members of the Working Group include representatives from: HMRC and HM Treasury; industry (GlaxoSmithKline; Dyson; ARM;Syngenta), the financial services community including large accounting firms (PWC; Deloitte; KPMG; Ernst and Young); independent consultants and representatives from the technology commercialisation sphere and professional bodies.

See also

There are various sources of information about the Patent Box.

• The original source legislation (contained in Finance Act 2012, with the specific legislation now incorporated into an amended Part 8a of Corporation Tax Act 2010);
• An accompanying technical note published by HMRC;
• HMRC’s published Patent Box guidance in their Corporate Intangibles and R&D manual (CIRD)
• HMRC’s YouTube video about the Patent Box

References

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External links

• HMRC
• HMRC CIRD re Patent Box
• UKIPO
• European Patent Office