Under the Patent Box Rules, companies may, from 1 April 2013, elect to tax trading profits from certain intellectual property rights (IP) from at a lower than standard rate of corporation tax. Eventually, the lower Patent Box rate will be 10 percent, but the measures are being phased in over a five-year period.
Profits subject to the Patent Box include all profits from the sale of items including patents, less ‘routine profits’ and profits attributable to brand value.
It is worth companies determining if they hold IP to make sure they do so in a more tax efficient way.
The Patent Box covers patents granted by the UKIPO, the EPO and certain other EEA states. Although US patents are not included, sales of products in the US can be included in the calculation of ‘relevant IP income’ for the purposes of seeking relief. The Patent Box will also apply to a number of other IP rights such as SPCs.
A company may benefit from the Patent Box if it is liable to UK corporation tax and owns (that is, holds legal but not beneficial title) or exclusively licences, under certain conditions, certain qualifying IP rights and is limited to companies and groups which have been involved in the innovation or development and as such meet the ‘development condition’.
To ensure that companies qualifying for the Patent Box are not merely passive IP holding companies, where a company has not met the development condition on its own account (i.e., where it is in a group and the group company meets the development condition), it must show that it is actively managing its IP (i.e., making development decisions).
The company must elect to benefit from the Patent Box, either in the computations accompanying the tax return or separately, in writing, within two years after the end of the accounting period in which the relevant income arose.
Broadly speaking, and at an extremely high level, it is necessary to undertake the following steps to calculate the profits that qualify for the Patent Box (relevant IP profits). Step one is to calculate total gross income of the trade for the accounting period. Step two is to calculate the relevant IP income (RIPI), which, subject to certain exclusions, has to fall within the five determined heads of: sales income; licence fees and royalties; proceeds from sale or other disposal of a qualifying IP right; infringement income; and damages, insurance, etc. Step three is to calculate the profits to be taken into account by taking a percentage of total profits of the trade – subject again to certain specific adjustments. Step four is to deduct the ‘routine return figure’ by stripping out ‘routine profits’ – i.e., those that would have been expected to make without the IP. This mark-up is apportioned and stripped out of the Patent Box to leave ‘qualifying residual profit’ (QRP). Finally, step five is to deduct the marketing assets return – that is, profits attributed to branding.
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