The Patent Box Tax Incentive

Why would the UK Government forgo over £1bn a year in corporate taxation?  To encourage innovation (which the country has always been good at) and, more importantly, the commercialisation of new inventions within these islands (which we have been less good at for a long time).  Companies that possess and exploit for profit, patented Intellectual Property (IP) stand to gain significantly by siting such activities in the UK.

The Patent Box tax incentive legislation is not unique.  A similar scheme already operates in the Benelux countries. It has been under development in the UK since 2009 and now it is being phased in over a period of five years, with 60% of the benefit available from 1 April 2013 and the full benefit applying from 2017 onwards. Subject to the number of conditions being met, this can result in significant cash savings and reductions to your company’s effective tax rate.

Patent Box creates a special 10% Corporation Tax rate on a proportion of profits generated from existing and future patents granted by the UK Intellectual Property Office or the European Patent Office or some countries situated in the European Economic  Area (patents registered in other parts of the world do not currently count).  In combination with the reduction in the headline rate from 23% to 20% by 2015, this gives the UK an extremely attractive tax regime for companies that structure their affairs efficiently.

The Patent Box regime is not just restricted to the owners of patents, it also extends to those who hold exclusive licences over patented technologies, so it is important to consider how the company’s license agreements are arranged.  Some useful restructuring opportunities now exist in order to optimise your tax position, because patents held in one Group company can be exploited by another and the benefit still applies.

The extent of the benefit depends on various factors including, for example, the amount of a company’s qualifying income and the amount of its R&D expenditure.

The qualifying income for this purpose is much wider than you would expect, and includes:

  • income from the sale of patented items, or an item incorporating a piece of patented technology
  • worldwide royalties and licence fees from rights granted over patented technology
  • income from the realisation of patents
  • income from patent infringement
  • a notional arm’s length royalty where a company uses its qualifying patented invention in processes or services

Maximising qualifying income and planning aheadHow can we help?

It is important that potentially qualifying companies act now in order to maximise their entitlements.  We can help to ensure that your company is fully prepared to obtain the full benefit of the relief. Specifically, we can help to:

  • identify existing income that qualifies for the Patent Box regime
  • advise on how to maximise qualifying income from existing and future revenue streams
  • perform the detailed calculations used to determine the Patent Box profits of the company, including benchmarking of suitable notional royalty rates
  • review licence agreements and operational structures to comment on their effectiveness in respect of this relief.

The calculation of the Patent Box benefits is not straightforward, and the Election to apply for it to HMRC has to be in letter form (there is no online format) so it is advisable to let us handle these matters for you.

GreenStones will work with you to put together a robust analysis of how to maximise your company’s qualifying Patent Box profits, either as a stand-alone project or as part of a wider tax compliance service. For more information you can call Loveth Watson on 01733 370856 or email her at loveth@greenstones.co.uk

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