The Patent Box scheme intends to encourage investment and growth in the UK by incentivising the development of innovative, patented products and processes.

Patent Box could cut the rate of corporation tax down to 10% for some elements of an innovative company’s profits – whether those profits come from domestic or international sales.

How would you qualify for Patent Box?

You would need to have created or developed patented inventions that generate profit for you as the reduced tax rate applies to the profits relating to those inventions.

What do you need to do next?

You need to assess the relevant patents you have and then work out how they map onto your existing profits.

You also need to work out how much of the relevant profits can be included in the scheme, for example consideration would have to be given to patented components sold as part of a larger unit.

When will you be able to take advantage of Patent Box?

The Patent Box scheme is being phased in from April 2013.

More detail – the essentials – what it is and qualifying conditions

The Patent Box is a government scheme intended to encourage innovation and development work in the UK. It allows a reduction in corporation tax based upon profits related to patented inventions.

The reduction will apply fully from April 2017, but is being phased in from April 2013.

The reduction in corporation tax will be available for companies that hold a qualifying IP right, or hold an exclusive licence in respect of a qualifying IP right. A qualifying IP right is, for example, a granted EP or UK patent. Some EEA patents also qualify – namely those granted by the patent offices of Austria, Bulgaria, The Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia and Sweden. Some other rights also qualify – namely supplementary protection certificates, plant variety rights and data exclusivity rights.

A qualifying company must either own or have an exclusive license for the qualifying right, and should also have carried out qualifying development in relation to the right. A company is deemed to have carried out qualifying development in relation to a right if it creates, or significantly contributes to the creation of, the invention; or if it performs a significant amount of activity for the purposes of developing the invention. If the company is a member of a group, it must either have itself carried out qualifying development or it must ‘actively own’ the qualifying IP right – for example, it must carry out a significant amount of management activity in relation to the right.

Despite the geographical restrictions on the qualifying IP rights themselves, all worldwide income is eligible for consideration, as long as UK corporation tax is paid on it.

When calculating relevant IP income for the scheme, the following worldwide income can be included:

  • sales of the patented item/products incorporating the patented item;
  • licence fees/royalties;
  • proceeds from sale of the IP;
  • infringement income; and
  • other compensation income, such as damages, insurance etc.

A notional royalty can be used if a company uses its patented invention in a way that doesn’t generate relevant IP income via the above-listed ‘normal’ means.

A ‘routine return’ must be calculated and accounted for – this is intended to allow for profit that might be made without access to the qualifying IP right. This might be difficult to estimate – for ease of calculation it has been set at 10% of routine deductions (e.g. capital allowances, spending on premises, personnel, machinery, professional (e.g. legal) and other services etc.) made by a company.

A marketing allowance must also be calculated and accounted for – this is intended to allow for profit attributable to marketing assets (such as branding). For ease of calculation, for smaller claims, there is a simple formula available to calculate this allowance.

Special rules apply to groups of companies within which there might be sharing of development, profit-generating acts etc. If your company is part of such a group, please seek advice tailored to your specific case.

More information can be found from HMRC at http://www.hmrc.gov.uk/ct/formsrates/claims/patent-box.htm