From 1 April 2013, companies will be able to elect for a reduced rate of UK corporation tax to apply to profits from qualifying patents. The reduced rate is 10%, which will be phased in gradually over a five year period, applying in full from 1 April 2017.
Who can benefit?
Companies who own or licence patents granted by the UK Intellectual Property Office, the European Patent Office or specified countries in the EEA (including Austria, Bulgaria, Czech Republic, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia and Sweden).
Companies must have undertaken qualifying developments by making a significant contribution to the creation or development of the invention which is the subject of the patent, or of a product which incorporates it, and any licence must grant exclusive rights (at least within a country). A company can also benefit if it is a member of a group in which another group company has carried out the qualifying development, provided that the company claiming the benefit has a significant role in managing the portfolio of patent rights.
Profits qualifying for the reduced rate
Profits from the following activities can benefit from the reduced rate:
- Licensing or sale of patent rights;
- Sales of a patented invention or of products which incorporate it;
- Use of a patented invention in the company's trade;
- Claims for infringements of patent rights and for other compensation including damages and insurance proceeds for lost relevant IP income.
Income from certain EU rights relating to plant breeding rights and certain other medicinal or botanic inventions is included for the purposes of the Patent Box. Profits from routine manufacturing or development functions, or from marketing intangible assets, are excluded.
Calculation of profits eligible for reduced rate
A company can choose how to calculate the amount of its profits that are eligible for the reduced rate, either by:
- Apportioning its total profits by the ratio of relevant IP income to total gross income; or
- Allocating its expenses on a just and reasonable basis between qualifying IP income and non-qualifying IP income, to arrive at its relevant IP profit.
Finance income and expenses must be excluded from the calculation, as must expenditure qualifying for R&D tax credits. The company must then deduct (i) a "routine" (10%) return on costs such as personnel, premises, plant and machinery and (ii) a notional royalty for use of marketing assets.
The calculation is not straightforward; the benefit is given by an additional deduction for the company in computing its profits for corporation tax purposes, which achieves the same result as taxing the relevant IP profit at the reduced rate.
Transition, Patents Pending and Anti-Avoidance
The phasing in will be achieved by increasing each year the proportion of relevant IP profits eligible for the reduced rate.
A company cannot immediately benefit from the Patent Box pending the grant of a patent. For up to six years before the grant, a company may calculate what the relevant IP profits would have been had the patent been granted, then aggregate those amounts and add them to the relevant IP profits for the Patent Box calculation in the year of the grant.
The rules contain anti-avoidance measures to prevent the licensing of commercially irrelevant rights with a main purpose of ensuring income generated under the licence qualifies for the Patent Box, and to counter other tax-motivated schemes within the context of the regime.