Patent Box Tax Relief Pay tax at just 10%
WHAT IS PATENT BOX? Patent Box is the name for legislation introduced by the Government to encourage the retention of intellectual property and the valuable jobs and activities that come with it in the UK. It offers companies involved in developing patentable technology a tax rate of just 10% which is half the normal tax rate. The potential benefits for qualifying companies are significant. 2
THE BENEFITS What tax relief is available? Profits derived from patents are taxed at a reduced corporate tax rate of just 10% compared to normal corporate tax rates of 20% or more. This therefore gives cash savings through reduced tax liabilities. The full benefit of Patent Box was phased in from 1 April 2013 (see table below). Companies must elect to take advantage of Patent Box within two years of the end of the relevant accounting period. Companies can claim Patent Box relief and continue to claim Research & Development tax reliefs. How does my company qualify for Patent Box? Companies must hold a UK or European patent or an exclusive licence to use patented technology from others (eg in relation to particular territories). Patent Box applies to income derived from patents pending. This means that the benefit of the relief can start to accrue from the date of application. PROPORTION OF FULL BENEFIT AVAILABLE EFFECTIVE TAX RATE ON PATENT BOX PROFITS 2013/14 2014/15 2015/16 2016/17 2017/18 60% 70% 80% 90% 100% 14% 13% 12% 11% 10% The company must meet the development condition; it must have played a significant part in the development of the patent or any item or process incorporating the patented invention. A company in a group must also meet the active ownership condition; it can claim Patent Box relief if another group company has undertaken the development of the patented invention but it must play an active role in the management of the patented intellectual property. 3
WHAT QUALIFIES? What income derived from patents qualifies? Income from the sale of patented products. Importantly, this includes the sale of products containing patented components. Even if the included patented component is a minor part of the product, all the income arising from the sale of the product is eligible for Patent Box relief. Licence fees and royalties received for granting use of a patented item to others. Income from the sale of patents or granting of an exclusive licence over patented items. Income from infringement of patents. Notional royalties deemed to have been received where patented processes or items are used in the company s own production. What profits are eligible for Patent Box relief? The intention behind the legislation is that only the profits relating to the impact of a patented invention are taxed at the lower rates. The legislation therefore contains complex rules that specify how routine profits that would have arisen anyway are identified and removed from the profits eligible for Patent Box relief. Detailed calculations therefore have to be carried out in order to strip out profits relating to routine or marketing activities. The following diagram illustrates how a company s profits are carved up to arrive at the profits eligible for Patent Box relief: ILLUSTRATION HMRC give the following example in their Patent Box guidance: A patented printer cartridge is designed to be inserted in a printer and once installed not to be removed until empty, at which point it will be replaced. The printer cartridge will be incorporated in the printer. Income from the sale of a printer including the printer cartridge (whether the cartridge is installed or included separately in the box with the printer as part of a single package) can therefore qualify as qualifying income, even if there were no patent over the printer itself. PROFITS FROM NON PATENTED PRODUCTS AND SERVICES TAXED AT 20% Profits from income derived from qualified patented products/services taxed at 10% Profits relating to marketing assets taxed at 20% Profits from routine activities taxed at 20% 4
EXAMPLE Blue Limited A manufacturing company with taxable profits of 500,000. It has several patented products which account for 25% of its income. Its routine costs total 1,000,000. It normally pays corporation tax at a rate of 20%. Patent Income Non-patent Income Total Taxable profits 25% 75% 100% 125,000 375,000 500,000 Less routine return (10% of 1,000,000) 25,000 75,000 100,000 Qualifying residual profit 100,000 300,000 400,000 Less marketing asset return (assume standard 25% deduction for SMEs) 25,000 Relevant IP Profits 75,000 Tax saving (20%-10%) 7,500 Check what Patents are held already by visiting http://worldwide.espacenet.com/ 5
WHAT NEXT? Other points to note and consider What you should do now Patent Box does not apply to copyrights and trademarks. If you have not done so already, consider whether you can claim Research & Development tax reliefs on innovative activities undertaken by the company. 1 2 If you have granted an exclusive licence to someone, bear in mind that they may be benefiting from Patent Box relief and receiving tax savings themselves. If you have innovated and have not taken legal advice to understand how you can protect your intellectual property rights, you should speak to a specialist intellectual property lawyer. Be very careful not to publish in the public domain details of your innovation and resulting intellectual property; it may prevent you from being able to patent it in future. The Government is looking at amending the Patent Box regime which will restrict the relief to the extent that the research and development giving rise to the creation of the patent takes place outside the UK. Software is difficult to patent but software patents can be granted where software is part of a broader item. whether you have any patents or exclusive licences over patents. whether any patented inventions are used in the business. 6
3 4 5 6 7 8 9 Talk to Shorts for an initial discussion. Identify income streams which are derived from patents. whether you have other patentable intellectual property (IP). Establish the company s eligibility for and estimate the tax savings available from Patent Box. Explore whether it would be beneficial to patent other IP. whether operational structures need changing, eg to bring IP to the UK. existing relationships to consider asking for or carving out exclusive licences. 7
CONTACT US Request your consultation HOW CAN SHORTS HELP? Help you to estimate the potential tax savings achievable from Patent Box. Highlight opportunities for optimising the company s entitlement to Patent Box. SCOTT BURKINSHAW Tax Partner Email: scott.burkinshaw@shorts.uk.com Mobile: 07545 644775 ANDREW GRANT Tax Partner Email: andrew.grant@shorts.uk.com Mobile: 07590 045760 Sheffield: Cedar House 63 Napier Street Sheffield S11 8HA T: 0114 2671617 Chesterfield: 2 Ashgate Road Chesterfield S40 4AA T: 01246 559955 www.shorts.uk.com Lead the provision for you of an integrated professional service involving intellectual property lawyers and patent attorneys to help you identify and obtain any relief due. Teaming up with fellow professionals in this way enables us to offer you an efficient and joined up service. Maximising your claims to Research & Development tax reliefs and factoring these into any Patent Box calculations. Prepare and submit to HMRC the complex calculations of Patent Box relief. Find us on LinkedIn Follow us on Facebook @Shorts1890 This document is intended to be illustrative only of the features and benefits of the Patent Box regime. The rules are complex and bespoke advice should be sought in relation to specific cases. All content correct at time of going to print. 8 TAX3/030615