How you can benefit from the current and the new UK Patent Box Regimes
The Patent Box is a tax relief scheme to incentivise companies to locate their research and development (R&D) activities in the UK.
Under the current Patent Box scheme, which came into effect on 1 April 2013, UK companies can benefit from a reduced rate of corporation tax in relation to profits attributable to patents or certain other qualifying IP assets. The scope of the provisions is broad enough to cover various revenue streams resulting from patented technologies. Moreover, the tax savings can potentially add up to exceed patent costs.
The current scheme will close to new entrants on 30 June 2016, but any company that has elected into the current Patent Box scheme by that date may continue to benefit from this scheme until 30 June 2021.
A new “next generation” Patent Box scheme will commence on 1 July 2016 for new entrants.
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Questions and answers on the Patent Box
The Patent Box is a tax relief scheme to incentivise companies to locate their research and development (R&D) activities in the UK. The current scheme will close to new entrants in June 2016 and a next generation scheme will commence on 1 July 2016.
UK companies can benefit from a reduced rate of corporation tax in relation to profits attributable to patents or certain other qualifying IP assets. The next generation scheme introduces a new requirement that a company should have itself conducted the R&D that led to the IP which, in turn, generated the profits that qualify for the Patent Box relief.
The changes are a response to concerns about companies using preferential IP schemes to shift profits between jurisdictions in order to benefit from a lower rate of taxation.
The government is implementing changes to the UK Patent Box to comply with a new international framework for preferential tax regimes for IP set out by the Organisation for Economic Co-operation and Development (OECD).
The initial Patent Box scheme was phased in gradually, starting with 60% of the full benefit from April 2013, and increasing by 10% for each tax year until it reaches full effect from April 2017 onwards.
The new Patent Box scheme will take effect from 1 July 2016.
Election into the Patent Box is not automatic and must be included in a company’s annual corporation tax return.
No. Gross profits are converted into qualifying profits by taking into account certain routine returns and a marketing asset return.
No. Design registrations, trade marks, copyright and confidential information or know-how - are not included.
The link between R&D and profits in the patent box will be made by use of a ratio, known as the nexus fraction. This must be calculated for each type of IP. It is given as Nexus fraction
N = (D+S) * 1.3 / (D+S+A+ R)
D = In-house direct expenditure on R&D
S = Expenditure on R&D subcontracted to third parties
A = Expenditure on acquisition of IP
R = Expenditure on R&D subcontracted to related parties
D, S and R will be defined using the same definitions as for the categories of expenditure in the UK R&D tax reliefs.
The final result will be the profit from the asset (or product, or product category) eligible for the reduced rate of 10% corporation tax.
The expenditure (using the definition of R&D expenditure used for R&D tax credits) is cumulative with each year’s R&D costs being added in. However, expenditure should be removed from the nexus fraction when it no longer contributes to income. To simplify matters, the scheme stipulates that expenditure is deemed no longer to contribute to income 15 years after being included in the nexus fraction.
Yes, at least because you only need to be granted a UK patent to claim on profits from worldwide sales of technology that you have developed!
A basic UK patent may cost £3-5k to reach grant, based on typical professional charges. Multiple patents covering the same product do not increase the benefit, so the scheme is accessible regardless of the size of your IP budget.
A UK patent may be granted within only 1-2 years. Moreover, Patent Box tax relief can be claimed for up to 6 years prior to grant. As soon as you have a patent granted you are eligible for the tax relief accrued on income during the patent pending phase.