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June 14th 2018

How to (nearly) halve your corporation tax bill

We've had the 'Patent Box' rules in place for a few years now, but it's probably fair to say that awareness of the scheme is still somewhat limited.

The aim of the regime is to incentivise UK companies to develop and retain patents and other qualifying IP. Qualifying companies can elect for profits from the sale of products or services and from the use of processes which have at least one patented component, and associated royalties, to be taxed at an effective rate of only 10% (the normal Corporation Tax rate in the UK is currently 19%).

The Patent Box applies to companies that hold qualifying patents, and also corporate partners (with some modifications), but is not applicable to individuals. The qualifying conditions are:

  • at any time during the accounting period, the company holds 'qualifying IP rights', or an exclusive licence in respect of such rights; and
  • the company is taxable in the current accounting period on income in respect of those rights, with the income being attributable to events occuring wholly or partly during a period when the company was a qualifying company and had made a patent box election; and
  • if the company is a member of a group, it must also meet the 'active ownership' condition, which essentially means that it must create or significantly contribute towards the creation, development or application of the patented innovation.

A right is a 'qualifying IP right' if it is a UK or EPC patent, a supplementary protection certificate, plant breeders rights, or any community plant variety right and the company meets the development conditions in relation to the right.

Qualifying companies can elect for the reduced rate of Corporation Tax to apply to the income generated from the relevant patents.The reduced rate is given effect by allowing a deduction to be made from the company's trading profits. Profits which do not qualify under the regime continue to be taxed at the normal rate, currently 19%.

The detailed calculation rules differ depending on whether the company enters the regime before or after 1 July 2016. Since that date, to benefit from the Patent Box rate the company must itself have conducted R&D which led to the income-generating IP. A simplified regime is available for smaller companies.

An election into the regime must be made within 12 months of the filing date of the Corporation Tax return for the first accounting period that the company wishes to elect in to the regime, i.e. normally within two years of the end of the relevant accounting period.

The Patent Box may be claimed in addition to relief under either of the R&D Tax Credits schemes. Registered patents normally have a 20 year lifespan, so the tax savings achieved under the Patent Box regime may be very significant. If your company qualifies (or could potentially qualify if it obtained qualifying IP), get in touch to discuss how we can help.

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