There really isn’t long to go before the UK’s new Patent Box regime comes into effect. Relevant profits arising from qualifying patents on or after 1 April 2013 will be taxed at a reduced rate of 10% if you elect into the Patent Box.
The most important thing to understand about the Patent Box is that it is NOT just for “Big Pharma”. Any company generating income from qualifying patents will be able to benefit from this relief. It is not an automatic relief, however, it has to be claimed by way of an election. Whatever you do, make sure that you don’t miss out.
A blog isn’t really the place to go into great detail on the ins and outs of this relief. If you would like to read more about it, see my Patent Box briefing note or my article on preparing for the Patent Box (published in Tax Journal and reproduced with their permission). What I can do within the confines of this blog, however, is to provide some pointers for anyone not sure what to do next.
Hopefully your accountant has already raised Patent Box with you and they are helping you prepare for it. Just in case, here are the things that you really need to be doing now. Remember that this relief applies to relevant IP profits arising on or after 1 April, so a proportion of this year’s profits may be eligible.
Above all, do investigate the Patent Box to see whether you could benefit.
Start by identifying the company’s qualifying patents. These will either be those that the company owns outright, or those over which it has an exclusive license, and they will have been granted by the UK’s Intellectual Property Office (IPO), the European Patent Office (EPO), or by the patent authorities in Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia or Sweden.
There are some other, quite specialised, rights that are included, but these are of limited general application.
Once you have done that, identify the income stream generated by those patents. The regime allows the inclusion of income from:
- the sale of patented items themselves;
- the sale of items incorporating at least one qualifying patent; and
- the sale of items wholly or mainly designed to be incorporated into either a patented item or an item incorporating a patented item.
Then look at your R&D expenditure (note that this is the expenditure accounted for as R&D, not just that on which you have made an R&D tax relief claim). In the early periods, it is necessary to compare the current period R&D spend with the average of the four years immediately prior to electing into the Box. If the current year’s spend is less than that average, a profit adjustment will need to be made.
Identify the Marketing Assets of the company. Unless the company is able to make a ‘small claims election’, you will need to compute a Marketing Asset Return.
My briefing note on the Patent Box contains a flow diagram showing the process for computing the profit eligible for the reduced rate of taxation. If you would like further information on the benefits of this relief, please read my briefing note, the Tax Journal article or HMRC’s summary. Alternatively, please feel free to contact me on 07703 472569 or via my website.