Do you have registered patents? Could anything you do qualify for a patent? Even if it is only the smallest element of your product this could reduce your tax bill.
The aim of the patent box regime is to "provide an additional incentive for companies to retain and commercialise existing patents and to develop new innovative patented products". It follows in the footsteps of other, similar regimes in Belgium, Luxembourg, the Netherlands and Switzerland.
From 1 April 2013 companies will be able to elect to phase in a reduced rate of corporation tax to profits generated from qualifying patents and limited other forms of intellectual property (IP). Ultimately the rate will fall to an effective 10% from 2017.
Who and what qualifies for the regime?
Patents granted from the UK Intellectual Property Office (IPO), the European Patent Office (EPO) and certain other European Economic Area countries are treated as qualifying, along with certain other IP rights. If your company owns or has an exclusive licence in the patent then you could also qualify.
The regime applies to new as well as existing patents, however, you must have had or intend to have a significant involvement in development of the patented invention or activity, or a product incorporating the patented item or activity.
The benefits of the patent box will be available through legal ownership and through holding a licence to commercially exploit a patent. It will also apply to patents that have been developed through partnerships, joint ventures and cost- sharing arrangements.
Income from the following sources is treated as qualifying:
- patent licensing and royalties
- sales income from the patent or patent protected products even if the patent only applies to a small part of the total product
- patents used in processes or services
- patent right damages for infringement.
How to determine company income derived from patents
The usual method for determining the profit eligible for the 10% rate is a three step process, normally used for when relevant IP income is embedded into, for example, a product. The following notes simplify the approach.
1. Identification of relevant IP income and profits
This is generally found by identifying the proportion of relevant IP income as a percentage of gross income of the trade.
It should be noted that the income of this trade can include gross sales for products, where only a small part of the product is patented. For example, the full proceeds of the product on sale of a car is included if, say, it only includes a patented windscreen wiper.
Once this percentage is found it is used to apportion the company's total taxable trading profit and expense between qualifying patent and non-qualifying income.
In some instances this may not be clear, for example for services or processes, and so 'notional royalties' may need to be calculated. It is therefore essential to begin thinking about how to determine which products will qualify and whether your management accounting information can determine the qualifying income.
2. Deduction of routine profit
A 'routine profit' is calculated by deducting a notional 10% return on certain operating expenses from profit determined in point 1 above. These expenses include capital allowances, premises costs, personnel costs, plant and machinery costs and miscellaneous services.
3. Reduction for profit derived from other forms of IP
A business needs to identify how much of the profit from points 1 and 2 above is due to the patent and how much to other forms of IP. HM Treasury proposes that this is calculated by assuming that a company's annual research and development spend roughly equates to patent IP, and that marketing spend equals its non-patent IP. Therefore a ratio of the two can broadly be used to establish patent-derived profits. This final split can be done using the value of marketing intangibles if this gives a better result.
There are also generous 'small company' limits which can reduce the impact of point 3 for companies with qualifying profits of less than a certain amount.
At this point profits generated between application and grant, subject to certain conditions, may also be added to the figure worked out above.
The resulting figure is the profit eligible for the reduced corporate tax rate.
In the case of a relevant IP loss arising, relief may be available to set off against other trades or groups or may be carried forward to use in the next period.
In some cases the above method may under or over allocate trade profits to relevant IP income. A 'streaming' method is therefore available, which requires a just and reasonable apportionment of a company's expenses.
Companies without patents may wish to consider whether they have products or processes which could be patented. In limited circumstances this may include IT/software.
How can we help?
In order to maximise the benefit of the regime, it is worthwhile taking the time to consider the issue now. We can help with advice in the following areas:
- patent identification, in conjunction with patent attorneys including determining whether anything else can be patented
- determining qualifying income from patents on a 'just and reasonable' basis
- performing the three-step calculation or 'streaming' method as detailed above
- general advice on patent box
- structuring of trading and other amounts to secure benefits e.g. considering group profit agreements
- planning for intellectual property in general.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.