The Patent Box is a government initiative that incentivises companies to keep and commercialise their patents.
The Patent Box is a government regime that reduces the rate of Corporation tax from 19% to 10% for profits generated by patented inventions.
This relief is available to profits earned worldwide after 1 April 2013.
On 1 July 2016, new rules introduced an additional hurdle to companies’ eligibility for the Patent Box and a new step to how profit is calculated.
The regime applies to:
Patents protected by the UK Intellectual Property Office, the European Patent Office or specific patent offices within the European Economic Area are recognised.
Although you can only benefit from the Patent Box after your patent has been successfully registered, relief can be claimed for profits made 6 years before the grant on the basis that those profits were made when your company was part of the Patent Box.
You can apply to the Patent Box by writing to the HMRC or through the calculations in your company tax return.
For profits earned within a particular accounting period, election must be done within 2 years after the end of that accounting period.
Once your company has elected into the Patent Box, all your businesses will be subject to the regime until you opt out. However, once you’ve elected out, you'll be barred from re-applying for 5 years.
The Government has produced a calculation flowchart to help you determine how to do your calculations.
This refers to global income generated through various avenues, namely:
the licence fees and royalties generated by each of your patents
any income generated by the sale of each of your patent or the relevant products or processes
any damages and compensation received as a result of patent infringement
Originally, companies were required to calculate proportionally the income generated by their patents as a percentage of their total income and make the necessary adjustments to the IP-generated profits to derive their RIPI. Companies could choose to calculate their RIPI by conducting an income-expenditure analysis for each patent or each product involving a patent. This is called streaming.
An update in July 2016 requires all companies to make streamed calculations by July 2021 but as of now, companies are free to choose between the two methods.
Your Routine Return is a notional 10% return on operating expenses, which include capital allowances, personnel and premises costs etc. However, expenses covered by the R&D tax relief and costs of raw materials are excluded.
MAR refers to any profit attributed to the brand rather than the invention itself. To work out the MAR, you need to reduce the actual marketing cost from the notional brand’s value.
You will only need to deduct the MAR from your QPR if the brand is worth more than the amount your company has paid for marketing. Where the cost of marketing is higher than the brand, no further deduction is required.
If your company’s QPR is less than £1 million, you can apply for Small Claims Treatment where your MAR will be assumed to be 25% of your QPR. Although this may be simpler, it may be more beneficial to do your own calculations because sometimes it may result in no MAR deduction hence enhancing the benefit from the Patent Box.
Under the original rules, you’ve reached your taxable profit. However, the new rules introduced an additional step.
This step is compulsory for any companies that elected into the Patent Box after 1 July 2016 or any participating companies that created new IP since 1 July 2016.
The formula for working out the fraction is: (D + S) x 1.3/ (D+S+A+R)
D is the in-house R&D expenditure on the particular IP
S is the costs of R&D subcontracted to third parties
A is the relevant patent acquisition cost
R is the costs of R&D subcontracted to connected parties (eg other companies within the group)
These figures refer to the total costs your company has spent over the life of the patent for up to 20 years.
The fraction would be 1 if there’s no acquisition cost or all R&D is taken by your company alone or by third parties.
It depends.
If your improvements haven’t effectively changed the nature of the product, then the new rules will not apply.
If the improvement upgrades the product to the extent that it’s almost a new product, the HMRC have 2 suggestions.
You can either consider whether the value of the product is due to the new patent or original patent or take a numerical approach:
if 80% of the product consists of the old IP, then treat the relevant profit as old
if less than 20% of the product consists of the old IP, then treat the relevant profit as new
if the percentage of old IP within the product is between 20%-79%, then that percentage of the relevant income would be treated as old and the remainder as new
Since it’s crucial for your company to be able to provide specific data related income and expenses related to each patent, you may wish to consider the adequacy of your existing accounting system before entering the regime.
You must:
audit your company’s income streams and determine which ones are generated by patents
audit your company’s expenses to identify what they’re for
You should also make sure your company actively develops the patent. If your company belongs to a group, consider subcontracting R&D work directly to third parties rather than to connected parties to enhance your R&D fraction.
For more information on the Patent Box, read the HMRC’s manual on the Patent Box.
If you have any questions, contact the Specialist Incentive and Relief team through email.