A new era for the UK patent box

The UK patent box regime is a statutory tax incentive regime that enables companies to claim an effective 10% corporate tax rate on certain qualifying IP profits. The patent box regime is a valuable UK incentive and will become even more beneficial with the announced increase in the UK corporation tax rate to 25% from 1 April 2023. All companies claiming patent box relief are subject to the new nexus regime from 1 July 2021. These new rules require claimants to track their R&D expenditure in order to calculate a cumulative ‘nexus’ R&D fraction, between 0 and 1, and apply this to their relevant IP profits, which must now be calculated using a streaming methodology. In most cases, compliance with the nexus patent box regime needn’t be onerous. However, claimants will be expected to document their position and monitor it going forwards.
 

Introduction to the UK patent box regime

The UK patent box regime was originally introduced in 2013. It provides for a corporation tax rate of 10% on profits derived from the exploitation of qualifying patents. The stated aim of the patent box regime is to provide additional incentive for companies to:

• Increase the level of patenting of IP developed in the UK, and ensure that new and existing patents are further developed and commercialised in the UK;
• Manufacture and sell those innovative products and services from the UK; and
• Locate the high-value jobs associated with the development, manufacture and exploitation of patents in the UK

Broadly, a company qualifies for the UK patent box regime if:

•  it legally owns or exclusively licenses in a ‘qualifying IP right’ (CTA 2010 s 357B(2));
• it meets the development condition in CTA 2010 s 357BC; and
• where a company is part of a group, it meets the active ownership condition in CTA 2010 s 357BE.

Assuming that a company qualifies, it must then elect into the patent box regime and undertake calculations that identify ‘relevant IP profits’; broadly, the company’s taxable profits allocable to the company’s exploitation of their qualifying IP, subject to a number of regime-specific adjustments. The taxable profits allocable to qualifying IP are taxed at an effective rate of 10%, rather than the main rate of corporation tax (currently 19%). The relief is given via a deduction from total taxable trading profits for a chargeable accounting period.

In 2017/18, the latest year for which HMRC published detailed statistics, 1,305 companies made UK patent box claims, with the total value of relief being £1,101m. More than half of the claimant entities were in the manufacturing sector (715 claimants), although the highest proportion of the aggregate relief was claimed by companies in the financial and insurance sector (34% of aggregate relief).