Patent Box - benefitting your business in the UK

Think inside the box

The Patent Box legislation has been introduced to encourage innovation by providing an incentive for companies to “locate their high-value jobs associated with the development, manufacture and exploitation of patents in the UK and maintain the UK’s position as a world leader in patented technologies”. From April 2013, a key benefit of Patent Box is a lower effective rate of corporation tax on profits attributable to UK or European patents - by 2017 the tax rate for such profits will be as low as 10%. HM Treasury has calculated the cost of the relief at £1bn per year

Who will benefit from Patent Box?

• If you are liable to UK corporation tax and commercialise patents or develop new innovative patented products, processes or services, you could be eligible for Patent Box.
• Your organisation must own or exclusively license patents, and must have undertaken qualifying development on them.
• If you are a member of a group you may also be eligible if the qualifying development has been undertaken by another member of the group, but it must meet an additional “active management” condition

Are you ready to make the most of this incentive?

If there is a possibility that your company may qualify for Patent Box, contact Deloitte today. We have an in-depth understanding of all facets of the legislation and have already advised many clients on Patent Box. We have a patent attorney in our Patent Box team,  who has an excellent knowledge of how patents are registered and then mapped to products.  Our multidisciplinary team, including transfer pricing and international tax experts, can help to demonstrate how Patent Box can play a role in your wider business strategy.

A typical feasibility study entails:

• Confirming, from a group perspective, the benefit that Patent Box could offer
• Identifying the group’s IP that would qualify for Patent Box (both existing and planned IP)
• Documenting that the group fulfils the ‘active ownership’ criteria for its patents
• Analysing qualifying patent profits, which will involve the identification and exclusion of other forms of income and expenditure, including marketing spend, routine expenses, R&D etc.
• Selecting the most appropriate calculation methodology
• Preparing the Patent Box calculation

Which patents qualify?

• For a company to be within the Patent Box it must actively hold a patent that’s been granted by the UK Intellectual Property Office, the European Patent Office or equivalent IP offices in certain other countries in the EEA , and receive income relating to that patent. The definition of “holding a patent” is drawn widely – it includes legal ownership, an exclusive licence to exploit a patent, partnerships, joint venture and cost-sharing arrangements and income from the sale of a patent.
• Either patent holder or another company in its group must have performed significant activity to develop the patented invention or its application AND, if the development was done by a group company other than the patent holder, then the holder must also be actively involved in the decision-making connected with exploiting the patent. This allows flexibility for both group-wide activities and products incorporating purchased bundles of patents to quality.
• Companies that don’t hold patents now may want to reconsider their policies on using or licensing patents, so that they too can be included in the Patent Box.

How does this work with R&D tax relief?

Companies qualifying for the Patent Box are also likely to be undertaking significant research and development and qualifying for R&D tax credits.  The Patent Box legislation has been designed to complement this relief.  Companies claiming R&D tax credits will not be penalised when calculating their profits for Patent Box.

How to calculate the income eligible for the reduced tax rate

The Patent Box legislation takes a formulaic approach to simplify what could otherwise be an arduous process; the aim is for Patent Box to be as straightforward as possible.

The starting point is GAAP revenue (Gross Income). You must then identify the how much of that income is earned from patents, by mapping patents to products so that only qualifying income streams are identified as relevant.  Once both figures are established, calculate the patent income  as a percentage of Gross Income.

The next step is to apply the percentage to your Relevant Profits (broadly taxable profits subject to certain adjustments).  This assumes that if a percentage of income is derived from patents, it’s likely that roughly same percentage of profits will also be derived from patents.

The final stages aim to strip out profits not arising as a direct result of the patents.  Firstly, the Routine Return is eliminated (broadly calculated as 10% of routine costs such as general admin and sales).  The Routine Return is intended to represent the profits that anyone could make from selling a non-patented version of the product, process or service.

Secondly, the marketing return is excluded.  This is broadly to eliminate the effect of brands on your profits (note that no effort is made to exclude profits deriving from IP other than brands, so there is no adjustment for design rights, copyright, know-how, etc).  Smaller claimants can apply a formula (set out as Stage 5, below); larger claimants must calculate a Notional Marketing Royalty under transfer pricing principles.

The result is the profit  falling into the Patent Box.  This is converted into the deduction necessary to give an effective 10% tax rate on the Patent Box Profits.

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