Introduction to Patent Box to reduce Corp Tax
Starting from 1 April 2013, the “Patent Box” will allow companies to apply a reduced rate of corporation tax to all profits attributable to granted UK and European patents.
This is a great incentive to UK incorporated companies to commercialise existing patent products/processes and to develop new innovative products.
Importantly, it can be utilised in addition to R & D Corporation Tax Relief.
Crucially, Patent Box will allow companies to elect to apply a 10% rate of corporation tax to worldwide qualifying profits (Its not 10% * Profit, but works out to the same thing, see below for how it is actually worked out)
Some Basic Facts:
- It will be phased in from 1 April 2013
- Types of company able to benefit include recipients of patent income, producers of patented products and those using patented processes as part of their business;
- Qualifying IP rights include patents granted by the UKIPO and the EPO
- There will be a due diligence exercise to ascertain what patents and what associated income/profit will fall within the Patent Box for your business. This is similar to writing a ‘narrative’ as per the current R&D tax credit procedure.
- Any income arising between the application and grant date of the qualifying patent may qualify as income within the Patent Box. This can be for several years prior to grant.
- Check that accounting records are in place to calculate income/profits associated with Patent Box inventions.
The patent box tax rate will potentially be of great benefit to companies owning or using patents in their business activities. The key to maximising the benefits lies in the preparation for the new rules. Details of the rules and implementation to follow.
EXAMPLE OF HOW THE 10% EFFECTIVE RATE IS CALCULATED
If a company has trade corporation tax profits of £1,000, which qualify in full for the Patent Box when the main rate of tax is 22%, then instead of arriving at a tax charge of £100 by multiplying £1,000 by 10%, the calculation is as follows:
Profits of Company’s trade chargeable to CT: £1,000
Patent Box Deduction 1,000 x (22-10) / 22: £545
PROFIT CHARGEABLE TO CORPORATION TAX: £455
TAX PAYABLE: £455 × 22%: £100
(compared to tax payable at ordinary rates – between £200 and £230, depending on rate applicable)
PDF of this blog available for download: /perch/resources/1343042642-horizon-patent-box.pdf