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Date of publication: January 2012
What is the Patent Box Regime?
For qualifying companies, with effect from April 2013, income from qualifying patents and other qualifying intellectual property rights will benefit from a lower rate of tax- just 10%, (Normal rates would be 20% or 24%).
What does "qualifying" mean?
- Qualifying Companies: hold the patent/IP and actively engage in the development and commercialisation of new and innovative products incorporating that technology.
- Qualifying Patents: granted by EU or UK patent office.
- Qualifying IP Rights: if development is being carried out to develop a patent or a product incorporating the patent.
What income will be eligible for the 10% rate?
There is a somewhat complicated seven step approach to calculating the eligible income, which is briefly summarised below-
- Calculate Total Gross Income- this is trading revenue plus income from sales of IP, licences and royalties etc. Income from interest and dividends is not included.
- Calculate what % of the above is "Relevant IP Income"- this includes product sales (note the whole product sale is included, even if only a part of the product is patented) plus sales of IP, license fees and damages awarded for patent infringements. Companies who use their IP to provide a service or perform a process calculate their Relevant IP Income on the basis of a notional royalty- which is based on an arms-length price principle.
- Taxable profits are adjusted to add back R&D super deduction and finance income. The % calculated at step 2 is then applied to the adjusted taxable profit.
- Routine return is calculated, this is 10% of the cost base attributable to the IP Income- the % from step 2 is applied to the sum of the cost of premise, capital allowances, staffing costs, plant and machinery etc. and 10% of this is deducted from the residual profit figure reached in step 3.
- A "brand value" is calculated, using arms-length principles. This is deducted from residue profit. This step is subject to a 10% de minimis for many companies. The result is the Relevant IP Profit which is eligible for the 10% tax rate.
- This step is a simplification procedure for companies with just one trade- the relevant IP Profit is the lower of 75% of the step 4 figure, or £1m.
- This step allows profits from patents pending situations over a six year period to be brought within the 10% tax rate.
The legislation is not final but significant amendments are unlikely at this stage.
The seven step calculation looks complicated and laborious, but in the most part it uses information which should be readily available within the company. The exception to this is the notional royalty calculation for companies using IP to perform a process or supply a service, and the brand value calculation. Both of these require an equivalent arms-length value to be calculated, which may not be straight forward. In the case of the brand value this can be avoided by using the simplified procedure at step 6, which will be appropriate for smaller companies.
Overall the patent box is to be welcomes as another step towards making the UK an attractive place to do business, and keeping us at the forefront of technological innovation.