In his 2012 Budget speech, the Chancellor confirmed that the government is to go ahead with introducing new legislation known as “Patent Box” a new form of tax relief for companies who undertake innovation. The regime will provide an opportunity for companies that hold patent interests and use them in the business to significantly reduce their UK corporation tax liabilities. This article briefly sets out the scope of the new rules and the potential benefits.
From 1 April 2013 the Patent Box will tax worldwide profits attributable to patents at 10% rather than the standard rate of corporation tax (currently 24%).
Not only will the new rules help companies to reduce their tax liabilities but also allow for more efficient use of losses and other reliefs.
For company to qualify for the lower tax rate it must actively hold patents that have been granted by the UK or European patents offices, and receive income relating to those patents. What constitutes ‘holding a patent’ is widely drawn and can include partnerships, joint ventures, and other cost sharing arrangements involving patents.
The types of income that will benefit from lower tax rate include:
The government has said that the new regime will come into effect from 1 April 2013. Transitional rules will apply which will mean that the 10% tax rate is phased in over a five-year period.
In essence patents box will use a formulaic approach to calculate the amount of profits which will be subject to the 10% tax rate. A brief summary of the steps involved is shown in the table below.
The rules are complex and so companies are advised to seek specialist tax advice in order to ensure that they are benefiting fully from the relief.
How the rules will work in practice
Patent Box will follow a three stage formulaic approach in order to identify the income which will benefit from the reduced tax rate:
There are a number of key areas which should be looked at in order to ensure that the benefits of Patent Box are fully realised. These include:
The new rules are intended to complement the existing R&D reliefs, which companies should also be encouraged to look as part of their overall tax strategy.
Forbes Dawson can assist businesses in a number of ways. Examples of where we can help include:
This is in addition to the services we already offer in relation to R&D relief.
Detailed legislation is in the process of being drafted, and we will provide an update on any significant developments.
In the meantime we are already working with clients to assess the potential tax savings. If your company could benefit please contact us for a free consultation.
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