All companies that receive income from patented products or Intellectual Property should consider whether it can pay corporation tax at a reduced rate of 10% thanks to a new tax initiative, Patent Box.
Why is Patent Box being introduced?
The government wants to “encourage companies to locate the high-value jobs and activity associated with the development, manufacture and exploitation of patents in the UK.” In essence, the government wants to stimulate entrepreneurialism and small business enterprise, making the UK a centre of excellence and increase research and development expenditure.
When is it being introduced?
HM Treasury ran a consultation period in 2011, which was well received. Draft legislation published in December is expected to pass into law in the Finance Act 2012 (this summer). Profits earned after 1 April 2013 will be subject to these new rules. Therefore, annual accounting periods commencing after 1 April 2012 are potentially subject to this tax rate. The benefits will be phased in over five years.
What type of company can benefit and how much can I save?
All companies with UK or European patented products could be eligible. Patent Box is not industry specific, whatever field your business is in, you should consider this tax relief now. From April 2013, Patent Box will tax qualifying profits at a rate of 10%, rather than 23% corporation tax rate (for large companies).
Is my company eligible?
Whilst the Patent Box concept is simple, eligibility is not. There are a number of conditions which must be met:
- The company must have rights (held or exclusively assigned) to the income from the patented product. Therefore, consider now whether your company should be applying for a patent.
- The company or a group company must have significantly developed the patented product.
- The company must “actively” own the patented product; management time must be spent formulating plans and making decisions in relation to the development or exploitation of the product.
We have patents, does my company automatically qualify?
No. Provided that your company is eligible, the company must elect into the Patent Box regime. Thereafter, there are seven tests to be undertaken annually to determine how much of the company’s income qualifies for a 10% effective tax rate. Broadly, these can be summarised as extracting the company’s non-Intellectual Property income, routine return and brand value. A patented product that falls within the scheme could be:
- Sales income from selling the patented item,
- Royalties income received from licensing the patented item,
- Sales income from selling a parent item which includes the patented item as a component.
Overall, from 1 April 2013, any product that is patented or contains a patented component product could be affected by this new tax relief.
Who should I speak with to find out more?
Chiene + Tait can assist you through the process of qualifying for this generous tax relief and will ensure that your company receives the full benefit available to it. If you have a query about Patent Box, please contact Neil Norman in our Entrepreneurial Team on 0131 558 5800 or email firstname.lastname@example.org.