Innovation harvesting to maximise corporation tax reductions.
Many companies have Product or Process IP they did not realise was patentable, have not patented for commercial reasons, or believed costs to be prohibitive. Given the introduction of Patent Box, it may be time to reassess all of your business IP to ensure you are making the most of the benefits that can be derived from them.
In simple terms, by separating the profits made from patented products or process, you are able to apply a greatly reduced Ct rate to those profits which falls to 10% by 2017. For example, if you product mix consists of two products, one with a patent and one without, assuming the sales of both are equal, you could effectively reduce your overall tax bill by 25%! This would be due to the fact that you are only paying half the CT on half of your profit… the saving are even greater if you extend your patent portfolio to the whole of your product mix!
Who can benefit?
- UK Company’s liable to Corporation Tax and making a profit from exploiting patented inventions.
- Product and process patents both qualify.
- Patent Box is not sector specific; all innovative companies generating profits from patents and patented profits are eligible whatever their industry sector.
- Your company must own or exclusively license-in the patents and must have undertaken qualifying development on them by making a significant contribution to either;
- The creation or development of the patented invention.
- A product incorporating the patented invention.
- If your company is a member of a group, it may qualify if another group company has undertaken the qualifying development.
- Your company may also benefit from the Patent Box if it holds certain other medicinal or botanic innovation rights.
When does it come into effect?
- Patent Box comes in to effect from April 2013; the full benefits will be phased in over a 5-year period.
- The percentage applied to profits earned from patented inventions for each financial year are: 1 April 2013 to March 2014: 60%; rising by 10% pa to 100% from April 2017.
The Patent Box profit apportionment formulaic calculation
- The calculation to arrive at the patent box deduction, whether formulaic or streamed, requires the input of figures which some companies’ existing accounting procedures may not readily provide. Many companies will have multiple sources of income, some of which will be relevant IP income and some of which will be non-relevant IP income. If a streaming calculation is to be made, a detailed understanding of income and costs and how they are attributable between various income streams will be required.
- The company apportions its total profits according to the ratio of RIPI to total gross income.
Example: A company has trade Corporation Tax profits of £100,000 in the financial year from 1 April 2015, which qualify in full for the Patent Box, and the main rate of tax is 23 %
The Patent Box profit apportionment streamed calculation
The company allocates its expenses on a “just & reasonable” basis to the two streams of income: RIPI and non-qualifying income, to arrive at an appropriate profit derived from its RIPI stream.
- Calculation Amount
- Profits chargeable to Corporation Tax £100K
- Patent Box deduction = £100,000 × 60% x ((23 – 10) ÷ 23) £33.9K
- Profits chargeable to Corporation Tax £66.1K
- Tax payable = £66.1K × 23% £15.2K
- A 34% Tax reduction (saved) due to patent box £7.8K
Calculating your claim
A company can normally choose one of two routes to calculate how much of its profits derive from IP income. (RIPI)
The Technical Bit
- The scheme aims to create a competitive tax environment for companies to develop and exploit patents in the UK, supporting business investment and growth by reducing the rate of Corporation Tax on profits from the sale of patented products and certain other innovations down to 10% for 20 years.
- Profits generated in the “Patent pending” period can qualify for the 10% corporation tax rate but this will require action to be undertaken in advance of the patent being granted.
- The 10% tax rate applies to worldwide profits arising from the exploitation of UK patents and patents granted by the European patent office or from exclusive license over such patent rights.
- Patent Box must be actively claimed in the company’s corporation tax return.