The Patent Box is a corporation tax relief for relevant intellectual property profits of a company’s trade and commenced on 1 April 2013. The relief is not automatic and therefore a company must elect for Patent Box to apply if it considers that it is eligible to make a claim.
The relief will ultimately tax relevant intellectual property profits of a company’s trade at a flat rate of 10% but the relief is being phased in over a 5 year period from 1 April 2013 and so for the first year only 60% of the relevant profits will be taxed at 10%, 70% in year 2 and so on until the full 100% of relevant profits is taxed at 10% in year 5.
The starting point is to establish if the company is a qualifying company for these purposes and broadly this will be a company `which, within an accounting period:-
Holds any qualifying Intellectual Property rights, or
Holds an exclusive license in respect of qualifying Intellectual Property rights, or
Has held a qualifying Intellectual Property right or an exclusive license and is receiving income in the current accounting period which relates to an event in an earlier accounting period when the company was also a qualifying company
The company meets the “development condition” in relation to the Intellectual Property right
A qualifying Intellectual Property right is restricted but includes:-
Patents granted by the UK Intellectual Property Office (under Patents Act 1977)
Patents granted by the European Patent Office (under the European Patent Convention)
Rights corresponding to either of the above that are granted under the law of specified EEA States
The development condition for the company is generally satisfied by the company (or in some cases a Group company) carrying out qualifying development by creating or significantly contributing to the creation of an invention or undertaking significant activity for the purposes of developing the invention or any item or process that incorporates it.
There are special rules which apply to groups of companies.
In order to make a claim the company must compute its Relevant Intellectual Property Profits. Where, for instance, the sale of patented items is much more profitable than other sales the pro-rata allocation of expenses under the usual computational method may produce an unfair result. In such cases the company may elect for “streaming” whereby expenses are allocated on a “just and reasonable” basis. Streaming is also mandatory in some cases.
The main category of Intellectual Property income is usually sales of products which incorporate a patented item. The rules can be very generous and where a patented item is an essential part of a larger item then it may be deemed to be incorporated into that larger item and the whole item may qualify – an example of this may be a patented spark plug within a car where the whole car may qualify!