Patent Box: reduced CT rate for profits from patents
The Finance Act 2012 introduced a new Part 8A in the Corporate Tax Act 2010 (‘CTA10’). Commonly known as the Patent Box, this new regime allows companies to elect to apply a 10 per cent rate of corporation tax from 1 April 2013 to all profits attributable to qualifying patents and certain other intellectual property rights. The full benefit of the regime will be phased in over the first four financial years with the full reduced rate applying from 1 April 2017 (CIRD260170).
A company that is a qualifying company (CIRD210000) can opt to elect into the Patent Box (CIRD201020) under CTA10/s357A(1). If, exceptionally, a company has more than one trade, an election applies to all of them. There is an expectation that the company will include a Patent Box computation within its original or amended CT Tax Computation in that year and all subsequent years, unless the election is revoked. This is the same for both the old and new regimes.
Where a company makes an election under CTA10/S357A(1), the reduced rate of tax is delivered through an additional deduction in the corporation tax computation (CIRD201020). A company’s profits which benefit from the Patent Box are a proportion of the corporation tax profit of the company’s trade and are called its ‘relevant IP profits’.
Broadly, there are three stages to calculate the relevant IP profits. These stages remain the same whether or not the IP falls within the old or new regime and, if under the old regime, whether the company uses the steaming or proportionate methods.
- Identify the profits attributable to income arising from exploiting patented inventions - known as ‘relevant IP income’ (see CIRD220150).
- Remove a routine return - this reflects the fact that a business would be expected to earn a profit on that product even if it had no access to patented technology or intellectual property. (See CIRD220430.)
- Remove the profit associated with intangible assets, such as brand or other marketing assets - the Patent Box is not designed to reward other forms of IP. In many cases this figure is nil and in others a simplified small claims treatment can be applied. (See CIRD220470+.)
The calculations are explained further at the following links:
- ‘profit apportionment’ method for companies in the old regime with only old IP. It involves the company working out the proportion of RIPI to the total gross income - see CIRD220110.
- Companies in the old regime may also ‘stream’ their expenses to RIPI on a just and reasonable basis. In some circumstances companies must use the streaming method. See CIRD230000+.
- Companies with new IP are required to ‘track and trace’ their R&D expenditure against particular substreams (see CIRD272000). If they still have some products within the old regime due to grandfathering, they must also stream their expenses to income for these (ie they will have one separate ‘old IP’ stream, to which no R&D fraction is applied see CIRD271500).
An additional step may apply if profits were made previously from inventions awaiting grant of a patent if the patent is awarded in the accounting period - see CIRD220540 and CIRD275200.