Patent Box: reduced CT rate for profits from patents: patent box election
From 1 April 2013 companies may elect into the Patent Box regime. The Patent Box allows qualifying companies (CIRD210000) to be taxed at a reduced rate on the profits from patents and other specified intellectual property.
The Patent Box reduces the rate of tax by allowing an additional deduction (‘the Patent Box deduction’) from the profits of the trade for corporation tax purposes for each of the accounting periods it is a qualifying company.
The Patent Box deduction is a proportion of the relevant profits from patents and intellectual property. CTA10/S357A(3) provides the calculation for the Patent Box deduction as -
|RP||x||(MR - IPR)|
RP is the Relevant Intellectual Property Profits (CIRD220000)
MR is the main rate of corporation tax (CTM01750), and
IPR is the 10% Intellectual Property Rate of corporation tax.
The formula is the same for companies charged at the main rate of corporation tax and for companies charged at the small profits rate, or at the main rate with marginal relief. This means that in some cases Patent Box profits may be charged at a rate that is not exactly 10%.
If a company has corporation tax trade profits of £1000 and all of these qualify for the Patent Box, when the main rate of corporation tax is 21%, then the tax payable will be calculated as follows:
|Trade profits chargeable to corporation tax||£1000|
|Patent Box deduction £1000 x ((21-10)/21)||(£524)|
|Profits chargeable to corporation tax||£476|
|Tax payable (£476 x 21%)||£100|
So it can be seen from this that relevant IP profits of £1000 have an effective 10% rate of tax.
The relief is phased in from 2013 to 2017. In the 2013 financial year only 60% of the relevant intellectual property profits will be included when calculating the Patent Box deduction. This will increase 10% a year until it reaches 100% in the 2017 financial year (CIRD260170).