Patent Box: relevant IP profits: profits arising before grant of right
A company which has been granted a patent (or exclusive rights in relation to a patent) can, in the accounting period in which the patent was granted, elect to obtain the benefit of the Patent Box on profits arising from exploiting the patented invention during the period between the application for the patent and the granting of the patent. This is the patent pending period.
The relief itself is given by adding an amount to the company’s relevant IP profits in the accounting period in which the patent is granted. That amount is the difference between the aggregate of the relevant IP profits for accounting periods which ended in the patent pending period (up to a maximum of six years) and the aggregate of what the relevant IP profits for that same period would have been if the patent had been granted at the date of application.
Profits can only qualify if they relate to periods during which the company was a qualifying company (CIRD210100) and for which an election under S357A had effect (time limits apply - see CIRD260100). For this purpose a company is treated as a qualifying company where it would have been one but for the fact that the right had not been granted at the relevant time.
The election is made on a patent by patent basis, and covers the whole of the period from the patent application to the date of grant (up to the 6 year limit).
It is not possible for profits arising before 1 April 2013 to benefit from this look-back, because the regime as a whole only has effect in relation to accounting periods that begin after 1 April 2013 (accounting periods that straddle 1 April 2013 are treated for this purpose as two separate periods).
Mr A has an innovative idea that he considers will result in a product or process that can be patented. Instead of developing the idea and applying for a patent himself, he decides to incorporate a new company, Company A, so that it can develop the idea and potentially claim R&D tax relief as well as meet the development condition (under S357BC) to enable Company A to be a qualifying company (under S357B) under the Patent Box.
On 1 May 2013 Company A applies for a patent under the Patents Act 1977. On 1 December 2017 the patent application is granted without modification. Company A does not wait until 2017 to make an election because the legislation allows a company to take into account profits arising before grant of a patent.
So Company A makes an election under S357A and S357CQ(2) and specifies that the first accounting period for which the election is to have effect is the year ended 31 December 2015. The company is loss-making in the year ended 31 December 2014 and therefore, although it could elect into the Patent Box regime for that accounting period, it chooses not to.
Company A makes the following relevant IP profits (as defined under S357C(2)):
|Accounting period ended 31 December||Relevant IP profits|
Company A would have been a qualifying company for the accounting periods ended 31 December 2015 and 2016 but for the fact that the patent had not been granted. In these circumstances, S357CQ allows the company to elect to be treated as if it were a qualifying company for those accounting periods. However, the relevant IP profits for these accounting periods are brought into account only in the accounting period ended 31 December 2017 (the accounting period in which the patent is granted) and not before. So Company A has a total of £120,000 (30,000 + 40,000 + 50,000) relevant IP profits for the accounting period ended 31 December 2017.
Assume the facts are the same as above but Company A sells the right on 1 November 2016. The company can still bring in relevant IP profits for the accounting period ended 31 December 2017 but only in relation to the period from 1 January 2015 to 31 October 2016, so £30,000 plus £33,333 (10/12 x 40,000), making £63,333 of relevant IP profits. In addition, any profit arising on the sale of the patent will also qualify.
Note that the actual taxable profits of the trade for the accounting periods ended 31 December 2015 and 2016 are unaffected. It is just the Patent Box deduction that may be increased in the accounting period ended 31 December 2017.