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A company subject to UK Corporation Tax can opt into the Patent Box regime and pay a lower rate of Corporation Tax (10%) on profits resulting from certain intellectual property rights.
The Patent Box is relevant to all companies paying UK Corporation Tax, including UK subsidiaries of overseas groups. For overseas groups in particular, consideration will need to be given to ownership, development and/or management of IP rights to ensure that they are classified as relevant IP rights and so capable of being included in the Patent Box.
We give here an overview of the Patent Box legislation. Separate sections are directed to the main themes:
The Patent Box rules permit a claim to be made by a qualifying company liable to pay Corporation Tax in the UK to reduce the effective rate of Corporation Tax on profits arising from IP. The Patent Box legislation permits a claim to be made by a qualifying company liable to pay Corporation Tax in the UK to reduce the effective rate of Corporation Tax on profits arising from IP. The section “Patent Box - Are you a Qualifying Company?” deals with the requirements of a qualifying company.
A qualifying company must hold or be an exclusive licensee of a relevant IP right. But merely owning a patent will not be enough to qualify the patent as a relevant IP right. A development condition and, in certain circumstances, a separate active ownership condition must be met. The most common form of relevant IP right is a patent. Trade marks, designs and copyright are not relevant IP rights. The section “Patent Box - Do you Hold Qualifying IP Rights?” deals with the conditions that must be met for an IP right to qualify for the Patent Box.
To calculate the deduction in UK Corporation Tax, relevant IP income needs to be calculated. Relevant IP income is income from activity associated with qualifying IP rights. Only profits arising from relevant IP income can be included in the Patent Box calculation to reduce the Corporation Tax payable. The worldwide income associated with the qualifying IP rights is deemed as relevant IP income and so the low rate of Corporation Tax can be claimed for that income, even if all or part of the income is generated without the benefit of IP protection (e.g. in a country in which no patent protecting the product exists). The section “Patent Box - What is Relevant IP Income?” deals with what income streams can be classified as relevant IP income and therefore taken into account in calculating a Patent Box benefit.
In order to benefit from a reduction in UK Corporation Tax the qualifying company must have elected in to the Patent Box in the relevant accounting period. The section “Patent Box - When should you Elect In to the Patent Box?” deals with this issue.
The legislation defines how to calculate a Patent Box deduction which is subtracted from the total profits of trade to arrive at a figure on which UK Corporation Tax is payable at the normal rate. The Patent Box deduction is effective to reduce the UK Corporation Tax payable on relevant IP profit to 10%, after deductions have been made to account for a routine return and marketing asset return and after an R&D fraction has been applied. The section “Patent Box – How to calculate the Patent Box Benefit” explains the calculation and gives a simple example.
The chart below sets out the steps for determining whether a company is able to take advantage of the Patent Box regime and the extent to which they could benefit from it.
To view all our Patent Box pages as a single downloadable PDF, click here.