Lifting the lid on UK Patent Box legislation

Lifting the lid on UK Patent Box legislation

The London 2012 Olympic Games have come to a close and it is hoped they will encourage many more visitors from the world, including those looking to set up business here.

If that in itself is not enough, this year’s Finance Act 2012 introduced new legislation to enshrine the Patent Box rules into our legislation. However in addition to meeting the conditions needed for the Patent Box to apply, care must be taken in applying the rules to ensure that the relevant Intellectual Property [IP] profits are identified correctly.
The Patent Box comes into effect on 1 April 2013 and the legislation covers accounting periods straddling that date. It gives a significant tax incentive and it is hoped that this together with other incentives such as Research & Development tax relief, will encourage the world to base their enterprises here in the UK.

The main incentive is a 10% rate of tax, which will be phased in over four years in 10% increments until 2017. So, for example in 2013, 60% of the Patent Box profits will be eligible for the 10% rate.

The Patent Box rules make available a beneficial rate of corporation tax on:
• sale of patented items (either in part or whole);
• licensed-in patent rights; and
• compensation for infringement of patent rights.

The calculation allows the relevant profits to be placed in the box, though adjustments are required to strip them down to the core patent related costs.

For profits to get into the box, various conditions must be satisfied:
• The organisation must be within the charge to corporation tax – essentially the legislation applies to companies, not sole traders or limited liability partnerships.
• The company must hold a patent or a countrywide exclusive licence to exploit that patent and that patent must either be granted with the UK patent office, the European patent office or the individual country offices of certain other countries.
• The company must have actively developed the patent or a product incorporating the patent. If a company is a member of a group an additional ‘active ownership condition’ is required.
• In a group where one company holds all the IP, but does not actually develop the product, its income streams will only qualify if it takes an active role in managing the portfolio of IP that it holds.
• Finally, the company must elect into the regime by the deadline to benefit. This is a one-off election and once in the box, the company remains there until it revokes the election.

It is possible to include profits that were amassed while the patent was pending.

If the company is profitable, there are arguments that the company should enter the Patent Box at the earliest opportunity. However, if a company is loss-making, it may be better to wait until the losses are used. This is because the legislation provides for a certain mirror image basis: i.e. if the profits are to be taxed at 10%, then equally losses should only be offset at 10p in the pound.

Therefore, Patent Box losses may only be carried forward against future Patent Box profits, or if in a group (where excess Patent Box losses remain), to other Patent Box companies making a profit.

So if the London 2012 Olympic Games didn’t encourage you maybe this will.

Note: The above is intended as general information only. For specific advice on how the issues raised could benefit your business contact us on