Companies in line for 10% tax on patents profits

The key requirement to qualify for this proposed new tax relief is the company must have exclusive licence to one or more patents, or be in the process of getting a patent registered. The patent has to be a UK patent or a patent issued by certain other member states of the EU, and the company has to be actively developing the patented IP. 

The amount of the reduction in the company’s corporation tax liability requires a three stage calculation. This takes up over 30 pages of detailed legislation. There was an earlier consultation on this relief and in essence the three stages that were put forward in the earlier proposals have survived, but fortunately with some complexity removed.

The three stages are:

• Identify the activities in the company that use a patent and calculate the profits from that activity on a turnover based apportionment
• What the legislation calls the “routine return” will not benefit and this is assumed to be a cost mark up of 10% on certain specified costs.  This 10% is deducted from the above profits
• Finally a further deduction is made to exclude the return from marketing activity  

Some companies will be eligible for a more straightforward calculation. These are companies claiming patent box profits of less that £1m. When more than one company in a group claims patent box the limit is reduced - with two companies claiming patent box the limit becomes £500,000.  When patent box profits exceed the limit, even by £1, the company has to produce the full calculations.

The relief will apply to all patent profits – whenever they were granted. However, as a quid pro quo for the low rate not being limited to profits from recently granted patents initially the 10% rate will be restricted to a proportion of the amount of patent box profits. For the first year from 1 April 2013 to 31 March 2014 60% of patent box profits will benefit, then increasing by 10 percentage points each year. This initial limitation of the benefit will come to an end on 1 April 2017.

The Government are introducing this relief to attract knowledge based businesses to the UK. We hope that the relief will not founder by being too complex or too paltry. One positive attraction of the UK is the confirmation that the main rate of corporation tax will continue to reduce at 1 percentage point a year until it reaches 23%. This simple measure may prove to be a greater draw than what is a complicated relief.