Briefing Note: Patent Box - March 2013

1. Summary

The Patent Box regime introduced by Finance Act 2012 (which will become new Part 8A of CTA10), provides that on election a company's qualifying patent box profits will be taxed at broadly an effective 10% rate of corporation tax (though this rate is to be phased in equally over the years from introduction in April 2013 until it is fully effective from April 2017). The actual effective rate will depend on the marginal rate of the taxpayer.

It will apply to profits generated from qualifying IP rights. This encompasses licensing or sale of patent rights, sales of the patented invention or products incorporating the patented invention, use of the patented invention in the company's trade and infringement & compensation rights. Patents can only qualify if they are granted by the UK Intellectual Property Office, the European Patent Office, or specified EEA countries. To be qualifying IP rights, a development condition must be met. In the case of a group company, an active ownership condition must also be met.

The computation of profits to which the rate applies will exclude certain costs and income, including a routine return on manufacturing and development functions and the exploitation of marketing intangibles. The computation follows a formulaic approach, although it is possible to use a bespoke calculation. A simplified computation process can apply for companies with smaller levels of patent box profits. The patent box rate will be delivered by an additional deduction in the corporation tax computation. Some points to consider when contemplating entry to the patent box, or once within it are:

How and where IP is held within a group. It may be more effective to locate this in one entity, provided the development and active ownership conditions can continue to be met. In respect of qualifying IP rights, a company will need to meet the development condition. HMRC interpret the legislation in s357B(2) and (4) with respect to exclusive licence as meaning that although the company holding the exclusive licence does not need to hold the qualifying IP right, it must still meet the development condition in relation to the right. A group company will always need to meet the active ownership condition. The interaction of the patent box regime with the R&D tax relief regime. If there is 'insufficient' R&D activity in the first four years of entry to the patent box regime, ie when compared to R&D activity in the period of up to four years...