The Patent Box regime is due to commence in April 2013 and businesses are worried that it will be yet another cross to bear in uncertain times. But how can you prepare?
Patent Box is a fantastic opportunity for UK companies to pay less corporation tax by reducing the rate to just ten per cent on profits generated from patents and certain other medicinal or botanic innovations.
The regime will not just apply to patent royalties and similar license revenues, but also to the sales of complex manufactured products, including one or more patented components. Reduced tax rates can be claimed by companies using patented technologies in their production processes. The scope of the Patent Box is much wider than many companies realise, so take advice early and don’t miss out on the tax savings.
Both existing and new patents will be included and the legislation is expected to encourage UK businesses to invest in research and development and use patents to further their commercial interests. Intellectual property must be registered in the UK or Europe to qualify, but the scheme will cover worldwide income that is taxed in the UK.
Evidence of how Patent Box will enhance the competitiveness of the UK tax system for high-tech companies came earlier in the year when GlaxoSmithKline said that, as a direct consequence of the Chancellor’s announcement, it would be investing £500m in the development of its UK manufacturing facilities.
A ten per cent corporation tax rate makes the UK an attractive place to do international business, but it also benefits domestic companies. Benefits from the scheme are expected to bring advantages to businesses of all sizes, and will be phased in over a five year period.
In the first year the proportion of relevant profits to which the ten per cent rate will apply is 60 per cent. This will then increase annually from April 2017, up to 100 per cent.
So, what do businesses need to do now to prepare?
There are a number of key issues to consider. Most significantly, patent ownership requirements. As a matter of priority, companies should review their intellectual property portfolio to see if patent applications could and should be filed. Many companies are expected to seek to secure patents on innovations where they previously may not have bothered. This could lead to backlogs at the Patent Office. A company cannot get tax relief whilst the patent is pending, but back relief will be available after it is granted, so the sooner the application is made the better.
The legislation puts in place a framework explaining how businesses can calculate the proportion of profits that are attributable to qualifying intellectual property. However, maximizing the tax savings is not going to be straightforward. There is a structured approach to the calculation of the claim and this will mean that it is important companies identify streams of income that arise from qualifying IP.
In addition, a business has to identify profits attributable to routine manufacturing, development functions and the exploitation of marketing intangibles. These have to be excluded them from the claim.
Accounts information may need to be collected in an alternative format to ensure the data is available to gain maximum benefit. Reviewing the potential savings now will also assist in forward planning, especially for companies who pay their tax by quarterly payments.
For companies in both UK and in international groups it may be necessary to consider how IP is held and managed within the group to ensure all profits qualify. Companies planning acquisitions need to consider the potential for Patent Box to ensure that a target with patented technologies continues to qualify post the transaction.
Because of these complexities and the enormous potential to benefit from the Patent Box, it is vital that companies obtain advice from their accountants and patent attorneys, and start to define their strategies now to ensure they maximise returns.
Sharon Bedford is a Business Tax Partner at James Cowper LLP, accountants and business advisers in the Thames Valley.
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