10% Corporation Tax – Changes Afoot
A relatively new tax relief for companies, which enables them to pay a low rate of just 10% corporation tax on relevant profits, “Patent Box” is based on profits arising from a patented product, or patented manufacturing process. Although it is has only been in place since 2013, the government is already mulling over changes to Patent Box from July 2016 which could have a substantial impact.
The changes are intended to more closely link the benefits from Patent Box to the level of research and development expenditure incurred by the company – in the phraseology, there must be a “nexus” between the two. The aim is to stop multinationals exploiting tax rules between different countries, but there is a knock-on effect to SME’s too as the proposals will bring in a Research and Development threshold.
For new claimants after July 2016 HMRC are not proposing to alter the fundamental calculation of what the qualifying patent “profit” is, but the new second step of relating that to R&D expenditure will make a significant difference in many cases. The R&D expenditure will include that both pre and post grant of patent. The overall balance of qualifying/non-qualifying development expenditure will need to be carried forward cumulatively for 15 years (the expected life of a patent is only 20 years anyway) to calculate the qualifying percentage. Companies will need to identify their development expenditure for each income stream. If they have incurred all of the expenditure themselves, or paid an unrelated third party to do so for all or part, then they will still receive the full benefit of Patent Box tax relief.
It seems that the revised Patent Box may work as in the following example:
|Non Patent Box profits for comparison||Patent Box profits|
|Current version||July 2016 version|
|Qualifying R&D in its creation||n/a||n/a||20,000|
|Non-qualifying cost in its creation||5,000|
|Proportion of qualifying costs||80%|
|Corporation tax due on profits||20,000||10,000||12,000|
Companies already with a Patent Box claim made by 30 June 2016 will not see any change until July 2021. On that date, they will also need to apply the “second step” apportionment calculation to relate their Patent Box claim to any previous development costs. Where there is no development spend from 2016 to base this on, the company must make a best estimate on the basis of pre-2016 expenditure.
For companies anticipating a claim in future there may be a benefit in “opting in” to Patent Box on their corporation tax return before July 2016.
We are handling a number of Patent Box claims for our clients, and are happy to have an initial discussion with you on this topic.