Business Tax, patent box, Personal tax, R&D Tax Credits, Tax Relief

Patent Box: New tax relief options negate need for aggressive tax avoidance

By RJP LLP

An awful lot of the headlines currently relating to tax involve the avoidance measures being taken by big businesses and celebrities, with their subsidiaries in Luxembourg and use of aggressive schemes based on the Isle of Man. We all dislike the fact that we have to pay tax and our job as tax advisers is to help clients minimise their liabilities.

But there is a fine line to tread here. Paying what we describe as the legal minimum is very different to aggressively avoiding paying your dues. For instance, one of our aims is to help clients identify ways to legitimately take advantage of the many forms of tax relief available, especially for business owners, and there is absolutely nothing amoral in doing this. If anything it’s regarded by the Government as a route to stimulating the economy.

The newest of such tax relief schemes designed to help businesses pay less tax is the Patent Box and yet recent research has uncovered that it is regarded as complex and inaccessible by business owners. However this is not the case and like R&D tax credits, if properly applied, it will become a very valuable source of tax relief. It is also an excellent way to kick start innovation and investment in more UK based R&D activities. Find out more about our Patent Box services.

What is the Patent Box?

The Patent Box is aimed at companies who own UK patented technology and innovations. It essentially allows the patent’s owners to pay just 10% corporation tax on any profits that arise from sales of the qualifying patented technology. This is in addition to deducting any relief as a result of applying R&D tax credits so some businesses could be in for a double tax relief windfall.

Like R&D tax credits, Patent Box will be applicable to a wide range of industries filing patents, including pharmaceutical, software and information technology, manufacturing, energy and utilities, telecoms, aerospace, defence plus some other consumer related and media businesses.

The Patent Box regime applies to patents granted by the UK or European Patent Office and certain other European jurisdictions. Exact details of which other jurisdictions will qualify are due to be confirmed later this summer. In addition to ordinary patents, it also applies to other qualifying intellectual property rights such as regulatory data protection, supplementary protection certificates and plant variety rights.

Phased introduction of Patent Box Tax Relief

Although the full level of Patent Box tax relief will not come into effect until 2017, it is possible to benefit from 1^st April 2013, with tapered reductions to corporation tax (click here for more information about our corporation tax planning services).

Tapered Patent Box relief will operate as follows: 60% of the total tax relief available can be applied to profits generated from April 1 2013, with increases of 10% every subsequent year until April 2017 when the full 10% corporation tax rate can be applied.

Note this will be occurring at the same time as reductions in the main rate of corporation tax, which have already been legislated in the 2011 Finance Bill.

What action should be taken?

If you own patents and wish to take advantage of this initiative, it is important to isolate precisely the source of any revenues. It will be necessary to demonstrate whether sales accounted for under the Patent Box regime do actually relate specifically to a particular patent and or are derived from a combination of other sources.

Alternatively, if you own IP which is capable of being patented then we strongly recommend you consider this sooner rather than later.

The calculations to undertake in order to establish this are quite complex and we recommend getting specialist advice on how to go about isolating the so-called ‘Patent Effect’ before making an approach to HMRC.

RJP’s verdict

As tax advisers working with a lot of innovative businesses, we welcome the Patent Box measure and believe it will become as valuable to business owners as R&D tax credits. Initially this too was widely criticised as being overly complex, but our experience has shown the complexity to be manageable – it is in fact a very valuable form of tax relief which has saved some of our clients hundreds of thousands of pounds in corporation tax.

New measures like Patent Box should go a long way to stimulate investment in R&D and fuel innovation, which this country so desperately needs to improve economic conditions in the long term.

Quick review – R&D Tax Credits

In recent months, RJP has covered this topic in detail within Livewire and we are currently offering clients the chance to make an application on a ‘no win no fee’ basis. Read our earlier blog on R&D tax credits. (link)

If you would like to discuss the Patent Box or R&D tax credits and how they might be relevant to your business contact Lesley Stalker at las@rjp.co.uk.

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FAQs

At RJP, we understand that keeping a finger on the pulse of your business's health is crucial. That's why we offer management reporting services—think of them as a regular health check for your company. These insights show you the real-time performance of your business, helping you make informed decisions to nurture and grow your enterprise.

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