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Patent Box ~ The Tax Benefits & July 2016 Changes

The aim of the Patent Box is to provide an additional fiscal incentive for companies to retain and commercialise existing patents and to develop new innovative patented products.

The original Patent Box scheme, which was introduced in 2013, is being changed from 1 July 2016 following exploitation and abuse of the scheme across tax jurisdictions resulting in certain companies artificially benefiting from the lower tax rate.

The original 2013 scheme effectively ring-fences the profits of a company derived from intellectual property (IP), such as patents, and subjecting them to a lower rate of corporation tax.

The original 2013 scheme effectively ring-fences the profits of a company derived from intellectual property (IP), such as patents, and subjecting them to a lower rate of corporation tax.

The 'new' scheme rules applicable from 1 July 2016 will only apply to profits directly linked to a company’s research & development (R&D) activities in developing the intellectual property asset.

Details of the original scheme

The benefit of a lower rate of corporation tax applicable to IP profits is being phased in over four years between 2013 and 2017 so that the special 10% rate of corporation tax will apply in full for the year ended 31 March 2018.

The current scheme is to be closed to new entrants from 30 June 2016 with the benefit of the lower 10% rate on IP profits continuing for a further five years until 30 June 2021 under transitional arrangements.

Planned Changes from 1 July 2016

The new Intellectual Property regime will limit the benefits and be based on the proportion of relevant UK research and development expenditure and activities undertaken as a proportion of global R&D.

From 1 July 2016 a company will need to track the income and expenditure relating to each registered patent or product to permit the necessary calculation of the 10% lower rate taxed profits.

However the changes to the Patent Box from 1 July 2016 are likely to encourage investment and economic growth as well as prevent the movement of intellectual property offshore by innovative companies who otherwise might invest elsewhere.

Recommended action

To benefit from the existing Patent Box scheme any pending patent applications should be accelerated so that they are filed before 30 June 2016.

Otherwise to maximise the benefit of the new restricted scheme companies should consider relocating their R&D activities to the UK or ensure that IP being developed within the UK is patented.

To obtain the reduced rate of corporation tax a claim needs to be made within the Company Tax Return (or separately in writing) within 2 years of the end of the accounting period in which the relevant profits and income arose.

Further Information

Full details of the Patent Box scheme can be found on the HM Revenue & Customs website at the following link:

HMRC~Patent Box

If you wish to discuss the impact of this article and the July 2016 changes outlined above in more detail then please do not hesitate to call us on 01633 215544 or email us at contact@marshvision.com