View the related Tax Guidance about Patent box
Patent box tax regime ― overview
Patent box tax regime ― overviewIntroduction to the patent box regimeThe aim of the patent box regime is to provide an incentive for companies to develop and retain patents and other qualifying intellectual property within the UK. The regime is available for accounting periods commencing on or after 1 April 2013. It applies to companies within the charge to corporation tax that actively hold qualifying patents. Qualifying companies can elect for a reduced effective rate of corporation tax of 10% to apply to the income generated from the relevant patents (‘relevant IP profits’). The reduced rate of corporation tax is given effect by allowing a deduction to be made in the calculation of the company’s total taxable profits, rather than by actually applying a reduced rate of tax to the relevant IP profits. Patent and non-patent profits are therefore not separated and taxed at different rates in the corporation tax computation, although detailed calculations must be performed to identify the relevant IP profits themselves. The benefits provided by the patent box regime became more valuable with the increase in the UK main corporation tax rate from 19% to 25% from 1 April 2023. Non-qualifying profits generated by a company which has elected into the regime will continue to be taxed at the normal rates of corporation tax.Please refer to the Patent box ― qualifying companies guidance note for information on the relevant conditions. The regime applies equally to corporate partners, with some necessary modifications. It is not available to
Calculating relevant IP profits ― new entrants and 1 July 2021 onwards
Calculating relevant IP profits ― new entrants and 1 July 2021 onwardsChanges to relevant IP profits calculationsNumerous modifications were made to the way in which the patent box calculations could be performed with effect for accounting periods beginning on or after 1 July 2016. The commentary in this guidance note applies to the calculation of relevant IP profits of a company:•that is a ‘new entrant’, ie its first patent box election, or its most recent election, takes effect on or after 1 July 2016, or•where the accounting period begins on or after 1 July 2021CTA 2010, s 357AAccounting periods which straddle these dates are split into two notional periods and profits and losses are apportioned between them on a just and reasonable basis. The calculation now requires streaming of profits by reference to each IP right, with relevant R&D expenditure directly linked and allocated to the patent or patented item. As a result, the amount of profit that can qualify for the lower effective rate of tax applicable under the patent box regime depends upon the proportion of development expenditure that has been incurred by the company. A greater level of detail is now needed as the calculations require the allocation of income and expenditure to each sub-stream, which must be supported with evidence. HMRC expects that companies must be able to demonstrate the methodology by which R&D expenditure is allocated to individual sub-streams, at least in the first such period of calculation. Any significant adjustments to
Patent box ― relevant IP losses
Patent box ― relevant IP lossesCalculating relevant IP lossesA company may elect that any relevant IP profits of a trade for accounting periods during which it is a qualifying company are chargeable at a lower effective rate of corporation tax (currently an effective rate of 10%). See the Patent box tax regime ― overview guidance note for details. Such an election is given effect by allowing a deduction to be made in calculating the profits of the trade for corporation tax purposes. However, it is possible that the result of the calculations performed in arriving at the relevant IP profits is negative. This figure is known as a relevant IP loss. In these circumstances, there are no profits from which the deduction can be made to give effect to the reduced patent box rate of corporation tax. A company which has not already elected into the patent box regime is unlikely to make such an election for the first time during a loss making period. This is because the losses can only be relieved in a certain way (see below), which is more restrictive than other types of losses, such as trading losses. For example, a standalone company will only be able to relieve the patent box losses against patent box profits, thereby obtaining relief for the losses at a reduced rate of corporation tax, rather than at the main rate.However, a company may have already elected into the patent box regime when it subsequently becomes loss making. The
Patent box ― qualifying intellectual property
Patent box ― qualifying intellectual propertyRequirement of the qualifying company conditionsOne of the requirements of the qualifying company conditions set out in CTA 2010, s 357B is that the company must hold a qualifying intellectual property (IP) right or must hold an exclusive licence in respect of such a right. Please refer to the Patent box ― qualifying companies guidance note for more detail on the qualifying company conditions and the additional criteria that must be satisfied.The rights which must be owned by a company in order to benefit from the patent box and the meaning of an exclusive licence to such rights are set out below.Rights to which the patent box appliesA right is a qualifying IP right if it is listed in CTA 2010, s 357BB and s 357BBA. The list is as follows:•patents granted under the UK Patents Act 1977 by the UK Intellectual Property Office (UK IPO)•patents granted under the European Patent Convention by the European Patent Office (EPO)•patents issued by other specified EEA national authorities (see the list below)•supplementary protection certificates relating to medicinal or plant protection products granted by the UK IPO or EPO•UK plant breeders and European plant variety rights•certain UK and European data or marketing regulatory exclusivity rights for medicinal, veterinary or plant products•inventions that have not been granted a patent under the UK Patents Act 1977 solely on grounds of national security or public safetyPatents which have been granted under the European Patent
Effective tax rate planning
Effective tax rate planningCalculation of the effective tax rateAn international group’s effective rate of tax is usually calculated as the amount of tax it pays divided by its consolidated profits. The effective tax rate depends largely on:•the rate of tax paid by each company in the group•the companies in which profits are recognisedSee Example 1.The objective of effective tax rate planning is usually to ensure the profits are recognised in companies which pay tax at a low rate rather than a high rate.However, other taxes may arise as a result of:•withholding taxes on trading and other income ― see the Foreign trading income guidance note•controlled foreign company (CFC) and other anti-avoidance rules ― see the Introduction to CFCs and Shareholder issues ― international corporate structures guidance notes•withholding taxes on dividends paid to the group’s parent company ― see the Holding companies guidance note
Research and development expenditure credit (RDEC)
Research and development expenditure credit (RDEC)This guidance note provides information on how research and development expenditure credits (RDEC) are calculated and utilised. The Qualifying expenditure for R&D tax relief guidance note provides information on what expenditure qualifies for RDEC.See also Simon’s Taxes, D1.417, D1.435A.The RDEC is a taxable credit which is payable to the company in accordance with the seven steps set out below. For accounting periods beginning on or after 1 April 2024, RDEC can be claimed by a company of any size which carries on a trade. Loss-making R&D intensive SMEs can, however, claim under the SME intensive scheme, as an alternative. See the Research and development SME tax reliefs guidance note for more on the SME intensive scheme.For accounting periods beginning before 1 April 2024, RDEC is primarily for large companies and the SME scheme applies to SMEs. Where an SME cannot claim SME R&D relief on qualifying expenditure because it is capped, subsidised or subcontracted out to the SME, then it may instead be able to claim under RDEC. For details of the restrictions on SME qualifying expenditure, see the Research and development SME tax reliefs ― SMEs and the R&D expenditure credit (RDEC) guidance note for further information.For the definitions of an SME and a large company, see the Companies eligible for R&D tax relief guidance note.Amount of RDECRDEC is calculated by applying a specified percentage to the company’s qualifying expenditure. For expenditure incurred on or after 1 April 2023, the percentage is 20%.
Research and development (R&D) relief ― overview
Research and development (R&D) relief ― overviewThis guidance note provides an overview of the research and development (R&D) tax reliefs for companies.See the Research and development tax relief summary diagram which summarises the R&D tax relief.See also Simon’s Taxes D1.401.For a factsheet which summarises the R&D tax regime and which can be tailored for an advisor’s branded headings, see the Client factsheet ― research and development relief.Types of R&D tax reliefExpenditure by a company on R&D can be relieved in the following ways:•for a trading company, revenue expenses are allowable as a deduction against the profits of the trade, and capital expenditure may be eligible for a 100% R&D allowance as detailed in R&D allowances in the Research and development tax relief ― capital expenditure guidance note•in addition, qualifying expenditure on R&D is eligible for additional R&D tax relief. Significant changes have been made to the relief available with effect for accounting periods beginning on or after 1 April 2024. There continue to be two different types of relief: the R&D expenditure credit (RDEC) and a scheme which is now only available to certain loss-making SMEs. Before April 2024, the SME scheme was the default for SMEs (whether making profits or losses), which could claim RDEC only for specific expenditure which did not qualify under the SME schemeThe 2024 changes extend beyond the type of relief available to a company. See below under ‘Reforms to R&D reliefs from April 2024’ for a summary of the changes.R&D tax
A–Z of international tax terminology
A–Z of international tax terminologyList of commonly used phrases in international taxThe table below lists some of the terminology commonly used in the context of corporate international tax and transfer pricing, together with links to additional sources of information including other guidance notes, Simon’s Taxes and HMRC’s manuals.Navigation tip: press ‘Ctrl + F’ to search for a particular term within the table.TerminologyDefinitionFurther detailsAAnti-conduitCertain double tax treaty provisions contain anti-conduit conditions, which deny treaty benefits where the amounts received are paid on to another company. This ensures that treaty benefits are only obtained by the contracting states, rather than residents of third countries who have deliberately arranged their transactions to obtain treaty benefits to which they would not otherwise be entitledDT19850PPArm’s length arrangementAn arm’s length arrangement reflects the price that would be payable and the terms which would be agreed for a transaction between unconnected parties. This is important for the purposes of the transfer pricing legislation (see ‘Transfer pricing’ below)Transfer pricing rules ― overview guidance note Simon’s Taxes B4.147INTM412040ATAD (anti-tax avoidance directive)ATAD is an EU directive which provides for a series of anti-abuse rules relating to interest expense deductions, controlled foreign companies and hybrid mismatches, and requires the introduction of a corporate GAAR and an exit tax (these two measures not being part of the BEPS project). ATAD II introduced further measures to combat hybrid mismatches, whilst ATAD 3 aims to limit the use of ‘shell’ holding
Patent box ― qualifying companies
Patent box ― qualifying companiesMeaning of qualifying company for the patent boxOnly those companies which meet the qualifying company conditions in CTA 2010, s 357B are able to benefit from the reduced rate of corporation tax which can be applied to patent box profits. See the Patent box tax regime ― overview guidance note for more background information on the regime. Standalone companies must satisfy conditions A or B below, and companies which are members of a group must also satisfy condition C, as follows:•Condition A is that at any time during the accounting period, the company holds qualifying intellectual property (IP) rights, or holds an exclusive licence in respect of any such rights•Condition B is that:◦the company has held a qualifying IP right or exclusive licence (as defined in CTA 2010, s 357BA) in respect of a right◦the company has received income in respect of an event which occurred in relation to the right or licence when:▪the company was a qualifying company, and▪the company had made a patent box election◦the income falls to be taxed in the accounting period•Condition C is that the company meets the ‘active ownership’ condition for the accounting periodFor the purposes of condition B, a right is a qualifying IP right if it is listed in CTA 2010, s 357BB (see also the Patent box ― qualifying intellectual property guidance note) and the company meets the ‘development condition’ in relation to the right as set out
Group intangible fixed assets
Group intangible fixed assetsGroupsThere is specific legislation which deals with groups of companies and intangible fixed assets. This looks at:•definition of ‘group’•intra-group transfers•rollover relief between group companies•rollover relief on acquisition of a subsidiary•degrouping charges, including reallocation of the charge, allocation of rollover relief, and recovery from another group company or director•intra-group payments for reliefsCTA 2009, ss 764–799This guidance note covers the definition of ‘group’ and intra-group transfers. For further guidance on the other areas, see the following guidance notes:•Degrouping charges and elections ― IFAs•Rollover relief on IFAs•Reorganisations / reconstructions ― IFAsDefinitionThe definition of a group follows the definition for capital gains purposes. A group is defined as:•a parent company and its 75% subsidiaries•75%
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