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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. 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 (as illustrated below). 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 have become 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 individuals. The term ‘accounting period’ within the patent box

Patent box ― calculating relevant IP profits

Patent box ― calculating relevant IP profitsChanges 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•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 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 than previously 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 their methodology arising in subsequent

Pillar Two ― overview of the UK’s multinational top-up tax

Pillar Two ― overview of the UK’s multinational top-up taxOrigins of the Pillar Two multinational top-up taxIn October 2021, over 135 jurisdictions signed up to a ‘two-pillar’ solution to reform the international taxation rules. The main aim is to ensure that large multinational enterprises (MNEs) pay a fair share of tax, no matter which territory they operate in. The two pillars are as follows:•Pillar One ― profits earned by large MNEs are reallocated to the market jurisdiction in which they have the most engagement, irrespective of whether or not the MNEs have a physical presence there•Pillar Two ― introduction of the Global Anti-Base Erosion (GloBE) rules, which require qualifying MNEs to pay tax at a minimum effective rate in every jurisdiction in which they operate, regardless of the main rate locally or the availability of local tax reliefs, by charging a top-up taxThe framework for Pillar One is still under consultation at OECD level, however the OECD’s Model Rules and Commentary on Pillar Two were published in December 2021 and March 2022 respectively. The Model Rules provide governments with a template upon which to draft the local legislation needed to implement Pillar Two. Further updates have been made to the Commentary since its initial publication, with the Consolidated Commentary being published in April 2024.For details of other related publications issued by the OECD, see the OECD website and Simon’s Taxes D4.301.In January 2022, the UK Government launched a consultation on the UK’s implementation and administration of the

Weekly tax highlights ― 11 November 2024

Weekly tax highlights ― 11 November 2024Direct taxesChange to updated HMRC guidance on basis period reformOn 31 October the guidance was updated to advise that the transition profit calculator cannot be used if the business is a partnership. It has now been further updated to confirm that the calculator can be used for partnership trading profits only.See Simon’s Taxes B8.108B.SI 2024/1082 Platform Operators (Due Diligence and Reporting Requirements) (Amendment) Regulations 2024These Regulations ensure that the effect of the policy is as originally intended and is aligned fully with the OECD model rules. Specifically, they ensure that information on UK sellers held by UK platform operators is reported directly to HMRC, and remove requirements to apportion certain thresholds, which led to unintended consequences in certain situations.They come into force on 25 November 2024.Simon’s Taxes B5.665A.Updated HMRC guidance on let property campaignSections 1 and 2 of the guidance have been updated to provide further information about who is affected

Patent box ― relevant IP losses

Patent box ― relevant IP lossesCalculating relevant IP lossesA patent box election is usually given effect by allowing a deduction to be made in calculating the profits of the trade for corporation tax purposes. See the Patent box tax regime ― overview guidance note for details. 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 company will be able to relieve any actual trading losses, as if it had not made an election into the patent box. However, it must still compute the amount of the relevant IP loss because this

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 and Withholding tax guidance notes•controlled foreign company (CFC) and other anti-avoidance rules ― see the Controlled foreign companies (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•tax on dividends received by the group’s parent company It is therefore also important to ensure that the structure of the group is tax efficient.The rate of tax paid by a company may not be equal to the headline tax rate in a particular jurisdiction, but may be reduced by:

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%.

Tax planning for international groups ― overview

Tax planning for international groups ― overviewWhen initially setting up overseas or when reviewing international operations, there are a number of different tax issues that should be considered. It is necessary to do this in order to ensure that the group is structured in a way which both makes commercial sense and minimises tax costs (and associated administrative costs). Tax arbitrage is often the first tax point that is considered, which is discussed in the Effective tax rate planning guidance note, but there are a wide variety of tax considerations that should be reviewed.In addition to the points discussed below, a number of employment and employment-related tax issues will need to be considered. These are discussed in detail in the Managing global mobility section of the Employment module of TolleyGuidance, but the Global mobility ― overview, Temporarily overseas, Pre-entry planning for UK inbound assignees from an employer’s perspective, Pre-departure planning from an employer’s perspective and Foreign employment guidance notes may be most useful as a starting point.How will investments or trading operations be financed?Companies may receive loan finance from companies in other countries. This may be particularly relevant when an overseas company is establishing

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