All grandfathering rights to the previous set of rules ended in June this year. Find out how the new rules affect your Patent Box claim.
Why are the changes to Patent Box being made?
Patent Box tax relief is a great way for companies to reduce their Corporation Tax bill. You can apply 10% tax rate to your profits from your Patents, rather than the Corporation Tax main rate. It was introduced in 2013, with the dual aims of retaining businesses that invest in IP in the UK and encouraging innovation across the board,
Unfortunately, the international Organisation for Economic Co-operation and Development (OECD) decided it was “a harmful tax practice” and the rules had to change. These new Patent Box regulations came into effect in 2016.
But companies that already claimed were allowed to stick to the old system under a ‘grandfathering rights’ consideration. Of course, this provision was never intended to go on forever and it officially ended on 30th June 2021.
This means that there is one set of Patent Box rules for everyone. And, if you’re an existing Patent Box claimant, it means that you need to adapt accordingly.
There are two main changes and, rather predictably, they make the process more complicated.
Nexus Fraction Calculation
While this might sound like something Mr Spock might propose, it’s just the algebraic formula that you need to apply to each Patent you’re claiming for. This is an additional step in calculating your Patent Box tax relief claim.
The Nexus Fraction includes the amount of third party subcontracting, your company’s R&D costs and how much you spend on buying Intellectual Property from somewhere else.
The idea of this new R&D fraction is to connect the amount you make from Patents with your R&D expenditure. So, if your company hasn’t developed the Intellectual Property, you’ll have less profits directly from IP and therefore a decreased amount of Patent Box tax relief.
In other words, IP you develop yourself will get you more Patent Box tax relief than patents you buy from elsewhere. And vice versa.
Previously, Patent Box tax relief was calculated simply on the total profits from your IP. Now, the costs and income from each individual Patent must be calculated as part of the application for Patent Box. This means that there’s clear ‘streaming’ between the IP and the profit you make from it.
This immediately adds a layer of administrative complexity. To do this efficiently, you need to set up processes that works this out as you’re going along. Otherwise you’ll need a substantial time investment to sort it out when you come to make your Patent Box application.
What are the effects of these changes?
These changes inevitably make it trickier to apply. So you need to invest more into the process. This is a good tax relief that saves companies a substantial amount of money. But, depending on your unique position, you might have to weigh up if it’s worth the cost of meeting the eligibility criteria.
The good thing is that you don’t have to miss out because you’re not sure how the Nexus Fraction works. That’s for your accountant or R&D specialist to understand. And you reap the rewards of a successful Patent Box submission. Especially considering the up-coming increase to Corporation Tax rates.
It’s important to be aware that a change to the regulations may mean that your Patent Box tax relief amount may change. But you don’t have to worry about all the details yourself. Leave that to the professionals and focus on your next Patent application.