Upcoming changes in the Patent Box rules

The Patent Box regime was set up in 2013 to enable companies to pay a reduced rate of Corporation Tax on certain income derived from patents.  The original Patent Box regime had to be amended in 2016 following scrutiny from various international bodies on the basis that it represented unfair or harmful tax practice, with the original scheme abolished from 1 July 2021.  The more complex replacement scheme, which started from 1 July 2016, will continue for the foreseeable future. 

Who will this affect?

Any company which still holds relevant IP on 1 July 2021, who claimed relief under the original scheme and has not withdrawn from the Patent Box regime.

How will this affect my claim?

Any company who wishes to continue claiming relief under the Patent Box regime must prepare a claim under the replacement scheme rules.  The first accounting period where this will take effect is the first accounting period which starts on or after 1 July 2021. 

One significant difference between the two Patent Box regimes is that under the ‘new’ rules, companies who did not carry out the Research and Development behind the relevant IP will no longer realise a ‘Patent Box profit’, and so won’t benefit from the reduction to the rate of Corporation Tax on income from the relevant IP.  This is due to the new regime including the calculation of an ‘R&D fraction’, which is based on the aggregate R&D expenditure incurred by the company on the R&D which produced the relevant IP.

What do I need to do?

Whilst the effects of the change in the Patent Box regime won’t be felt immediately, it is recommended that affected companies consider their record keeping so that they are able to provide the additional detail required by the ‘new’ regime. 

The new rules require all claims to be streamed by allocating expenses to the patent-related income, rather than apportioned based on turnover, and these expenses should be recorded from the start of the first accounting period which starts on or after 1 July 2021. 

Records on the costs of carrying out the R&D which produced the relevant IP, covering all periods from 1 July 2016 (or before), should be retained, in order to support the calculation of the ‘R&D fraction’.  The company is not required to claim R&D tax relief on these costs, but the relevant costs are the same as those which qualify for R&D tax relief.

For further information on the content discussed in this insight, please get in touch with our tax team.