The UK Patent Box scheme enables companies to pay a reduced rate of 10% Corporation Tax on profits derived from exploiting patented inventions. The aim of the scheme is to incentivise UK companies to commercialise their patented inventions in the UK.
UK companies who are liable for Corporation Tax can qualify for the Patent Box scheme if they make a profit from exploiting inventions which are subject to a patent, which they own or exclusively licence, and which was granted by the UKIPO, the EPO, or by certain specified EEA states.
The Patent Box was initially introduced in 2013. After it was found that the original legislation inadvertently enabled abusive tax avoidance practices, by not requiring a company claiming the benefit to undertake any research and development in the UK, a modified set of rules were phased in from 2016. A five-year transition period into the “modified nexus approach” ended on 30 June 2021, and the updated rules will now apply to new and existing Patent Box claims from 1 July 2021.
Under the modified nexus approach, tax reduction benefits are constrained, based on the proportion of relevant UK R&D undertaken as a proportion of global R&D. Relevant profits are subject to a weighted R&D fraction, taking in-house and outsourced R&D expenditure into consideration. The effect of the R&D fraction is that profits qualifying for Patent Box are significantly reduced if the company holding the intellectual property does not directly undertake the research and development.
Whilst the new rules increase the complexity of calculating qualifying profits, the scheme can still provide significant tax relief to qualifying companies. Corporation Tax rates are set to increase for many companies in 2023, from 19% to 25%, therefore the Patent Box scheme could provide qualifying companies with tax relief of up to 15%.
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