This presentation by Mr Vince Walker, a tax partner at the Liverpool offices of BDO, was the second presentation to the meeting of Liverpool Inventors Club of 29 April 2013 on the Patent Box. It sets out the patent box concession in the context of other concessions to encourage R & D in the UK. It explains the conditions and provides a worked example.

1. RESEARCH & DEVELOPMENT TAX CREDITS
& UK PATENT BOX REGIME
Summary of the new regimes
Vince Walker
29 April 2013
Copyright © May 13 BDO LLP. All rights reserved.
INVENTORS CLUB

2. RESEARCH AND DEVELOPMENT TAX CREDITS

3. RESEARCH AND DEVELOPMENT
BENEFITS
• Monetary benefits
Small companies
- For every £100 of qualifying expenditure, the company is entitled to an additional £125
deduction for tax purposes
- At a tax rate of 24% this equates to a benefit of £30 for every £100 of qualifying expenditure
Large companies
- For every £100 of qualifying expenditure, the company is entitled to an additional £30
deduction for tax purposes
- At a tax rate of 24% this equates to a benefit of £7.20 for every £100 of qualifying expenditure
• Cash repayment
• Tax R&D is different to accounting R&D
Page 3

4. RESEARCH AND DEVELOPMENT
Per DTI Guidelines
• The Project must be seeking to obtain an advance in science or technology.
• Activities that are qualifying R&D are those that directly contribute to the
advance, through the resolution of scientific or technological uncertainty (see
examples)
• Does it qualify – it is considered from the viewpoint of a „competent
professional in the field‟
WHICH PROJECTS QUALIFY?
Page 4

5. RESEARCH AND DEVELOPMENT
• Wages and salary costs
• Consumable materials
• Utilities
• Software
• Qualifying indirect overheads
TYPICAL QUALIFYING EXPENDITURE
Page 5

6. PATENT BOX

7. The basics of the new regime
Page 7
• 10% tax rate on patent profits
• Applies to new and existing patents – granted by HMRC approved
patent offices
• From the effective date – accounting periods beginning on or after
1 April 2013
• Split year treatment for 2013 year ends
• Phase in over a five year period (60%, 70%, 80%, 90%, 100%)

8. PATENT BOX EXAMPLE
Sale of a car
Page 8
Patented
steering wheel
Whole of profits from sale of car qualify

9. PATENT BOX
Phasing in the 10% rate
Financial Year 2013-14 2014 -
15
2015 -
16
2016 -
17
2017 –
18
% of reduced tax rate in
force
60% 70% 80% 90% 100%
Main rate of CT
(proposed)
23% 21% 20% 20% 20%
Small companies rate of
CT
20% 20% 20% 20% 20%
Effective patent box tax rates:
Large companies: 15.2% 13.3% 12% 11% 10%
Small companies: 14% 13% 12% 11% 10%
Page 9

10. The basics of the new regime
Page 10
Conditions and computation
• Must be a „qualifying company‟
• Computation of income in the box = three stage process

11. What is a Qualifying Company?
• Must hold relevant IP
• Qualifying IP rights, or
• Exclusive licence in respect of qualifying IP rights
• Qualifying IP right
• Patent granted by UK or European Patent Office (plus certain other patent offices)
• Must meet the “development criteria”
Page 11

12. Introduction to patents
Page 12
IPO definition (paraphrase s1 Patent Act 1977)
• Invention must be
- New, include an inventive step
- Be capable of being made or used in some kind of industry
• Invention must not be
- Scientific or mathematical discovery, theory or method
- Literary, dramatic, musical or artistic work
- Way of performing a mental act, playing a game or doing business
- Presentation of information or some computer programmes
- Animal or plant variety
- Method of medical treatment or diagnosis
- Against public policy or morality

13. Introduction to patents
Page 13
• Traditionally a form of IP protection granted for up to 20 years
- Maximise the breadth of the monopoly protection („broad claim‟)
- Subject to „opposition‟ and challenge
• (i) scepticism about value for smaller companies (ii) not traditional in
some industries (iii) concern about public disclosure
• Specific industries - software

14. Determination of patent box profits
Three Stages
Stage 1: Identify qualifying net income
Stage 2: Extract routine profit element (10% mark up on costs)
Stage 3: Extract „brand‟ value to determine patent profits
REMAINING PATENT PROFITS SUBJECT TO TAX AT 10%
Page 14

15. Determination of patent box profits
Stage 1
Stage 1a: Identify total gross income of the trade of the company
Includes
- Trade income
- Credits brought into account for tax on the realisation of intangible assets and pre-2002
patent rights
Excludes
- Income streams from financial assets and lending activities
Page 15

16. Determination of patent box profits
Stage 1
Stage 1b: Identify proportion of “Relevant IP Income” as a percentage of total trade income
(from Step 1a)
Relevant IP Income
a) Actual income
1i) Income from the sale of qualifying items (i.e., an item protected by a qualifying
patent)
1ii) Income from the sale of items incorporating a qualifying patent
1iii) Income from the sale of items wholly or mainly designed to be incorporated into a
qualifying item (e.g., spare parts)
2. Licence fee or royalty fees for granting rights over qualifying IP or rights granted
under an exclusive licence
3. Proceeds from realisation
4. Infringement income
Page 16

17. Determination of patent box profits
Stage 1
Stage 1b: Identify proportion of “Relevant IP Income” as a percentage of total trade income
(from Step 1a)
b) Deemed income
“Notional royalty income”
• Company holds a relevant IP right
• Total gross income of the company includes any income derived from “things done by
the company that involve the exploitation by the company of that right, and
• That income is not itself relevant IP income or excluded income
Company can compute a notional royalty that is treated as Relevant IP Income
Page 17

18. Determination of patent box profits
Stage 1
Stage 1c: Split trading profits according to percentage of RIPI/total gross income
Prior to any apportionment
• Add back any R&D expenses
• Strip out any loan relationship debits and credit
Page 18

19. Determination of patent box profits
Stage 2
Stage 2: Remove routine return to determine “Qualifying Residual Profit” (“QRP”)
• 10% mark up on certain costs
• Capital allowances
• Costs of premises
• Personnel costs
• Plant and machinery
• Professional services
• Utilities and transportation
Page 19

20. Determination of patent box profits
Stage 3
Stage 3: Remove marketing return to arrive at “Relevant IP Profits”
Either
• Small claims relief
• Take 25% of QRP out as a deemed marketing return
• Remaining 75% (up to a maximum of £1 million) is left in the patent box
Or
• Compute an arms length royalty rate on the marketing assets – “notional marketing
royalty”
• Trade marks
• Signs and indications or geographical origin of goods or services
• Information about actual or potential customers
Page 20

21. Page 21
Example

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