Your guide to the Patent Box and Above The Line R&D tax credit
New tax incentives
driving UK innovation
Your guide to the Patent Box and
Above The Line R&D tax credit
From 1 April 2013 two new tax reliefs for innovative
companies come into effect. This high level guide
sets out some of the opportunities and frequently
asked questions to help identify how these might
benefit your company.
Research & Development
(R&D) above the line tax credit
What is it?
10% effective tax rate on profits derived
from patents including the sale of products
incorporating a patented component, and some
services based on patented technology
A cash credit from HM Revenue & Customs
(HMRC) equal to 9.1% of a company’s
expenditure on qualifying R&D activities
What are the key
• ny tax paying companies/groups with
qualifying patent rights can reduce their UK
• oss making large companies can benefit from
cash credits for the first time
• Loss making companies should consider
positioning themselves to take advantage of the
relief when they become profitable
• mall and medium-sized enterprises (SMEs)
receiving grant funding or with subsidised
RD expenditure can also claim 9.1% cash
• All companies should consider whether they
can patent items which they produce or use
Who does it apply to?
Any UK companies/groups who could protect
their intellectual property (IP) with patents.
‘Large’ loss making UK companies
undertaking RD and SME companies with
subsidised and/or subcontracted RD
Is it optional?
Yes. You need to ‘elect in’ to the patent box
regime. The company must elect into the Patent
Box regime by giving notice to HMRC that it is
a qualifying company with a qualifying patent,
exclusive licence or patent pending and from
which accounting period the company would
like to be within the regime. The company must
notify HMRC on or before the first anniversary
of the corporation tax self assessment (CTSA)
filing deadline for that accounting period. The
company is then in the Patent Box regime for
Yes. Until 1 April 2016, claims can either be made
under the existing RD tax relief scheme or the
new RD tax credit scheme (but not both).
Who should I
Partner - Head of RD
T 01865 799805
FAQs… Patent Box
Who can qualify?
To qualify for the Patent Box regime, a company must own
a qualifying patent or an exclusive licence under a qualifying
patent. The company must also have been involved in the
development of the patented invention. Broadly, if the company
meets these criteria, then it can elect into the regime.
What are the benefits?
The adjusted profits arising on the income from patents are
partially excluded from UK corporation tax, such that they are
taxed at a reduced effective rate. This reduced rate will be 10%
from 1 April 2017. The benefit is being phased in from 1 April
2013 such that approximately 33.9% of the adjusted profit is
exempt from UK corporation tax and then increases in stages to
approximately 52.4% from 1 April 2017.
What is a qualifying patent?
A patent is a qualifying patent if it is a current patent, irrespective
of when granted, and the current patent was granted by one of
• UK Intellectual Property Office;
• the European Patent Office; or
• the patent office of Austria, Bulgaria, Czech Republic,
Denmark, Estonia, Finland, Germany, Hungary, Poland,
Portugal, Romania, Slovakia or Sweden.
The rules also extend to other forms of intellectual property
such as supplementary protection certificates and certain plant
What is an exclusive licence under a patent?
An exclusive licence needs to give the licensee an exclusive right
to exploit the patent in one or more countries and the right to
enforce the patent against any infringement of those rights.
If the patent is held by a group company and the patent rights
are conferred on another company in the group, then that other
company is to be treated as holding an exclusive licence.
“We welcome HMRC’s recent
clarification on the practicalities of
the detailed patent box calculations.
In particular, the commercial view
taken in respect of the marketing
return appears fairer than the
legislation originally implied, with
restrictions seemingly focussed on
the largest consumer brands.”
Wendy Nicholls, Head of Transfer Pricing
Calculation of patent box profits
Step 1: Split profits between qualifying for patent box
The regime applies to the profits arising from the sale
of products containing the patented invention, licence
and royalty fees from the patent, proceeds of sale of the
patent and damages for infringement of the patent or other
compensation. The income includes all worldwide income
generated from these sources for the UK company. In other
words all worldwide income relating to the patent and the
patented invention received by the company.
In addition, where a patented process is used in the
manufacture of product for sale then a ‘notional royalty’
can be charged for the use of the patented process and this
will be treated as income from a patent.
The ratio of qualifying income to total income is used to
split taxable profits (after certain adjustments) as step 1.
Step 2: Deduct a routine return
The profit relating to income from qualifying patents or
exclusive licences is then adjusted to allow for a ‘normal’
return on certain overheads.
Step 3: Deduct a brand or marketing return
The aim of this adjustment is to remove the element of
profit that does not relate to the intellectual property in the
patent, such as brand value or normal commercial margin
Do the rules apply to patent pending profits?
If you have applied for a qualifying patent but it has not been
granted yet then the benefit of this Patent Box regime can apply.
The benefit accrues while the patent is pending, and is applied
after the grant of the patent. The accrued benefits are restricted to
the patent profits arising in the six years up to the date of grant of
the patent (and arising after 1 April 2013).
What happens with losses?
If a company makes losses then it may not be beneficial to elect
into the Patent Box regime, although in some cases this may
allow the company to access enhanced losses to offset against
Where a ‘patent loss’ arises (ie the company makes a loss from
its patent income), it can be offset against other patent profits.
If the company is a member of a group and another group
company has patent profits, any remaining patent loss must be
offset against group patent profits. If the patent loss exceeds the
patent profits (including group patent profits), then the excess is
carried forward and offset against future patent profits.