The much talked about patent box legislation came into effect for relevant profits arising on or after 1 April 2013. There have been many articles looking at how patent box works but in this blog I want to look at some of the less talked about, but just as important, aspects of the relief.
When does the relief start?
The new legislation has effect for accounting periods starting on or after 1 April 2013. The important point, however, is that sub clauses (2) and (3) apply where a company has an accounting period straddling 1 April 2013. Such a period is treated, for these purposes, as two separate accounting periods, one ending on 31 March and one starting on 1 April. The relevant profits of that second period will be eligible for consideration for the patent box.
I’ve got losses, should I elect into the patent box?
If your s 357C (or 357DA, if appropriate) CTA 2010 computation currently produces relevant IP losses, then it is almost certainly better to stay out of the patent box at this stage. Patent box losses must be set off against patent box profits. If the company is a member of a group, the losses must be set off against patent box profits of other group members before the relief is computed in those companies. If there aren’t any group companies with patent box profits, the losses must be carried forward and set off against future patent box profits of the claimant company.
A word of caution, the offset of available patent box losses in a group is mandatory. The definition of ‘group’ for patent box purposes is quite broad so make sure you know whether you are in such a group and, if so, whether other companies have patent box losses that you may need to offset.
There are scenarios, however, where you might still want to elect into the patent box regime even with losses. The legislation recognises that the patent application process can be quite long and in some cases profits may arise after the patent has been applied for, but prior to its actual grant. The legislation provides a mechanism for including such profits for up to 6 years prior to the grant of the patent. Following an election (s 357CQ CTA 2010), these amounts are added to the relevant IP profits of the period in which the patent is granted.
In order to make the election, the company must have been within the patent box (i.e. have made an election under s 357A CTA 2010) in the period in which the profits actually arose. Therefore, if you currently anticipate patent box losses but there is significant profit from a “patent pending” invention, it might still be worth electing into the patent box now. Ultimately, a little bit of financial forecasting will be required to enable a decision to be made.
Should I opt for streaming rather than the formulaic approach?
S 357C CTA 2010 provides a formulaic approach to identifying the relevant patent box profits; it is possible to elect for an alternative approach, known as streaming. The streaming approach is set out in s 357DA CTA 2010. Broadly, this involves a more direct splitting of income and expenditure between IP and non-IP related sources.
Streaming may be worth considering if you have a significant amount of non-IP income that is less profitable than the relevant IP income.
Note that streaming is mandatory if certain conditions are met.
We use a patented production process, can we benefit from patent box?
Companies sometimes use patents in industrial processes. Whilst it will not be possible to directly include income from products produced using such patented processes, companies will be able to compute a notional royalty income from such patents. In this way a proportion of the profits will be able to be included in the patent box. Essentially, the notional royalty is the proportion of the income (which is not otherwise relevant IP income) arising directly from the use of the patent which the company would have to pay to a third party for use of the patented process (assuming it didn’t already have the right to use that process).
Should I start applying for patents?
The availability of the patent box relief is one factor to consider in the company’s IP protection policy. However, its availability may just mean that seeking patent protection makes more sense. Anecdotal evidence suggests that there has been an increase in patent applications. The process of obtaining a UK patent, however, is quite long and earlier this year the IPO launched a consultation process looking at the possibility of introducing an accelerated process. The results of that consultation seem to have been generally negative and the Government has decided not to proceed with it at present.
This article first appeared on economia
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