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Patent Box: The Old vs. New rules

Under the previous patent box rules, as long as a UK company owned a UK or European patent (or exclusive rights to that patent), there was no requirement for a connection to be made between the underlying R&D activity and the Patent itself; so all worldwide sales derived from that patent going into the UK company was included in the three-step patent box calculation:

  1. Separate taxable profits into either a patent box stream or a non-patent box stream.
  2. Reduce this by an element of normal profit using the routine return deduction.
  3. Deduct an element of profits relating to brand value, known as the marketing asset return.

The result is Relevant Intellectual Property (IP) Profits to which the reduced patent box tax rate (10%) applies.

There are detailed eligibility requirements – for example, the company must have made a significant contribution to the creation or development of the patented item or a product incorporating this item.

New rules

The basic calculation for patent box retains the same three key steps, but the modified rules will insert an additional calculation.

The new rules are based on a ‘modified nexus’ approach linking relevant R&D expenditure to the patent or patented item.

The link is in the form of an R&D fraction which is calculated for each type of IP (assets, products, or product families) to which income is attributable. The calculation is based on cumulative R&D expenditure by the company.

The new calculation is given as:

the lesser of 1 and (D+S1) x 1.3 / D+S1+S2+A

D = In-house qualifying relevant expenditure on R&D

S1 = Qualifying relevant expenditure on R&D subcontracted to third parties

S2 = Qualifying relevant expenditure on R&D subcontracted to connected persons

A = Expenditure on acquisition of qualifying IP.

The result of the calculation is then multiplied by the Relevant IP Profits as calculated under the existing rules for each type of IP.