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Budget 2012 - Patent Box and Research & Development (‘R&D’) tax incentives

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21 March 2012

The Budget confirmed that improvements to R&D tax incentives that had previously been announced will feature in the 2012 Finance Bill and will be effective from 1 April 2012.  These include:

  • An increase in the rate of enhancement of tax relief for qualifying R&D expenditure from 100% to 125%.  This means that £100 of eligible R&D costs will give a tax deduction of £225;
  • The current cap on the amount of payable credits that can be claimed (limited to the PAYE and National Insurance paid by the company in the period) will be removed; and
  • The £10,000 minimum qualifying expenditure for a claim will be removed 

The Chancellor also confirmed that legislation will be tabled in Finance Bill 2012 to introduce new tax incentives for companies making profits from UK and European patents.  The draft legislation for these tax incentives had previously been published in December 2011 after consultation with industry and professionals.

The Patent Box will complement the existing tax incentives for Research and Development and will effectively allow eligible claimant companies to apply a corporation tax rate of just 10% to its profits within the Patent Box.  The new tax incentives will be phased in over a four to five year period from 1 April 2013 and according to Treasury figures, the Patent Box is expected to deliver total annual tax savings to UK business of almost £1 billion.

Some key features of the Patent Box proposals are as follows:
  • it will apply to existing patents as well as new patents;
  • it will apply to worldwide profits generated from qualifying patents;
  • there is a mechanism for it effectively to apply to profits arising during the ‘patent pending’ period, provided appropriate action is taken in advance;
  • it is not sector specific; any company with qualifying IP will be eligible;
  • it will apply to profits from products incorporating patented technologies, only one patent is required for the whole of the profits on the product to come within the Patent Box
  • it will include not only profits from sales of patented products but also other forms of patent profits, for example royalties from exclusive licences, sale of the patent, damages for infringement etc
  • patented tools and patented processes used in the production process can effectively be included; the attributable profits are identified via a notional royalty

It should be noted that the Patent Box tax incentives will not apply automatically; they must actively be claimed through the company’s corporation tax self assessment return.

There is also a beneficial interaction with R&D tax incentives; the more expenditure identified as qualifying R&D, the more profits will qualify for the 10% Patent Box tax rate.

The Patent Box tax savings may be optimised with some advance planning.