August 2013 – Patents Allow Companies To Pay Less Tax
The rate of corporation tax that larger companies pay is coming down to closer match the 20% rate that companies with a turnover of £300,000 or less enjoy, but HMRC is going one step further to encourage innovation and invention within UK industry.
The new Patent Box legislation could allow companies to claim an even lower rate (10%) if profits are generated from the use of patents. The idea is to give companies that design and develop new products an incentive to locate in the UK and retain their intellectual property here, and they would be able to claim the lower rate when they either own or have an exclusive licence to exploit the patent here.
The legislation was enacted in April of this year, and will be introduced in phases over the four years, and includes income from selling products that include the patented component, products manufactures using a process that includes the patented item, from licence fees or royalties, or as income from infringements.
As with most tax legislation, there are a number of loopholes that need to be spotted and avoided, but nothing that a good accountant can’t cope with provided they are given plenty of notice. The main issue is that the accounting systems may have to be adapted so that the relevant income and expenditure associated with the patent can be clearly identified, so the portion of the companies profit that can benefit from the lower rate is properly declared. Failure to get this right would mean the company would have to pay the full amount of tax and lose out on what could be a considerable discount.
If you think your company could benefit from this new tax break you should speak to your accountant as soon as possible about this Patent Box legislation and find out if it does in fact apply to you.