Should your company elect in to the Patent Box?
You’re not out of time but don’t be out of touch…
Bad Hall & Oates songs aside, the Patent Box is a complicated beast and 2018 is likely to be a crucial year for determining whether you should elect in. So here is some clarity if yours is a loss-making company.
The Patent Box provides for a 10% rate of corporation tax on patent-related profits, by giving an extra tax deduction. Therefore, for a company that owns or has an exclusive licence to a patent it would seem sensible to elect in to the scheme as soon as possible. Electing in means making a Patent Box election in the company’s corporation tax return.
But be careful
If you elect in before a company has made taxable profits then you cannot use the Patent Box deduction – the deduction becomes an IP loss that is carried forward and reduces future Patent Box deductions. It is therefore best to wait until you have taxable profits.
In fact, at the extreme, you can wait until two years after the end of the accounting period before making the election in your tax return – for example, for a year end of December 31, 2017 with taxable profits, you can wait until December 31, 2019 before putting in a claim. Conversely, if the company opted in within that two-year window and there was then a change of mind it could opt out again provided the return was submitted within the two years.
So can you relax?
If you have a company that meets the following criteria then you probably can relax – as set out above, you have two years from the end of each accounting period.
- No IP acquisition cost (either lump sums or royalties) and
- has not used group companies to do its R&D.
If you have IP acquisition costs or have used group companies to do R&D then you might want to elect in for the accounting period that includes July 1, 2016, even if this is before you have taxable profits. For example, for a December 31, 2016 year end this means electing in by December 31 December 2018.
Electing in for that period, which includes July 1, 2016, gets you into the ‘old’ Patent Box rules, where IP acquisition cost and group R&D companies don’t matter as they won’t reduce your Patent Box deductions. You would then stay elected into those old rules until 2021.
If you elect in after that accounting period then you will be bound by the new rules where IP acquisition cost and group R&D companies will reduce your Patent Box benefits.
How do I decide?
Set up spreadsheets based on forecasts to work out when you might pay tax based on electing either early or late when you have taxable profits. Or you can contact us to help you navigate through the process of finding out what is best for your company.