Patent Boxes – have you ticked them all?
One of the more generous corporation tax reliefs still available to companies in the UK is now worth more than it ever has been… but as a result, HMRC want to make sure that those that claim it aren’t going outside the lines.
In October’s budget it was announced that, despite rises and reforms in many areas of tax, the Government were keen to maintain the generosity of certain corporation tax reliefs including Patent Box tax relief. This is now worth up to 15p in the £1 in tax relief for companies that generate profits from qualifying IP (intellectual property).
Earlier this month HMRC published new guidance for Patent Box compliance as a result of many claims being submitted either without sufficient explanation and substantiations for the rationale used within the calculations and/or not comprehensively checking that the claim complied with all of the relevant criteria required for a claim to be made in the first place.
The guidance covers a number of areas where claimants can provide further information and explanations to help avoid errors and the need for further questioning which includes the following:
- Checking that qualifying rights (generally patents but also exclusive licences and other rights similar to patents) are actually held at the time of making the claim.
- Making sure that every step of the required calculation is being considered and calculated.
- Ensuring full consideration of the facts and circumstances for claimant companies.
Following the recently published guidance will not necessarily prevent an enquiry from being opened into a Patent Box tax relief claim, but it will go a long way towards addressing any questions that HMRC may ask in respect of a claim. It is always good practice to include the following information when submitting a return:
- How and why a company qualifies for Patent Box relief, particularly in group scenarios where there may be multiple claimants.
- Information about qualifying IP rights held by the company and/or group including the type of IP and the jurisdiction(s) which it covers.
- How the relevant claimant company(s) meet the development condition and/or active ownership condition.
In terms of actually calculating the Patent Box benefit, information that HMRC will find very helpful includes the following:
- How qualifying IP income has been derived and how it has been split into different “streams” where there are multiple products and/or patent families.
- The extent to which the company has streamed its expenditure (which will often depend on the sophistication of the company’s internal accounting systems).
- How the “Nexus” R&D fraction has been calculated and allocated amongst streams, where applicable.
- Where the company has claimed a “notional royalty,” the rationale behind its calculation.
- An explanation of how the “marketing assets return” has been calculated, and where this has not been applied the rationale behind this.
- Details of any of the available “small claims” treatment elections.
- Calculations of any profits arising before grant (where patents are still pending grant).
- Details of any cost-sharing arrangements where there are multiple developers and/or claimants.
Finally, HMRC make a point of mentioning good record keeping; what constitutes a satisfactory level of detail when making a claim will depend to some extent on the size of the company and claimant, as there will be an expectation that larger organisations have more detailed records than smaller entities. However, it is always good practice to use as much detail as possible when making a claim and to keep this information on file for at least six years.
It is clear from the guidance above that HMRC want to ensure that the Patent Box scheme does not suffer the same level of abuse that befell the R&D tax relief scheme, and are trying to control this before it gets out of hand. It is, however, still a largely underclaimed relief in comparison to its better-known cousin, and any company that does own IP (whether it has been granted or still awaiting grant) that makes a profit on the sale of any products or services deriving from that IP should certainly look at whether they should be claiming this very welcome relief.
If you have any questions or queries or have a claim that you feel would benefit from a review, please get in touch at hello@yes.tax
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