CIRD201020 - Patent Box: reduced CT rate for profits from patents: patent box election
CTA10/S357A
From 1 April 2013 companies may elect into the Patent Box regime. The Patent Box allows qualifying companies (CIRD210000) to be taxed at a reduced rate on the profits from exploiting patents and other specified intellectual property. Their other profits are taxed at their applicable rate of corporation tax.
The calculation to blend the Patent Box reduced rate and the applicable rate of corporation tax requires an additional deduction (鈥榯he Patent Box deduction鈥�) from the profits of the trade for corporation tax purposes for each of the accounting periods it is a qualifying company. CTA10/s357(3) provides the calculation:
For Accounting Periods commencing before 1 April 2023 the calculation for the Patent Box deduction is -
RP x (MR - IPR) / MR
Where -
RP is the Relevant Intellectual Property Profits (CIRD220000)
MR is the main rate of corporation tax ( /manual/company-taxation-manual/ctm01750), and
IPR is the 10% Intellectual Property Rate of corporation tax.
For Accounting Periods commencing on or after 1 April 2023 this calcuation is amended to RP x (AR - IPR) / AR
where RP and IPR remain as defined above and AR is defined as 鈥楢pplicable Rate鈥� which is:
(a) in a case where corporation tax is charged at the standard small profits rate on the company鈥檚 taxable total profits of the accounting period which are not ring fence profits, that rate, or (b) in any other case, the main rate of corporation tax.
The profit figure to which the Applicable Rate applies is the amount of profit prior to the Patent Box deduction.
For accounting periods which straddle 1 April 2023 there is no requirement to calculate separate notional Patent Box calculations as the rates apply to the profits apportioned between the Financial Years FY23 and FY24.
Example
If a company has corporation tax trade profits in an accounting period commencing on 1 April 2023 of 拢40,000 and 拢10,000 of these qualify for the Patent Box, then the tax 鈥榮aving鈥� from the Patent Box will be the difference between 拢10,000 x 19% and 拢10,000 x 10% which is 拢900. The 鈥楢pplicable Rate鈥� for 拢40,000 is small profits rate of corporation tax.
The calculation for CT600 purposes will be as follows:
Patent Box deduction 拢10,000 x ((19-10)/19) = 拢4,737
Profits chargeable to corporation tax after Patent Box deduction = 拢40,000 - 拢4,737 =拢35,262
Tax payable 拢35,262 x 19% = 拢6,699.78
Tax payable at 19% on 拢40,000 = 拢7,600, so a Patent Box benefit of 拢901. There will occasionally be minor differences such as this, especially where marginal rate is applied to the 鈥榥on Patent Box鈥� profits due to the automated computation.