Now that the Patent Box has been around for over a year, more and more claims are starting to be prepared as accounting periods end and company accounts start to be prepared. As much as an adviser can respond to HM Revenue and Customs consultations, read the legislation and speak to companies about their potential claims, actually preparing the claims is the best way to learn about the relief and I have learnt a huge amount in the last few months.
A quick summary for those who aren’t aware; the patent box is effectively a 10% rate of corporation tax for income from patents. The lowest corporation tax rate is 20%, so this presents an extremely good tax saving for many companies. The calculations are quite complex, so I won’t go into them in detail here.
A lot of the claims are as we expected. The way the relief is being phased in, combined with only an element of an accounting period qualifying for the relief means that a lot of the early returns are relatively small. However a few claims have been large and time and effort at the start on what might currently be a small claim will mostly save time in future when the claims become larger.
One way the claims are being phased in is that to balance HMRC’s books they are effectively gradually decreasing the rate of corporation tax to the 10% mark. A company will have to apply a percentage to its profits from patents, so for 2013/14 you can only include 60% of your patent profits in the claim, this increases by 10% per annum finishing at 100% from 1 April 2017.
Secondly, only income from 1 April 2014 counts towards the relief so, for example, if a company has a July 2014 year end, only the last three months patent income will be included in a claim.
One way we increased this for a client is by opting for the ‘streaming’ route. One of our clients with a September 2014 year end could only claim for six months, but by adopting the streaming rather than the standard calculation we increased their tax savings by almost nine times. The standard calculation is prepared by apportioning the taxable profits relating to the patent income, but by opting to stream, you can accurately calculate the profits attributable to the patent. Hence, if the patent income is more profitable than the company’s other income streams you can save a lot of money. This is often the case because the patent income tends to come from more specialist higher profit areas.
Preparing the claims themselves has been extremely complex, but the more I have prepared the less complex they have become and I can really see some of my clients getting a large benefit from the claim even before it has been fully implemented. The next few years will be interesting as me and other tax advisers have more discussions with HMRC about the claims.
