This is Dan Brookes's presentation to Leeds Inventors Group on 8 May 2013. Dan Brookes is a tax director of the Leeds office of BDO. The presentation is an introduction to the patent box, a tax concession for companies with qualifying patents which came into force on 1 April 2013. It introduces the regime, sets out the conditions and contains a worked example. There is also an introduction to the existing R & D credits scheme

1. TAX RELIEFS FOR INNOVATION
PATENT BOX & RESEARCH & DEVELOPMENT TAX
CREDITS REGIME
Summary of the regimes
Dan Brookes
8 May 2013
Copyright © May 13 BDO LLP. All rights reserved.
INVENTORS CLUB

2. PATENT BOX

3. THE BASICS OF THE NEW REGIME
• 10% tax rate on patent profits
• Applies to new and existing patents – granted by HMRC approved
patent offices – UK, European and some EEA.
• From the effective date – income on or after 1 April 2013
• Split year treatment for 2013 year ends
• Phase in over a five year period (60%, 70%, 80%, 90%, 100%)
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4. PATENT BOX
Phasing in the 10% rate
Financial Year 2013-14 2014-15 2015-16 2016-17 2017–18
% of reduced tax rate in
force
60% 70% 80% 90% 100%
Main rate of CT
(proposed)
23% 21% 20% 20% 20%
Small companies rate of
CT
20% 20% 20% 20% 20%
Effective patent box tax rates:
Large companies: 15.2% 13.3% 12% 11% 10%
Small companies: 14% 13% 12% 11% 10%
* Assumes all sales qualify for patent box benefits
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5. THE BASICS OF THE NEW REGIME
Conditions and computation
• Must be a ‗qualifying company‘
• Computation of income in the box = three stage process
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6. WHAT IS A QUALIFYING COMPANY?
• Must hold relevant IP
• Qualifying IP rights, or
• Exclusive licence in respect of qualifying IP rights
• Qualifying IP right
• Patent granted by UK or European Patent Office (plus certain other patent offices)
• Must meet the ―development criteria‖
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7. INTRODUCTION TO PATENTS
IPO definition (paraphrase s1 Patent Act 1977)
• Invention must be
- New, include an inventive step
- Be capable of being made or used in some kind of industry
• Invention must not be
- Scientific or mathematical discovery, theory or method
- Literary, dramatic, musical or artistic work
- Way of performing a mental act, playing a game or doing business
- Presentation of information or some computer programmes
- Animal or plant variety
- Method of medical treatment or diagnosis
- Against public policy or morality
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8. INTRODUCTION TO PATENTS
• Traditionally a form of IP protection granted for up to 20 years
- Maximise the breadth of the monopoly protection (‗broad claim‘)
- Subject to ‗opposition‘ and challenge
• (i) scepticism about value for smaller companies (ii) not traditional in
some industries (iii) concern about public disclosure
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9. PATENT BOX REGIME
Calculation - Follow the Steps…
Step 1
Determine the part of company‘s taxable trading profit that is
attributable to qualifying RIPI income
• Excluding any R+D tax credit enhancement, but not R+D costs themselves
• Exclude interest receipts and financing expenses
• Allocate this adjusted amount between qualifying/non qualifying income
— Turnover from sale of qualifying patents (see example)
— Turnover from other activities
• Allocate expenses on a pro-rata basis between qualifying/non qualifying.
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10. PATENT BOX EXAMPLE
Sale of a car
Patented
steering wheel
Whole of profits from sale of car qualify
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11. PATENT BOX REGIME
Company has trading turnover of £1,000 of which 70% is from the sale of qualifying patent
products. Its tax deductible expenses of £775 include R+D, none of which qualifies for R+D
tax credits, and £75 for marketing.
Step 1 Calculation: Divide taxable profit between qualifying and non qualifying income
(split on a pro-rata basis though actual apportionment can also be used)
Qualifying Non Qualifying Total
Income 700 300 1,000
Expenses
- R+D (£100)
- Marketing (£75)
- Other (£600)
(70)
(52)
(420)
(30)
(23)
(180)
(100)
(75)
(600)
(542) (233) (775)
Taxable trading profit 158 67 225
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12. PATENT BOX REGIME
Calculation - Follow the Steps…
Step 2 Identify Qualifying Residual Profits (QRP)
• Take out ―routine‖ profit that has not arisen from the ownership of the IP
• Routine profit calculated using a cost plus methodology by taking 10% of the aggregate
of the following costs
— Capital allowances
— Premises costs (deductible rent, rates, repairs, power etc)
— Personnel costs
— Plant & machinery costs (deductible leasing / servicing etc)
— Miscellaneous services
• Material content in product is the main excluded element of cost which is not subject to
the 10% adjustment
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13. PATENT BOX REGIME
Qualifying Non Qualifying Total
From Step 1:
Income 700 300 1000
Expense (542) (233) (775)
Taxable profit 158 67 225
Remove ‗Routine Profit‘
-10% of expenses (54) 54 -
Residual profit attributable to qualifying income 104 121 225
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14. PATENT BOX REGIME
Calculation - Follow the Steps…
Step 3 Identify patent box profits by removing ‘Marketing Assets Return’
• Determine how much of residual profit is attributable to the patent and how much is due
to non-patent IP assets – i.e. The awareness of the brand name in the marketplace
• May require a brand valuation to be performed or evaluation of what a company would
pay as a ‗notional marketing royalty‘ to a third party to exploit the assets
• Any actual marketing royalty paid can be deducted from the notional marketing royalty
to arrive the relevant deduction from Qualifying Residual Profits
• Alternative is to elect for small claims treatment which removes 25% of Qualifying
Residual Profit as a Marketing Assets Return.
• Small claims treatment places a ceiling on the profits subject to Patent Box benefits of
£3million.
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15. PATENT BOX REGIME
Qualifying Non Qualifying Total
From Step 1:
Income 700 300 1000
Expense (542) (233) (775)
Taxable profit 158 67 225
Remove ‗Routine Profit‘
- 10% of expenses (54) 54 -
Residual profit attributable to qualifying income 104 121 225
Remove ‗Marketing Assets Return‘
- Assume 5% of sales (35) 35 -
69 156 225
Total tax at 10%/23% 7 36 43
Total tax under old rules at 23% 52
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16. PATENT BOX REGIME
Patent Box Losses
• Losses in early stages of IP development could derive a ‗Relevant IP loss‘
• In the event of a relevant IP loss, the loss must first be offset against any other Patent
Box trades of the same company with Relevant IP Profits
• After any reduction for the above, any remaining loss must be set off against Relevant IP
Profits of other relevant group companies for the relevant accounting period
• If, after the application of both of the above offsets, the company has a remaining set-
off amount, this is carried forward against any Relevant IP profit arising in the following
accounting period
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17. PATENT BOX REGIME
Other considerations
• A separate calculation must be carried out for each company holding a qualifying patent
• As patent profits may be generated between application and grant, there is a look back
period between application and grant of the patent. These profits can qualify for Patent
Box benefits
• Patent Box benefits can be utilised in addition to claiming R&D tax credits
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18. PATENT BOX REGIME
Potential Action Points
• Confirm first accounting period when Patent Box applies (profits arising post 1 April
2013)
• Confirm history of patents – date of grant or application and country of registration
• Extrapolation of underlying income streams
• Preliminary feasibility – decision as to whether to opt into the regime
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19. RESEARCH AND DEVELOPMENT TAX CREDITS

20. RESEARCH AND DEVELOPMENT
BENEFITS
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• Monetary benefits
Small companies (less than 500 employees and either turnover less than €100
million or assets of less than €86 million).
- For every £100 of qualifying expenditure, the company is entitled to an additional £125
deduction for tax purposes
- At a tax rate of 23% this equates to a benefit of £28.75 for every £100 of qualifying expenditure
Large companies (more than 500 employees)
- For every £100 of qualifying expenditure, the company is entitled to an additional £30 deduction
for tax purposes
- At a tax rate of 23% this equates to a benefit of £6.90 for every £100 of qualifying expenditure
• Cash repayment – available from 1 April 2013 for large companies
• Tax R&D is different to accounting R&D

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RESEARCH AND DEVELOPMENT
WHICH PROJECTS QUALIFY?
Per DTI Guidelines
• The Project must be seeking to obtain an advance in science or technology.
• Activities that are qualifying R&D are those that directly contribute to the
advance, through the resolution of scientific or technological uncertainty (see
examples)
• Does it qualify – it is considered from the viewpoint of a ‗competent
professional in the field‘

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RESEARCH AND DEVELOPMENT
TYPICAL QUALIFYING EXPENDITURE
• Wages and salary costs
• Consumable materials
• Utilities
• Software
• Qualifying indirect overheads

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