Blog: Tax Talk – The Patent Box Calculation

Date: September 2, 2019

By Nigel Holmes, Head of R&D Technical Operations at Catax.

In last month’s Tax Talk, Nigel looked at some of the reasons for the low take up of the Patent Box tax relief. In this edition, he examines one of the issues in a little more detail – the complexity of the calculations.

The headline-grabbing benefit of Patent Box is a 10% Corporation Tax rate. In fact this is not true, there is no 10% rate but rather a series of steps and what can seem like baffling calculations in order to produce an adjustment to lower taxable profits to give rise to an effective 10% tax charge on these profits.

So how is the adjustment calculated?

Firstly, the company’s income (turnover) is streamed into income from patents and non-patented income. The patent stream is sub-divided if the company has multiple patents.

Next, various deductions are made from this figure. Costs are allocated to the patent stream on a just and reasonable basis and further deductions known as the routine return and marketing return are made.

The next step is to apply the R&D fraction which adjusts the figure so far for R&D undertaken by third parties.

Then additional relief is applied known as pre-grant relief. This was mentioned in my last article. Patent Box relief that would have been available during the patent pending period is added to the ongoing figure being calculated.

Finally, for earlier claims, the phasing in period adjustment is made.

Only now can the calculation take place to work out the actual Patent Box relief.

This is a very simplified overview of the complex steps and calculations but, of course, there is no need to use complexity as a reason not to proceed as that is what Catax are here for, to remove this complexity by doing these calculations for you.

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