How much could I receive from Patent Box Tax Relief? Patent Box Calculation Example

Patent Box Calculation Example

What is a Patent Box Calculation Example? How much could I receive from Patent Box Tax Relief? How do I calculate Patent Box deduction?

This is the tricky bit, so grab a coffee and brace yourself whilst we cover a Patent Box Calculation Example! The following is a simplified overview, there are many things to consider, so please contact us to discuss further.

The Patent Box Calculation shown below is for the pre-2016 election and is given as an example. The post 2016 election is more complex.

You work out your tax benefit by subtracting an ‘additional trading deduction’ from your Corporation Tax profits. To do this, you first need to work out what your relevant profits are.

To calculate your relevant profits, you need to identify all the profits broadly attributable to exploiting your patented inventions and subtract the “routine profit” (profit that you would still expect to make without the intellectual property) and the “marketing asset return – MAR” (income earned from the branding of the products; rather than from the product itself) from this amount.

Once you have calculated your relevant profits, you can then work out your tax relief.

HMRC provides the following formula to calculate the additional trading deduction you can make from your Corporation Tax profits:

RP x FY% x ((MR – IPR) ÷ MR)

where:

  • RP is the relevant profit
  • FY% refers to the appropriate percentage for the financial year
  • MR is the main rate of Corporation Tax (usually 19%)
  • IPR is the 10% reduced rate.

FY% depends on the tax year in question. The following percentages apply to each financial year:

  • 1 April 2013 to 31 March 2014: 60%
  • 1 April 2014 to 31 March 2015: 70%
  • 1 April 2015 to 31 March 2016: 80%
  • 1 April 2016 to 31 March 2017: 90%
  • from 1 April 2017: 100%.

How to calculate patent box deduction – worked example

A company owns the patent to an innovative medical device. Their relevant IP profits (see above) from the medical device equate to £50,000 in the financial year from 1 April 2019. The rate of corporation tax for that financial year tax is 19%.

The Patent Box deduction is calculated as follows:

£50,000 x 100% x ((19 – 10) ÷ 19) = £23, 684

This amount can then be deducted from the £50,000 to give £26,316. This amount is then charged at the usual 19% Corporation Tax rate, meaning the tax payable is £26,316 x 19% = £5,000.

Without the Patent Box, the company would have paid (19% x £50,000) £9,500 in Corporation Tax on the profits from their medical device, hence Patent Box saves the company £4,500.

If your company’s accounting period spans more than one financial year, you will need to work out the proportion of profits made in each financial year and carry out two separate calculations.

How TBAT can help

We support start-ups and early-stage businesses looking for investment, to grow and develop by applying into the tax relief schemes. Contact us for further information.

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