Patent Box – Corporation Tax main rate consequential amendment
Published 15 March 2023
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This publication is available at https://www.gov.uk/government/publications/patent-box-consequential-amendment-to-patent-box-deduction-formula/patent-box-corporation-tax-main-rate-consequential-amendment
Who is likely to be affected
Companies elected into the Patent Box incentive which will continue to pay Corporation Tax at 19% from 1 April 2023 (the ‘small profits rate’).
General description of the measure
The wording of the Patent Box formula which currently refers to ‘main rate’ Corporation Tax will be amended to refer to the company’s ‘applicable rate’ of Corporation Tax to ensure the formula remains accurate and clarifies which rate should be used.
Policy objective
This is a legislative fix required as a consequence of having more than one rate of Corporation Tax, it will ensure companies with profits of £50,000 or less, which will be paying the small profits rate of Corporation Tax introduced from April 2023, pay the correct preferential rate of Corporation Tax on their Patent Box profits.
Background to the measure
The Patent Box is a lower rate of Corporation Tax, 10%, for profits attributable to patents and other similarly robust intellectual property. Its intention is to incentivise the commercialisation of IP in the UK.
The Patent Box rate isn’t available on all of a company’s profits. It is only available on profits from exploiting patented inventions. The remainder of a Patent Box claimant’s profits is subject to their applicable rate of Corporation Tax.
The Patent Box rate is delivered through an additional deduction from profits subject to Corporation Tax.
The legislation for calculating this deduction requires amendment to ensure it delivers the correct rate for companies with profits of £50,000 or less which will be subject to the new small profits rate of Corporation Tax from its introduction in April 2023 rather than the main rate of Corporation Tax.
Leaving the formula unamended would result in these companies, effectively, paying a rate lower than 10% on their relevant Patent Box income. This is contrary to the policy intent of the Patent Box.
The legislative fix is straight forward, will resolve an area of potential confusion, and comes with negligible impact on the Exchequer.
Detailed proposal
Operative date
The measure will have effect for accounting periods commencing on and after 1 April 2023.
Current law
Current law is enacted in section 357A Corporation Taxes Act 2010.
Proposed revisions
The Patent Box formula currently creates a ‘Patent Box deduction’ which reduces profits to which main rate Corporation Tax is applied. It achieves the same amount of Corporation Tax payable as the Patent Box profits taxed at the preferential rate of 10% plus other profits taxed at the main rate. The purpose for this step is to retain only the one ‘profit entry’ on the CT600 Corporation Tax return.
The proposed amendment to section 357A aligns the Corporation Tax rates used in the Patent Box formula with the Corporation Tax rate charged on the return. This is achieved by amending the wording in the formula from ‘main rate’ to ‘applicable rate’ of Corporation Tax, and defining applicable rate.
Summary of impacts
Exchequer impact (£m)
| 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 |
|---|---|---|---|---|---|
| — | Negligible | Negligible | Negligible | Negligible | Negligible |
This measure is expected to have a negligible impact on the Exchequer.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
There is expected to be no impact on individuals as this measure relates to a company incentive.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
It is not expected that there will be adverse effects on any group sharing protected characteristics.
Impact on business including civil society organisations
This measure is not expected to impact on businesses or civil society organisations. This is a legislative fix designed to retain the status quo for those companies that have elected into the patent box incentive.
Operational impact (£m) (HMRC or other)
This is a legislative fix only. There is no operational impact.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The Patent Box incentive is monitored and was last evaluated in November 2020.
There will be a further evaluation when sufficient data has been obtained to understand the impact of the FA16 amendments introducing the new rules required by OECD.
Further advice
If you have any questions about this change, please contact Jane James, CT Innovation and Growth team, HMRC on 03000 594901 or jane.james@hmrc.gov.uk.