Making best use of available tax incentives can reduce the tax burden on a company and enable greater re-investment into the business. The UK’s Patent Box Regime is a generous and often underclaimed relief that was introduced to incentivise companies to retain and commercialise existing patents, and to develop new innovative patented products.

The Benefit

The aim of the UK Patent Box Regime is to tax the profits generated from qualifying patents at a preferential rate of 10%, rather than the standard rate of corporation tax (currently 19%).

The relief applies to profits of a UK business that are generated from the worldwide sales of patented products, even if the patent only applies to a small part of the total product. It can also apply where patents have been acquired, but there are some additional conditions to meet and the relief may be restricted.

Eligibility

The UK Patent Box regime is available for UK companies exploiting qualifying UK or European patents; patents only qualify if they are granted by the UK Intellectual Property Office, the European Patent Office, or specified EEA countries.

The regime can apply to existing, newly granted or acquired patents, however the UK company must have had, or intend to have, a significant involvement in development of the patented invention, or a product incorporating the patented item.

An election into the Patent Box regime must be made by the company within two years after the end of the relevant accounting period in which relief is to be claimed.

The calculation

An additional deduction is claimed in the company’s tax computation to give an effective tax rate on qualifying intellectual property profits of 10%. This additional deduction follows a multi-step calculation to determine the amount available for Patent Box relief. The aim of the calculation is to stream the income of the business and identify the profits that are attributable to the patent sales. This includes adjustments for other areas of the business, such as other product sales, marketing, staff and premises expenditure, that might ordinarily drive the profits of the business.

The Patent Box rules were amended on 1 July 2016, although grandfathering provisions will apply until 30 June 2021, to add the requirement for a link between the patent on which the relief is being claimed and the company carrying out the associated R&D activity. This restricts the benefit to the company where it has outsourced R&D to related parties or has acquired the IP (there are also some additional administrative requirements in calculating the relief available).

How we can help

The eligibility criteria and calculation of the Patent Box benefit may be complex, but the savings can be substantial. In order to maximise the potential benefits of the regime, it is worthwhile undertaking an initial benefits analysis as soon as possible.

We can help review your patents, pending patents and development activities to determine whether or not they fall within the UK Patent Box Regime and advise you on how Patent Box relief can be claimed in your tax returns.

Once eligibility is confirmed, we can assist with the elections, calculations and ongoing monitoring. Typically, it is worth investing in more detailed upfront work to establish the basis of the calculations, and then the work required in calculating the benefit in the following years is usually much more manageable.