Patent Box
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.
Frequently asked questions
What is the UK Patent Box Regime?
The UK Patent Box Regime enables businesses to benefit from a preferential rate of tax of 10% on the profits generated from qualifying patents, rather than the standard rate of corporation tax (currently 19%). The company must meet certain eligibility criteria and must calculate the benefit through a detailed calculation.
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.
Is my business eligible for the Patent Box?
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 patents granted by specified EEA countries. This will require the company to either own outright the patent or to have an exclusive licence over a patent to exploit it.
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 the development of the patented invention, or a product incorporating the patented item.
Do I have to develop the patent to be eligible for the patent box regime?
The development condition requires that the UK company must have had, or intend to have, a significant involvement in the development of the patented invention, or a product incorporating the patented item. Essentially, the benefit is reduced in line with the amount of Intellectual Property (IP) that is purchased or Research & Development (R&D) activity outsourced by the company.
If this development condition is only met because of activities of another group company, the claimant company must also actively manage its portfolio of qualifying patent rights. This may include activities such as protecting the patent, researching alternative applications for the patent or licensing others to use the patent.
Can I benefit from the Patent Box regime before the patent is granted?
A company can elect into the regime before a patent has been granted to enable the company to effectively claim tax relief on qualifying profits generated in the period from filing the patent application to the date of the patent grant. However, the accumulated relief is claimed in the tax return for the year the patent is granted.
Is the Patent Box beneficial to loss-making companies?
The benefit of the Patent Box regime is such that taxable profits are reduced in relation to the income derived from the qualifying patents. Where a business is elected into the regime and makes a loss from its qualifying patents, then these ‘patent box losses’ are carried forward to offset future patent box profits from the qualifying patents.
Typically, businesses do not elect into the regime until they are deriving profits from the qualifying patents, particularly given the up-front administration that is involved. However, care is needed to ensure the potential value of electing into the regime isn’t lost by delaying until profits are made, it can be preferential in some situations to elect in during the earlier loss-making period.
What is the ‘Nexus Fraction’ with respect to the UK Patent Box?
The Patent Box rules were amended on 1 July 2016, although grandfathering provisions will apply until 30 June 2021. The main change was to add in the requirement for a link between the patent on which the relief is being claimed and the company carrying out the R&D. This limits the benefit to the company where it has outsourced R&D to related parties or has acquired the IP. Therefore, the company must retain a ‘nexus’ with the original development and the benefit is proportionally reduced as the nexus is diluted.
How is the Patent Box benefit calculated?
The Patent Box benefit is received as an additional deduction in the corporation tax computation. This is calculated via a number of steps, summarised as follows:
- Identify 'relevant IP (intellectual property) income' - profits attributable to income arising from exploiting patented inventions.
- Remove a ‘routine profit’ - an adjustment that is made to reflect the fact that a business would be expected to earn a profit even if it had no access to patented technology or intellectual property.
- Remove the ‘marketing asset return’ – an adjustment for profit associated with other intangible assets, such as brand or other marketing assets.
There are two available approaches for businesses, being the formulaic or streaming methods, however in most cases you must now use the streaming method. The formulaic method identifies the proportion of a business’s profits that are arising solely based on the split of revenue from patented and non-patented sales. The streaming method is more complex and requires full analysis of the business’s income and expenditure such that the income and expenses are split appropriately between patented and non-patented sales.
Calculating the Patent Box benefit can be a daunting prospect, however our specialists at Smith & Williamson are able to work with you to help get this set up. We can also help you amend your internal systems to capture this data real time moving forwards.