Patent Box
Companies exploiting patented products, processes and innovations
can slash their Corporation Tax bill
Companies exploiting patented products, processes and innovations can slash their Corporation Tax bill
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What is ‘Patent Box’?
Patent Box was introduced to encourage companies to retain their intellectual property in the UK. The Patent Box achieves this by allowing companies to benefit from a significantly reduced rate of Corporation Tax on profits derived from its patented inventions.
What is the benefit of the Patent Box for my company?
Your company can benefit from a 10% rate of Corporation Tax on its income from patented products, or processes. That is a generous tax break even with the current rate of Corporation Tax at 19%. It becomes even more generous in 2023 when the rate jumps up to 25%.
Profits arising from the exploitation of Patents
The patent box regime allows qualifying companies to apply the reduced corporation tax rate to profits arising from:
- selling the patented products or selling a product which incorporates the patented invention.
- licensing patent rights.
- selling patented rights.
- damages or other compensation related to patent rights.
- manufacture using a patented process.
- providing a service using a patented tool or process.
What IP rights does the patent box regime apply to?
Part 8A Corporation Tax Act 2010 lists the rights to which the Patent Box regime applies. These are:
- a patent granted by the UK Intellectual Property Office under the Patents Act 1977.
- a patent granted by the European Patent Office.
- a patent granted under the law of certain specified European Economic Area states.
- rights similar to patents including rights arising under new legislation which came into force after the end of the UK transition. As a consequence of the UK leaving the EU.
The ‘rights similar to patents’ which are listed in the legislation include supplementary protection certificates relating to medicinal and plant protection products and medicinal and veterinary products with marketing authorisations and marketing or data protection.
How to access the patent box benefits
The patent box tax incentive is available to companies which pay UK corporation tax and which also have profits arising from the exploitation of patents (see above). Access to the tax incentive is not automatic. Companies must make an election into the regime. The election must specify the first accounting period for which it is to apply and it will automatically have effect for all subsequent accounting periods until it is revoked by the company. If an election is revoked, the company cannot then re-elect into the regime for five years. This is to prevent them dipping in and out of the regime depending on profits or losses in order to gain a tax advantage.
Patents pending
A company which has applied for a patent which has not yet been granted can still elect into the regime and calculate the relevant corporation tax deduction. It cannot immediately access the effective 10% rate of tax but in the accounting period in which the patent is eventually granted, it can apply the accumulated deductions for up to six years to the profits of the year of grant. Clearly, it makes sense to make a patent box election at the same time as a patent application.
Calculating relevant IP profits
The calculation of relevant IP profits is admittedly complex and relies on the application of accounting principles. In essence it consists of a number of stages. These are:
- identification of the income arising from exploiting a patented invention.
- deducting a figure from that income expenses which are allocated on a just and reasonable basis.
- deducting further amounts which relate to routine activities and marketing activities.
The idea behind the various stages is to arrive at a deduction that has been pared down so that it only reflects profits relating to underlying patented technology.
As a final hoop to jump through, an R&D fraction is then calculated and applied to the deduction. The R&D fraction ensures that companies which undertake their R&D in-house or subcontract it to an unconnected third party will benefit more from the patent box tax incentive.
How could my company Benefit?
The best way to illustrate this is by way of an example. If we assume that your company makes profits of £1 million in an accounting year and, of that amount, your profit from qualifying IP items is £500,000. In the absence of a patent box claim the corporation tax due at today’s rates would be £190,000. However, if a Patent Box election is made, the corporation tax bill is reduced to £145,000
When the main rate of Corporation tax increases to 25% in 2023, using the same figures and without a Patent Box election the corporation tax due would be £250,000. By making a Patent Box election that tax liability would be reduced to £175,000.
Is the Patent Box underused?
Yes, it is. Despite the very valuable tax benefits, some accountants are put off by the complexity of the calculation and discourage their clients from electing. Possibly they do not understand the full extent of the profits to which the tax incentive applies.
On the other hand, we have heard anecdotal evidence from patent attorneys that they have some clients who apply for patents with no intention of benefiting from the protection that they afford. Instead, they make their application solely to access the patent box tax deduction.
Patent Box rules are complex
The calculation of relevant income is very complicated. Many professional firms will not advise on it themselves and will often steer their clients away from it too.
Friend Partnership has been providing a Patent Box services to our clients since the regime was first introduced in 2013 and have a detailed working knowledge of the process and the complex legislation which underpins it.
Patent Box Knowledge Base
