Kevin Smyth, Senior Manager Corporate Tax in Bournemouth, looks at the UK Patent Box Regime and what business is eligible for the scheme.
UK Patent Box
The Patent Box regime is a generous tax incentive that is less well-known than Research and Development (R&D) tax credits. It could be time for your company to take advantage of this underutilised tax relief.
With corporation tax rates having risen to 25% from 1 April 2023, this scheme is increasingly attractive to UK companies looking to reduce their corporation tax liabilities.
What is the Patent Box regime?
The regime is a tax incentive introduced in 2013 to encourage innovation in the UK. Companies can benefit from an effective 10% corporation tax rate on relevant taxable profits arising from patented technology, medicinal and botanic innovation rights.
In general, approximately 20,000 patent applications are submitted each year to the Intellectual Property Office (IPO). It should be noted that it can take several years from submission of a patent to it eventually being granted.
As innovation in areas such as artificial intelligence and alternative technologies continues to develop at pace, both companies and entrepreneurs at the forefront of such innovation should certainly keep in mind the opportunities which Patent Box presents.
Is your business eligible for the Patent Box scheme?
To qualify for Patent Box, a company liable to UK corporation tax must make profits from exploiting qualifying patented inventions or processes.
A product may only need one patented component for all its revenue to fall within the regime. By way of a simple example, if one component of a car is patented (eg an exhaust), it may be possible for the total taxable profits from the sale of the car to be brought into the Patent Box regime. Relevant intellectual property (IP) profits should then be subject to an effective 10% corporation tax rate – saving up to 15% corporation tax on these profits.
Broadly, companies already owning qualifying patents (or holding exclusive licences for the rights to those patents) granted by the IPO, the European Patent Office or other certain European patent offices will meet the first condition for eligibility. These businesses should consider whether they can take advantage of this very beneficial regime which complements the R&D tax credit relief system.
If you’ve applied for a patent that is expected to be profitable, but it’s not yet been granted, the benefit of Patent Box can still apply, although the related relief will be provided in the period the patent is granted.
For those not already holding patents but undertaking innovation, it may be worthwhile thinking about applying for a patent to benefit from the Patent Box regime.
In all cases, the company must be involved in the development/innovation of qualifying IP rights or products incorporating the patented invention.
R&D tax relief and Patent Box calculations
The effective 10% tax rate is given by an additional deduction within the corporation tax computation. This reduces taxable trading profits or creates/increases taxable losses, which can be used to offset against previous/future or group companies’ taxable profits. Unlike R&D tax credits, it can’t be exchanged for a cash repayment.
As the Patent Box complements the R&D tax relief regime, companies claiming under one regime should consider the possibility and merits of claiming under both.
It is widely accepted that the Patent Box regime is complex. However, the benefits of claiming Patent Box can be significant, and so those companies that meet the qualifying conditions should consider taking advantage of it, particularly with UK headline tax rates having increased to 25% from 1 April 2023.
Business owners operating specifically in the manufacturing sector should be aware of the Patent Box relief. Statistics published by HMRC indicate the manufacturing sector accounted for more than 30% of all relief applied. Across all sectors the number of Patent Box claims submitted annually is approximately 1,500, which have resulted in £1.2 billion of tax relief being applied. Together with R&D claims, the Patent Box relief presents an excellent opportunity for businesses who hold patents for the innovations they have created.
Patent Box Regime – how can we help?
We advise a range of businesses and entrepreneurs on the Patent Box to ensure they select the most advantageous time to elect into the regime. We often work with our clients on both R&D and Patent Box to optimise the R&D tax credit relief, and also the benefit of the Patent Box.
If you’d like to understand more about Patent Box and how it could benefit your business, or if you’d like us to put you in touch with patent attorneys to discuss whether a patent application may be successful, please get in touch with your usual Saffery contact or email [email protected]. As ever, this briefing is of a generic nature and you should always take professional advice in relation to your own circumstances.
