Have you heard of the Patent Box Tax Relief? Don’t worry if you haven’t, not many people have. It is a set of complex rules that allows businesses to reduce their tax rate to encourage innovation and intellectual property development. Here’s a guide on the Patent Box Tax Relief to help you.
This guide is intended to be descriptive and technical to highlight the complexities. It is also important to point out that this is a guide, every business will need approach this tax relief correctly for them so make sure you get tailored advice for you.
Typically you will save tax of £3k to £5k per £100k of patented income.
Relief is available on:
- All income generated from the sale of a product which includes a patented item and/or
- Value added using Patented processed
Background
The Patent Box is a tax incentive introduced by the Government to encourage innovation and intellectual property development. It allows companies to benefit from a reduced rate of Corporation Tax on profits derived from qualifying patents and other intellectual property rights.
To qualify for the Patent Box, a company must meet certain criteria and satisfy specific conditions outlined in the legislation. The rules are complex and this complexity increased when the new Patent Box rules were introduced from 1 July 2016. The old rules were grandfathered until 2021 for those companies that elected into Patent Box before July 2016.
The new rules altered the development condition and introduced a modified “nexus approach” to ensure that substantive R & D activity is linked with the Patent Box deduction. You will see the impact of this in the example calculations later.
The Patent Box is marketed as a 10% tax rate but can work out at a different rate, due to the way in which the deduction is claimed.
It is important to be aware of regulations concerning the timing of the claim and other necessary steps as provisional claims can be made from the date of the Patent being filed and registered as “patent pending”.
Eligibility
To qualify for Patent Box, a company liable to UK Corporation Tax must make profits from exploiting qualifying patented inventions (or other certain medicinal or botanic innovation rights).
The company must either own qualifying patents or hold exclusive licences for the rights to those patents, which must have been granted by the UK Intellectual Property Office, the European Patent Office or certain European patent offices.
An exclusive licence needs to give the licensee an exclusive right to exploit the patent in one or more countries and the right to enforce the patent against any infringement of those rights. If the patent is held by a group company and the patent rights are conferred on another company in the group, then that company is to be treated as holding an exclusive licence.
A development condition must also be met. Under the new regime, the company claiming relief will need to be sufficiently involved in the development/innovation of the qualifying IP rights or products incorporating the patented invention. Managing the rights is no longer sufficient as was the case under the old regime for group companies that held qualifying IP rights and allowed other group companies to develop the IP.
Timing
A claim for relief starts by filing a patent, which involves writing an application (usually via a patent attorney) and then filing this with the UK Intellectual Property Office. The point at which this is filed is known as the “filing date” – from a Patent Box perspective this is effectively day one from when relief can eventually be claimed.
The next stage is known as the “publication date”, which is when the patent is actually published. It can take a year or two to get to this stage, assuming that the application is not terminated. From a Patent Box point of view the date is not particularly relevant other than for the knowledge that the patent is moving closer towards being granted.
The final relevant stage is the “date of grant”, which the company generally receives notice of in advance. This can quite often be well over 2 to 3 years from the initial filing date and up to 4 to 5 years for a UK application.
HMRC will allow relief to be claimed for the period before the date of grant and from the filing date. The actual claim is made in the period in which the grant is made and the company can then claim Patent Box relief for that period and up to six years previously, obviously only going back as far as the filing date.
Calculating the claim
If a patent clearly covers a physical product then the sales of this line will qualify.
A Process Patent is a right that covers a system, process, workflow, etc., i.e. something that produces income in an indirect manner.
Although the identification of sales income from patented products should be relatively easy to determine, it may be less clear in the case of processes and services and it may be necessary to calculate a “notional royalty”.
A series of calculations must then be carried out to strip out profits from routine or marketing activities to leave only profits relating to the underlying patented process.
For example if a company’s net profit margin increased from 8% to 12% since incorporating a process patent then it could be reasonably argued that a 4% notional royalty applies. This would be the starting point for identifying the profits that relate to the exploitation of the patented process. Increased sales due to an improved product as a result of the process may be another approach.
There are several deductions which then have to be made as part of the Patent Box calculation which reduces the final deduction that can be applied to the Corporation Tax computation.
Typically you will save tax of £3k to £5k per £100k of patented income. These savings will not change your life but they will represent a decent saving that can cover the cost of your accountancy fees.
Summary and action
The headline Patent Box tax rate is 10% but this remains a headline and not reflective of the actual benefit. Hence, it will be important to work together to maximise the claim and minimise the effort and risk of future challenge.
As highlighted at the beginning of this guide it is vital that you get tailored advice for you and your business.
We can help you to review the tax you pay using the HMRC relief.
This is just Aa guide on the Patent Box Tax Relief, to explore other tax reliefs that could be available to you, check out our tax services.
YOUR TAX PARTNERS LTD
JUNE 2023