Patent Box sits alongside R&D tax relief as a strong financial incentive for companies to innovate. Patent Box was introduced by the government in April 2013 to reward the active exploitation of patented technology in the UK and remains a very generous tax relief for businesses utilising their patents.
How does Patent Box work?
By electing to use Patent Box you can receive a 10% tax rate, reduced from the headline corporation tax rate of 19%. This tax reduction could easily outweigh the cost of obtaining a UK patent and potentially could generate a substantial cash injection to your business.
What income qualifies for the reduced tax rate?
To be eligible for the effective Corporation tax rate of 10%, income will need to come from at least one of the following:
- The sale of patented products or products containing a patented invention or bespoke spare parts
- The licensing of patent rights
- The sale patented rights
- Infringement income
- Damages, insurance or other compensation related to patent rights
- Your company can also benefit from the Patent Box if it uses a manufacturing process that is patented or provides a service using a patented tool
Do you need to be making profit from your own inventions?
Patent holders sometimes license their inventions to others for them to develop. If your company holds licenses to use someone else’s technology, you may still benefit from the Patent Box regime.
You must meet all of the following conditions
- Rights to develop, exploit and defend rights in the patented invention
- One or more rights to the exclusion of all other persons (including the licensor)
- Exclusivity throughout at least an entire national territory – rights to manufacture or sell within part of a country, for example, would not qualify as exclusive
Is Patent Box complicated?
In order to protect the scheme from abuse, the rules were tightened up in 2016. Now it is a requirement for companies to demonstrate that they are actively doing something with their patents. So it’s no longer enough to show that you have qualifying patents or Intellectual Property.
The calculations for determining the qualifying expenditure for Patent Box tax relief can be complex and may need specific tax advice
What does an average Patent Box claim look like?
In 2016-17, 1,025 companies claimed £942.5 million relief using the Patent Box.*
Most companies claimed were in the ‘Manufacturing’ sector (54.6%), followed by ‘Wholesale & Retail Trade, Repairs’ (18.0%). Companies in Manufacturing also claimed the highest value of relief under the Patent Box (37.1%), followed by ‘Professional, Scientific and Technical Activities’ (15.0%).
More than a quarter of companies claiming relief under the Patent Box in 2015-16 were classified as ‘large’ (28.4% of the total). So ‘medium’ and ‘small’ and ‘micro’ companies made up the rest.
And why are more firms not claiming?
Some start-up companies don’t claim if they aren’t generating revenue or profits yet. There will be others who haven’t filed patents – which raises another question about why firms choose to patent. There may be commercial reasons to consider filing for a patent, as well as the need to legally protect IP or competitive advantage. There may also be a few businesses that cannot claim for technical reasons.
However, we should be seeing more companies using the Patent Box scheme – everyone who is claiming R&D tax relief at least has the potential to benefit from Patent Box.
To find out if you can benefit, speak to one of our experienced specialists today by calling 01727 738600 or getting in touch through our web form today.
*Source: HMRC, September 2018