Patent Box
The UK Patent Box regime is a tax incentive designed to encourage companies to retain and commercialise IP within the UK. Introduced in 2013, it allows eligible companies to apply a reduced rate of corporation tax (currently 10%) to profits earned from patented inventions and certain other qualifying Intellectual Property (IP) rights. This is significantly lower than the standard rate of corporation tax, making Patent Box attractive for businesses who invest in R&D and IP.
Patent Box aims to reward companies that invest in R&D and go on to develop the results into commercially viable products or processes. It is mainly applicable to patented inventions and so is attractive to sectors such as pharmaceuticals, engineering and manufacturing where patents often play a central role in protecting competitive advantage.
To qualify for tax relief under Patent Box, a company must meet several conditions:
- The company must be liable for UK corporation tax
- The company must own or be the exclusive licensee of qualifying patents granted by the UK Patent Office, the European Patent Office or one of the patent offices of certain countries in the European Economic Area.
- The company must have undertaken qualifying development activity in relation to the relevant patented invention.
A qualifying development activity is where the company has made a significant contribution to the creation of development of the patented invention or to a product incorporating the patented invention.
If the company is the exclusive licensee rather than the owner, the exclusive licence must include the right to bring infringement proceedings in its own name.
The calculation of Patent Box benefits is relatively complex. Companies must identify the proportion of their profits attributable to the qualifying IP right. Profits may be attributed to the qualifying IP right if they come from sales of patented products, licencing fees, royalties and even damages related to IP infringement. Income from products that incorporate patent components may qualify, provided the patented element contributes significantly to the overall value of the product.
Companies are required to ‘elect-in’ to Patent Box. This is done for a specific accounting period by writing to HMRC clearly specifying the relevant legislation and accounting period. There is a time limit of two years following the end of the relevant accounting period in which to elect-in and election continues to apply for future periods unless the company elects-out.
The key advantage of Patent Box is its potential to significantly reduce a company’s effective tax rate. For start-ups this can be particularly valuable as it can help to support reinvestment into R&D. The regime is however not without its challenges. The administrative burden can be substantial, especially for smaller companies without dedicated tax expertise. Identifying relevant patents and determining qualifying development activities can be time-consuming. Calculating the relevant profits and applying the rules correctly requires that R&D expenditure and IP income streams be tracked closely. There are also considerations regarding corporate structure as to qualify for tax relief, the corporate owner or exclusive licensee of the qualifying IP right and the entity making the profit and claiming the tax relief must be the same legal entity. As a result, many companies seek specialist tax advice.
In summary, Patent Box is a useful tax incentive that supports innovation in the UK by offering a reduced tax rate on profits derived from patent inventions. While it involves complex calculations and compliance requirements, it can provide substantial financial advantages for companies that invest in and commercialise IP within the UK.
Our attorneys here at Mathisen and Macara can work with your tax advisors to help you identify qualifying IP in your products.