Five Things You May Not Know About Patent Box
Patent Box is still a relatively new tax relief, having been introduced to the UK tax system in 2013. Increasing numbers of companies are claiming the relief, but many are still sceptical – surely a tax rate of 10% is too good to be true? This article attempts to clarify some facts concerning Patent Box.
The relief extends wider than UK income and UK patents
Many companies assume that only those with UK patents can claim relief - and on UK income only. The reality is that the scheme reaches far wider. UK companies with a European patent issued by the European Patent Office (EPO) are eligible, as are those which hold patents granted in thirteen European countries. There are various other rights that also qualify, such as plant breeding and variety rights, medicinal and veterinary rights and even non-patented inventions that are prevented from being patented on grounds of national security or safety. Worldwide income qualifies for Patent Box relief even on national level rights.
In addition, companies do not even have to own these rights. If a company is an exclusive licencee to any of the rights mentioned above, it can claim Patent Box relief as long as it contributes towards the further development of the IP and has certain rights granted within the licence agreement.
You can still make a Patent Box claim if you are not paying corporation tax
Many potential claimants of Patent Box are dissuaded from making a claim when they have no profits chargeable to corporation tax. However, it may still be worth making a claim, subject to certain requirements. If a company is benefiting from a group relief claim, has losses carried forward to offset against profits, or has made a claim for R&D tax relief, a Patent Box claim would still generate a benefit.
At YesTax we can quickly establish whether a claim can be made through a simple review of your most recent corporation tax returns.
You can still claim Patent Box tax relief even if you are already claiming R&D tax relief
Many companies which are eligible for Patent Box will also make R&D tax relief claims as they develop new products and processes. The generous R&D tax relief received against taxable profits means that some companies do not feel it is worthwhile making a Patent Box claim, as the restated profits after R&D relief are much lower.
When calculating the Patent Box deduction, the R&D enhanced deduction is ignored for trading profit purposes, which means that both claims can be made. In certain situations, a Patent Box claim can even increase the value of an R&D tax credit.
The relief is not restricted to SMEs
Unlike R&D tax relief, Patent Box is available at the same rate for SMEs and Large Enterprises. This makes the Patent Box scheme extremely attractive for large companies that own significant intellectual property portfolios. However, SMEs can still enjoy significant benefits by owning a relatively small patent that covers a large proportion of its income.
A UK patent typically costs between £5,000 and £10,000 depending on its complexity. This means that even with an impending corporation tax rate of 17%, the company would only need to make qualifying IP profits totalling £142,857 to break even over a 20 year period. The payback period generated by a patent box claim can be very short indeed.
Income can qualify for relief even if only part of a component is patented
A patent will often be granted on a relatively narrow part of an overall invention. Patent Box is sufficiently generous to allow companies to account for the income from the entire invention when calculating the profits derived from the qualifying intellectual property. The legislation dictates that the patent should be integral to the operation of the entire component and intended to be so for its useful economic life. Bespoke spare parts designed solely for use within the patented invention also constitute qualifying income.
What constitutes a bespoke spare or a qualifying parent item is often far from straightforward. YesTax can advise on this potentially contentious area of the legislation.