Patent Box – Weighing up the Pros and Cons for potential patent applicants
The Patent Box scheme was introduced in the UK in 2013 and is a tax incentive designed to encourage companies to commercialise their patented technologies by offering a lower rate of corporate tax on profits derived from those patents.
Whilst the scheme's benefits can be significant, it is important to consider both the advantages and potential downsides of patenting your technology to determine if it is the right choice for your business.
Disregarding Patent Box tax relief in the first instance, we already know that applying for a patent can offer several benefits, such as protection for your inventions and offering the potential to gain financially from your intellectual property. However, there are also downsides and considerations to keep in mind when applying for a patent:
- Costs: The patent application process can be expensive. You will need to pay filing fees, patent attorney fees, and maintenance fees to keep the patent in force. These costs can add up, particularly if you are filing for patents in multiple countries.
- Time-Consuming: The patent application process can be time-consuming. It involves preparing and filing the application, responding to examiner inquiries, and potentially undergoing several rounds of revisions. The process can also take several years to complete, during which time you might not have protection if the application is still pending.
- Uncertainty: There's no guarantee that your patent application will be granted. Patent examiners might reject your application due to the existence of “prior art” (similar inventions already in the public domain), issues with the applicant's claims and various other reasons. This uncertainty can be frustrating, especially if you have invested time and money into the application.
- Disclosure: Patent applications are publicly available documents. This means that the details of your invention, including how it works and its potential applications, will become common knowledge. If your patent is eventually granted, your competitors can study the patent and potentially design around it (if this can be achieved without breaching the IP of course).
- Enforcement Challenges: Even if you are granted a patent, enforcing it can be difficult and costly. If someone infringes on your patent, it is your responsibility to take legal action to protect your rights. This might involve hiring attorneys and going through a long-drawn-out legal process. Additionally, challenging competitors in overseas markets can become increasingly difficult.
Before applying for a patent, and realising any subsequent taxable benefits, it is important to carefully weigh these downsides against the potential benefits to determine if seeking a patent is the right decision for your business.
Whilst consulting with a patent attorney can provide valuable regarding your specific patentable technology, YesTax can assist with any tax related elements which may be difference between moving forwards with the application and not.
So, how can Patent Box help? The main benefit is the reduced corporation tax rate on profits generated from patented technology. The effective tax rate of corporation tax for eligible profits is 10%, a substantial saving in comparison to the current main rate of corporation tax. In addition, the 10% rate of corporation tax of is potentially applicable to a large product which houses a component which represents only a small proportion of the entire item. For example, a small, patented component which is central to the entire unit’s operation may result in the whole item qualifying for Patent Box relief.
The scheme's eligibility requirements and calculations can be complex and companies need to carefully track and calculate profits attributed to patented technologies. YesTax can assist in this area, lowering the burden of administration and ensuring that the tax regulations are complied with.
Ultimately, whether the benefits of the UK Patent Box scheme outweigh the drawbacks depends on your business's specific circumstances, goals, and strategies. It is advisable to consult with financial tax experts and legal professionals who can provide tailored guidance based on your situation. Consider not only the potential tax benefits, but also the overall impact on your competitive position and long-term plans.
If you or your company has a patent or an exclusive license on a patented product, a conversation with YesTax may be a worthwhile undertaking. If you are yet to secure a patent, but wish to explore the possibility of doing so, we can put you in touch with our trusted partner firms which can assist with patent applications.
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