Patent Box Tax Relief
How do you secure a Patent?
There are three main criteria:
- The invention has to be new/novel;
- It has to involve an “inventive step”; and
- It should be capable of industrial application.
The patent application must be written in a way that covers the necessary scope, avoids ambiguity and does not infringe on prior art.
What is a Qualifying Patent for Patent Box?
Qualifying patents are those granted in the UK or 13 other jurisdictions in the European Union. Patents granted by the European Patent Office are also valid. The relief applies to worldwide profits derived from these patents.
Can I claim relief if I do not hold a patent?
There are certain other qualifying intellectual property types for Patent Box purposes known as rights similar to patents. These include plant breeding and variety rights and also rights relating to human and veterinary medicines. Marketing authorisation rights benefiting from either market protection or data protection are also deemed to be qualifying IP for Patent Box purposes.
Finally, if a patent cannot be granted to a company by virtue of compromiing national security or public safety then Patent Box relief may be available to the company without actually holding a qualifying right. It is unlikely that any protection outside of the UK would be available due to the nature of the IP.
Which countries can you hold a qualifying patent in?
You can benefit from the Patent Box if your company owns or exclusively licenses-in patents granted by the UK Intellectual Property Office, European Patent Office or one of the following countries in the European Economic Area: Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia, and Sweden.
What if a company did not actually hold a patent but held an exclusive license of a patent?
Companies can still take advantage of this relief if they hold an exclusive licence agreement to exploit a patent owned by another individual or company. The patent in question must still have been granted in one of the countries above (including the UK), and the extent of the qualifying profits depends on the scope of the exclusivity of the licence agreement.
Can you claim patent box and R&D tax relief?
Yes! Companies can retain the full tax incentives available under the R&D Tax Credit Scheme in addition to Patent Box.
How much does it cost to obtain a patent?
The cost of obtaining a UK patent is typically around £5,000. Small and medium-sized enterprises (SMEs) could save several times this amount in tax under the Patent Box scheme, in addition to gaining valuable patent protection. YesTax offers a standard fixed fee arrangement.
When do you have to elect into the patent box scheme?
You have to make an election within two years after the end of the accounting period in which the profits arose to apply Patent Box and receive the reduced rate of corporation tax.
There is no box on the Company Tax Return for making the election. Instead you use a formula to calculate the proportion of profits that can apply the reduced 10 per cent rate.
Is it worth electing in to the scheme if the company is loss-making?
In theory it is possible for a company to have a profitable IP stream which would attract a Patent Box deduction whilst the company as a whole has made a taxable loss. The likelihood is that in this scenario the election in to the scheme would simply result in the creation of additional losses to carry forward. It is possible that a claim could increase an SME R&D tax credit claim, so an election should not be dismissed outright if a loss is made.
Is the Patent Box election irrevocable?
Yes and no. The company has two years from the end of the first accounting period for which it wishes to elect in to make the election. If the company wishes to subsequently revoke this election the deadline is also two years from the relevant accounting period. A revocation prohibits the company from electing in for five years. Companies should therefore think very carefully before making an election in to the scheme for a specific period.
What types of income are eligible for relief?
The income which is relevant for Patent Box tax relief is known as “relevant intellectual property income” (RIPI). The scope of what this covers will broadly depend on the scope of the intellectual property held by the company. If a patent clearly covers a physical product then the sales of this line will clearly qualify. What is also covered includes any parent items which are intended to incorporate the patented element, which should be fundamental to the function of the parent item and intended to be so for its useful economic life. As well as this any bespoke spare parts designed specifically for use in the patented component constitute RIPI.
Instead of selling products covered by patents (or similar rights) a company may opt to licence out its technology for other companies to exploit. Any royalties received in respect of qualifying IP rights will constitute RIPI.
If a company sells a patent then this will qualify for relief in the period in which sales proceeds are received provided that the company was a qualifying company for patent purposes at the point of selling the right.
Finally any taxable income arising from infringement of a right (including damages, compensation or other insurance proceeds) is eligible for relief. It should be noted here that the company has to have been a qualifying company at the time of the infringement; HMRC appreciate that due to the fact that the litigation process can be ongoing for some time there is the potential for a right to lapse before the damages/proceeds are awarded.
What happens if the patent covers a process instead of a physical product?
A process patent is a right that covers a system, process, workflow etc, i.e. something that produces RIPI in an indirect manner. For example, a company might develop a machine that is subsequently covered by a process patent but that company’s revenue may actually be derived through the sale of widgets produced by that machine (as opposed to selling the machine itself). In this scenario there is no relevant head of income within which the sale of these widgets would fall, but clearly the existence of a patent is relevant to the production of what the company is selling.
What HMRC allow is for the company to claim “IP-derived” income through the use of a “notional royalty”. This is a deemed amount of the company’s turnover that relates to the value added by utilising a patented process. For example if a company’s net profit margin increased from 3% to 8% since incorporating a process patent then it could be reasonably argued that a 5% notional royalty applies. In reality the methodology that HMRC would expect to see would be more detailed than this, but this is the precedent which these provisions allude to.
Can I claim relief if a patent is pending grant?
For Patent Box purposes there are two relevant dates for each right that has been applied for: the date of filing and the date of grant. The date of filing is the earliest date from which relief can potentially apply if it is eventually granted. The relief that would have been deductible in the period had the patent been granted is effectively noted and rolled forward on a period-by-period basis. No relief can be claimed until the patent is granted; this is to avoid the scenario of having to repay corporation tax should a patent application be unsuccessful or withdrawn.
In the period of grant the company can then claim Patent Box relief for that period and up to six years previously. The earliest date at which profit deriving from qualifying rights can be accumulated is the later of:
- The filing date of the intellectual property;
- The first day of the election period (if an election has been made; if no election has been made the first day of the accounting period two years previously is relevant); or
- 1st April 2013 (the day on which the Patent Box scheme came into effect in the UK).
Are all profits made on IP eligible for the 10% corporation tax rate?
There are several deductions which 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. The routine return deduction is an administrative deduction which has to be made for certain expenses, and represents an assumed profit level by HMRC that the company would have made without patents purely on the administrative set up of the company. A marketing return deduction is also required, which is based on the assumption that some of the added value created does not relate to the technological merit of the patent but on the perceived value of the brand with which the product is associated. Finally, since July 2016 “new entrant companies” (see new rules section) have to apply the “Nexus fraction” which requires a deduction to be made where companies have either acquired intellectual property developed by a third party or incurred expenditure with related subcontractors in respect of R&D undertaken in connection with certain patents or patent families.
How do the new rules introduced in 2016 affect claimant companies?
The main changes to the rules which came into effect on 1 July 2016 related to the R&D activities undertaken by Patent Box claimants. HMRC wants companies to link the R&D undertaken both historically and presently to the IP which it has generated as a result of their R&D investments. The Patent Box benefit claimable by companies will be restricted by any IP acquired from third parties and any expenditure on R&D with connected subcontractors.
In practice, most single entity companies undertaking R&D in the UK in-house (or using third party subcontractors) will not be affected greatly by these changes other than having to keep more detailed records so that they can “track-and-trace” R&D to IP.
Why do you need an expert to oversee Patent Box claims?
- Patent Box does not apply automatically. It is optional and must actively be claimed in the company’s corporation tax return.
- The tax rules for ascertaining which profits are eligible are highly complex. There are several steps to calculating the profits attributable to the reduced corporation tax rate and a specialist will ensure that the calculation has been done correctly and each stage has been calculated to maximise the amount of relief available. There are many caveats associated with this profit figure. Whilst there does seem to be an appetite on the part of the UK government to simplify taxation, the Patent Box policy does add complexity to the tax system. However it generally appears that HMRC are taking a very positive attitude and interpreting the provisions generously.
- Corporate structures can affect the amount of Patent Box tax savings. It makes sense for an expert to review existing arrangements to ensure that the tax position is optimised.
- The company can elect for the 10% tax rate during the “patent pending” period (which can last years), but this will require appropriate action in advance of the patent being granted.
- A valid R&D tax relief claim will not only reduce the company’s total taxable profits but will also move more of that taxable profit into the 10% Patent Box rate. You will need a specialist with in an in-depth knowledge of Patent Box and R&D tax credits.
How is the relief calculated?
The relief is calculated using a complicated seven step method. This method calculates the profit attributable to patented products and processes and then makes deductions for the deemed administrative and marketing elements of the patent. The “relevant IP profit” derived from this calculation is then taxed at 10% as opposed to the minimum 19% standard corporation tax rate. Loss-making companies with profitable patents can also benefit from the scheme in certain scenarios.
Why did the government introduce the patent box?
The aim is to encourage development and innovation in areas with promising potential for patentable protection. According to HMRC areas most likely to produce such innovative inventions include pharmaceuticals, life sciences, manufacturing, electronics and defence sectors. It is believed that increased jobs stemming from development, production and implementation of patents in the UK will aid in preserving a competitive home advantage and keep the UK in first place in the global patented technology competition, as well as encouraging investment and economic growth.