Very simple, the Patent Box is a specialist tax regime which was introduced by the Government, to incentivise companies that hold qualifying intellectual property.
The Government introduced the Patent Box regime in April 2013, to incentivise business to protect their intellectual property.
Therefore, the Patent Box regime has been designed to reduce the Corporation Tax (CT) that companies pay on any profits that are obtained from qualifying intellectual property (IP).
Fortunately, the scheme goes hand-in-hand with the existing and well established R&D Tax relief schemes.
As a result, thousands of companies have claimed tax relief, using the Patent Box and have received over £2.7 billion in tax relief. We can see from the latest HMRC reports, that this has skyrocketed from £754.3 million in the 2015-16 tax year, to over £1bn in the 2016-17 accounting period.
There really is no catch, as the Patent Box has been designed to stimulate innovation and to benefit companies who undertake any qualifying research and development (R&D) and then patent their IP. This has been written into law and has already helped thousands of companies. Some companies have even restructured their IP holdings to benefit from the regime.
As with the longer running R&D Tax relief schemes, the Patent Box regime is purely designed to stimulate the economy by incentivising R&D and innovation. Check out our FAQs page.
Claiming through the Patent Box regime makes sense for all businesses that are eligible, as they would receive the following key benefits:
A calculation is undertaken to determine the relief available for qualifying IP rights income. This relief creates an effective corporation tax rate of 10% on the patented income. Unfortunately, not all of a company’s profits will automatically benefit from the Patent Box; to be eligible, there is specific criteria that must be satisfied:
Companies are even able to revisit previous years tax returns, which enables them to make a claim (providing it’s within two years of their financial year end).
The actual calculations are very complex and will require specialist tax advice, however, work in the following way.
Calculate the total gross income of your IP. This includes the revenues listed above but excludes any finance income.
Split the IP income into categories of IP e.g. a category for income relating to each different IP right.
Allocate expenses between the different categories. This will give a net profit per category.
This step requires you to remove the routine profit – this is the profit that your company would expect to make should you not have the qualifying IP. This is called the “routine return” and needs to be subtracted from the calculation in step 3, you are then left with your “qualifying residual profit”.
At this stage you must remove the marketing profit – this is the profit that your company would expect to make purely on the basis of its brand.
After all the above steps are done for each category of IP. The net position for each category must be multiplied by a fraction. This fraction relates to the proportion of R&D expenses incurred by the company (on qualifying IP) compared to the cost of buying the IP and subcontracting the R&D work to connected companies.
Add the final amount for each category together. This is the total amount of profits which should benefit from the reduced CT rate.
It is worth noting that Patent Box relief is not automatically applied; you will only receive the relief once you have opted into the regime.
Once you have elected into the Patent Box, all of your trade will be subject to the Patent Box relief. It’s also worth noting that it is possible for a company to elect out of the Patent Box regime. However, it will then be barred from re-entering the Patent Box regime for five years.
As previously mentioned, the good news is that you can claim retrospectively for two years of the end of the accounting period that you opt into. As a result, you haven’t completely missed out on previous years; however, with time ticking, it’s more important than ever to know whether you’re eligible.
Patents are granted to new and inventive products and these can be granted for seemingly minor improvements to already existing products. Obtaining a patent on a new feature, however big or small, could create eligibility for the Patent Box regime.
To qualify you must own or exclusively licence-in the patents granted by the The UK Intellectual Property Office, The European Patent Office or under the law of the following EEA states:
Plant Variety rights, along with certain marketing or data protection rights for human or veterinarian medicines, plant breeding or plant varieties.
Supplementary protection certificates that have been granted by the UK Intellectual Property Office, the European Patent Office or certain EEA countries.
A granted application that would have complied with the requirements of the Patent Act 1977 but that was not granted for reasons of national security.
Companies can also elect into the regime during patent pending stages (the period during which the company has applied for the patent but it not yet been granted). The benefit of this is that that tax relief is available for this period, once the patent has been granted. However, this isn’t always beneficial as the regime is most advantageous when the IP is generating profits.
If you are a member of a group of companies, the rules are slightly more complicated, insomuch, that as well as satisfying any of the above conditions, the Company will also be required to demonstrate “active ownership” of the IP. When demonstrating “active ownership”, companies aren’t required to have made all the decisions during the product development stage, but must have performed a significant amount of management activity.
We aim to make the Patent Box claims process as easy and stress free as possible. More importantly, we can discuss your business with you and identify whether or not you are able to claim.
If your Company is eligible, we will work with you to gather the relevant information and then prepare all of the necessary documentation that is needed. Therefore, not only does this free up your time, but also ensures that all legislation is adhered to.
Everything we do is tailored to maximise your chance of having a successful claim. Not only this, but we take all of the hard work out of the process. We can, and often do, work with and alongside your existing accountant, as with this being a specialised area, our help is greatly received.
Why not contact us today to discuss your business’ R&D tax relief? It only takes our team around 20 minutes to determine if you are eligible or not.