Patent Box Tax Relief
If your company holds patents or has licensed in patents from other companies then you may be eligible to claim a valuable and little-known tax relief on the profits.
Patent box is a regime that allows UK businesses to realise a lower rate of taxation on profits from patents that they have carried out qualifying work on and it can prove to be a worthwhile benefit indeed.
Some time ago the UK government took the decision to reward companies that carry out work on patent development and as a result, HMRC now operates the patent box regime which came into full effect in 2017.
There are some stringent conditions that relate to the Patent box regime however once these are satisfied the business concerned can apply a much lower Corporation Tax rate to income arising from the patent.
Who can benefit from the patent box?
The patent box regime is a tax relief set against corporation tax and so the first thing to say is that companies will only benefit if they are profitable and paying UK Corporation Tax.
The company also needs to hold the rights to the patent concerned, either because they have developed and registered the patent or because they have the exclusive rights granted by another entity.
Exclusivity, in this case, can mean territorial exclusivity but can also relate to use or sector. In their Patent Box manual, HMRC gives the example of a manufacturer that allows one business the exclusive right to use a computer chip in a mobile phone and another the right to use it in a laptop. In each case, because the rights were given exclusively for that application then the exclusivity condition is satisfied.
The company that wishes to make use of the UK patent box regime will also need to show that they have carried out significant development work on the patent to bring it to market.
There are two key words here; Significant and Development.
Significant means what it says – the development has to have a major bearing on the product’s viability as an income-earning item. Simply changing the color won’t succeed. Significance can also relate to the cost of the development work or the time it takes to carry out the project.
The Development condition is designed to ensure that companies that contribute to the innovative nature of the patented product can benefit. The development could be in terms of the patented item itself or could relate to the development of a product that uses the patented article. Similarly, an innovative process that uses the object of the patent could also qualify.
HMRC specifically exclude work that focuses on the commercialization of the patented product. Patent box is not applicable where businesses spend time or money on bringing the article to market either in terms of marketing work such as packaging or naming or alternatively regarding the channel that the item is sold through.
What income is allowable?
Patent box reduced taxation is applicable to profits that arise from the ownership of the Intellectual Property (IP) in a patented product.
There are a number of ways that this can occur;
• Selling the patented product. The company develops a product, patents it and then sells it to the end user or a wholesaler
• Infringement damages. The business takes action against companies that use the patented product or copies without authorization
• Licencing income. The business develops the idea but licenses another entity to produce, market or sell the finished items.
• Selling patented rights. The company develops a patent but then sells this on to another business.
• Development and use of a patented item in a process. The company takes an already patented part and develops a novel way to use this in a process that in turn generates profit.
How to claim patent box tax relief
Claiming relief under the patent box regime is fairly simple as long as the business is able to satisfy all of the conditions that relate to the scheme.
The company can write to HMRC to elect to use the scheme. Sochall Smith is expert in this area and can SME’s with the application process. For larger businesses that deal with a larger business unit at HMRC, they can contact and liaise with their account manager.
Alternatively, the company can simply elect to use Patent Box for qualifying profits and show this separately in their tax computations that should accompany their CT600 tax return.
Be aware though that all claims need to be made within two years of the end of the accounting period in which the profit arose.
There are two methods of calculating the amount of benefit the business can obtain by using patent box; the formulaic method and the streaming method. Space precludes the inclusion of a detailed explanation of these and we’d really suggest having a chat with our patent box experts about which one might be right for your particular situation, not only because one may give a better result than the other but also because in some cases the streaming method is mandatory.
Whichever method the company chooses to use to calculate its patent box benefit, the business will still need to ensure that it is able to correctly identify the turnover, costs, and profits that directly relate to the patented items without which the computations are impossible.
In conclusion, it is clear that the UK patent box regime offers a valuable taxation benefit for companies that hold the rights to patents however to make the best use of this it is important to take sound, qualified and experienced advice as early as possible.