What is the Patent Box?
The UK Patent Box regime is a generous tax incentive. It effectively applies a reduced rate of corporation tax on profits arising from patents and patented products, providing that the claimant company has been involved in the development of the patented technology or products and services based on it. Innovative companies will pay tax on their Patent Box profits at just 10% when the new incentive takes full effect - less than half the current main rate of company tax.
Broadly, the 10% tax rate applies to worldwide profits arising from the exploitation of UK patents, patents granted by the European Patent Office and certain EU member states, or from an exclusive licence over such patent rights.
The Patent Box complements existing, valuable tax incentives for Research and Development (R&D). In principle, therefore, tax incentives are now potentially available for the whole of the innovation lifecycle; from costs of development through to generation of profits from the resultant improved technology, if it is patented.
What income does the Patent Box apply to?
The 10% tax rate is intended to be available regardless of how the company exploits its patent rights. Consequently, eligible Patent Box profits can arise from various income sources, including:
- sales of patented products;
- sales of products incorporating patented items;
- sales of bespoke spare parts for such products;
- licence fees or royalties for granting rights over patents and other associated IP rights;
- income from the sale of patent rights or exclusive licences over patent rights;
- income received as damages for infringement or alleged infringement of patent rights;
- deemed ‘notional royalty’ income for patented tools and patented processes used to create non-patented services or products for sale.
The tax incentive recognises that the patenting process takes some time. Although the Patent Box only applies to granted patents, there is effectively a ‘catch-up’ mechanism; profits arising from the patented technology for up to six years of the ‘patent pending’ period can be included in the Patent Box claim, for the year in which the patent is granted. Note that the company still needs to elect to claim the relief in the tax computations during the patent pending period, so it is important that specialist advice is sought at an early stage when the patenting process is considered to ensure that the opportunity for potential tax savings is not missed.
What intellectual property rights does it apply to?
Intellectual property (‘IP’) rights qualifying for the Patent Box include:
- UK patents;
- Patents granted by the European Patent Office;
- Certain other IP rights which are treated in the same way as patents under UK legislation; and
- Patents granted by certain other EU member states; the Government has compiled an approved list of qualifying states.
Existing patents as well as new patents are eligible for the 10% tax rate, although the benefits of the Patent Box are being phased in over five years from 1 April 2013.
Patent rights which are acquired from third parties can also be eligible for the 10% Patent Box tax rate, provided that the claimant company has done further work in developing the intellectual property or a product into which it is incorporated.
Patent rights licensed in by a company are also eligible for the Patent Box, provided that the licence provides exclusivity at a national level.
Important points and opportunities
- The Patent Box is optional and does not apply automatically; it must actively be claimed in the company’s corporation tax return.
- Company / group structures can affect the level of patent box savings. It is therefore important to review existing structures and consider potential planning to ensure that the tax position is optimised.
- Beneficial interaction with R&D tax incentives. A valid R&D tax relief / credits 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 tax rate.
How can Hazlewoods help?
In light of these points, companies that might qualify for the Patent Box are recommended to seek specialist tax advice at the earliest opportunity so that eligibility and appropriate planning may be considered.