The Patent Box is a scheme that allows businesses to profit more from their patents by reducing the tax paid on those profits. Much like Research & Development Tax Credits, the aim of the Patent Box is to encourage innovation across UK businesses.
Businesses that qualify for the scheme will benefit from a rate of 10% corporation tax as opposed to the usual rate (currently 19%) on relevant profits. This reduced rate applies to profits earned after 1st April 2013.
How does a business qualify for the Patent Box scheme?
A business can only benefit from the Patent Box if the company is liable to Corporation Tax and makes a profit from exploiting patented inventions.
For a business to qualify, they will need to hold intellectual property (IP) rights or an exclusive IP license and receive royalties from them. A company must have made a significant contribution to either the creation or development of the patented invention or a product incorporating the patented invention.
- You don’t have to be making a profit from your own inventions to qualify
It’s not uncommon for patent holders to license their inventions for others develop. This means that if your company holds licenses to use someone else’s technology you may still be able to benefit from the Patent Box scheme. To do so, you must have:
- Rights to develop, exploit and defend rights in the patented invention
- One or more rights to the exclusion of all other persons (including the licensor)
- Exclusivity throughout at least an entire national territory – rights to manufacture or sell within part of a country, for example, would not qualify as exclusive
What income can you pay the reduced tax rate on?
It may be that not all a company’s profits come from exploiting patented inventions. Only relevant income will qualify for the Patent Box scheme. To be relevant intellectual property income, it must come from at least one of the following:
- Selling patented products – that is sales of the patented product or products incorporating the patented invention or bespoke spare parts
- Licensing out patent rights
- Selling patented rights
- Infringement income
- Damages, insurance or other compensation related to patent rights
How do you claim corporation tax relief through the patent box scheme?
You first must make an election. You can do this in the computations accompanying your Company Tax Return or separately in writing. There is no special form of words for this election. You must make your election within 2 years after the end of the accounting period in which the relevant profits and income arose.
Calculating the qualifying expenditure for Patent Box tax relief can be a lengthy and complex process. As such, we recommend you consult a professional advisor before taking any action. If you would like to talk with someone about how you could benefit from the patent box scheme, please visit our contact page.