What is the Patent Box tax incentive?

patent box

Using a patent to protect your invention can be a complex and fairly costly business. On the other hand, any profits you do make from your patented intellectual property (IP) assets will be subject to a reduction in corporation tax under the UK government’s patent box tax regime. So, what exactly is the patent box, how does it work in practice and how do you qualify for the scheme?

In a nutshell, the patent box regime is a corporation tax relief which provides a reduction in the rate of tax (10%) on any income that is earned through the commercial exploitation of a patent. It’s a relatively new government-sponsored incentive regime and only applies to profits made from patented inventions after April 2013. The patent box can help you to cut your tax rate and the amount you are due to HMRC, so it’s definitely worth applying for wherever possible.

Please note, however, that the patent box regime was closed to new entrants in June 2016 and the current scheme will be abolished altogether in 2021, to be replaced by a new system. This guide is for information only.

Some key points of the patent box

  • Any profits from exploiting patented inventions will be taxed at 10%. This is in addition to other benefits, such as tax credits, that can be claimed on research and development (R&D).
  • The rules apply to such profits made after 1 April 2013, phased in over five years. From 1 April 2013, 60% of the benefits are available, increasing to 100% in the tax year starting 1 April 2017.
  • The regime still applies even in cases where the patented element of a product is relatively minor. This means that 100% of income from that product will be eligible for tax relief.
  • All UK companies, as well as overseas companies with a taxable operation in the UK and with interests in qualifying IP rights (see below), can benefit from the patent box regime.
  • If the patent relates to an internal process you use to manufacture your products or is integral to the services you provide, you may still be eligible for a tax reduction under the regime.

How do you qualify?

You can take advantage of the scheme if:

  • you hold qualifying IP rights or exclusive licenses-in patents granted by the UK Intellectual Property office, the European Patent office or a list of countries in the European Economic Area (see here).
  • you have made a demonstrable or significant contribution to the development of a patented product
  • you have a significant management role in developing or exploiting the patented invention or product (this applies even if your company didn’t develop the original patented product).

Excluded income

Income from the regular activities of your business that are unrelated to your patent rights of your business do not qualify for patent box tax relief. Income generated by branding, as opposed to technological innovation, is also excluded from the regime. Certain sectors are also subject to tighter restrictions on IP income, such as the finance and banking sector.

Some changes to the patent box

A number of amendments to the way the regime works have been implemented in response to claims the patent box was open to abuse. The qualifying criteria remains unchanged as do the calculation of IP profits and the tax rate.

However, under the Finance Act 2016, companies now have to stream every IP right or patented product separately. In other words, a company that has three patented products will need to make three separate calculations, allocating income and expenses to each product.

Another change means that only those profits accrued from R&D activities carried out by the company will be allowed in a claim. Future changes are expected to include a narrowing of the definition of a cost-sharing arrangement.

Looking to the future

The patent box regime was closed to new entrants in June 2016 and the current scheme will be abolished altogether in 2021, to be replaced by a new system.

Transitional arrangements have been put in place and companies holding IP rights issued before June 2016 will still be able to be taxed under those rules until 30 June 2021.

Other conditions may also apply and, as this is a fairly complex area, it’s important to get professional advice to ensure you are not missing out on any tax relief you’re entitled to under the regime.

For more information, see this Government guide.

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