The UK’s Patent Box scheme is a tax incentive designed to encourage businesses to develop and commercialise patentable intellectual property (IP). While many will know the headline benefit, that Patent Box claims reduces the effective rate of corporation tax paid on eligible profits to 10%, there are a number of misconceptions about how the scheme works. In this article we examine some common myths and highlight how businesses can benefit from the Patent Box.
Patent Box relief is only for manufacturing and technology companies
While businesses in these sectors can and do benefit from the Patent Box, from financial services to shipping there is no reason why companies in all sectors can’t elect into the scheme. Any business that has patent-derived income can make Patent Box claims if they meet the qualifying criteria.
Patent Box only applies to goods
Patented processes or technology that enable services to be provided can qualify for Patent Box relief. For example, a computer-implemented method for time stamping a transaction, where your systems document a time of payment to authenticate a user, could be patentable.
The whole product needs to be patented
Many products and services now contain a wide variety of components that are essential to the way they work. If you have a patent over one essential element, the whole of the income derived from the product or service can qualify for relief. Helpfully, profits arising between patent submission and grant can be included in you Patent Box claim once the patent is granted.
You can’t patent software
In recent years, companies are being increasingly successful in applying for patents over their software platforms for both external and internal use. Where the software provides essential support to a service offering, income generated from that service can qualify for relief. If you have made a successful claim for R&D tax relief on software or other technology, it is worth exploring if you can patent a component of your technology and thereby gain access to Patent Box relief as well.
You have to own the patent to claim
You can claim Patent Box relief if you have an exclusive license over the qualifying IP right. Provided your company actively manages the IP and another company in your group has undertaken the qualifying development activities you should be able to make a claim.
You can’t have R&D relief and Patent Box relief on the same thing
Yes, you can – in fact, you have to have carried out R&D on the patented item to be able to claim Patent Box relief: the amount of any Patent Box claim is adjusted by the ‘R&D fraction’ to limit relief where you have acquired the patent or subcontracted out the R&D leading to its creation to another group company.
The ‘R&D fraction’ is frozen in time
The amount of qualifying R&D spend that is counted for the R&D fraction adjustment is not limited to the R&D you carried out before the patent was granted. Later R&D work to apply the patented item to your products or services count as “good” expenditure for the R&D fraction – so the more R&D you do to develop the patented application, the more Patent Box relief you can claim.
It’s not worth the hassle of trying to stream revenues and track costs
Making your first Patent Box claim can be time consuming but it is worth remembering that once a system for calculating the qualifying profits has been set up, then compiling the details for subsequent years will become a relatively straightforward process.
Intragroup sales don’t count as relevant income
All sales revenue that arises from patents can qualify and this includes license fees paid by members of the same group to use a patent – e.g. patented software or other technology.
In practice, the benefit of the Patent Box is too small to be worth the effort of claiming
Patent Box claims can be highly beneficial – reducing corporation tax payable on qualifying income by 47% (60% from 2023). The actual benefit will depend on how your product and service offerings are structured. For example, if you have a patent over something that is sold as an add-on to a core product, it may be worth reconfiguring your product in future so that more income is ‘patent dependent’.
Could you claim relief?
With corporation tax rates set to rise, all companies, which undertake R&D should actively consider how they can benefit from the Patent Box as well as R&D tax credits. For help and advice on making a claim please contact Ross Robertson or Carrie Rutland