The UK Patent Box is a tax incentive that allows eligible companies to pay a reduced rate of 10% corporation tax on profits generated from their patented inventions and other qualifying intellectual property rights.
What is Patent Box and how can it benefit your business?
Patent Box is a tax incentive, revised from 1st April 2023 which allows companies to apply a reduced 10% corporation tax rate to profits attributed to their patented inventions.
The regime is designed to encourage innovating businesses to retain and commercialise their IP rights in the UK and to develop new innovative patented products.
This can result in significant savings for eligible companies compared to the standard 25% CT rate.
From 1 July 2021, UK companies joining the Patent Box regime are required to demonstrate that they have undertaken the qualifying research and development (R&D) activity that led to the creation of their patented inventions or other qualifying IP rights.
You must make an election to join the regime.
Once elected in, the revenues from worldwide royalties, license fees, product sales (including bespoke spare parts) and sales of patents that get taxed in the UK can be included in the Patent Box tax regime.
The Patent Box is a complex and nuanced area of tax but can bring great benefits if applied correctly.
What qualifies for Patent Box?
You may be surprised to find that Patent Box is applicable to more companies than you expected and the amount of savings in terms of a reduced tax liability could be significantly greater.
The key qualifying criteria are:
- Your company is liable to Corporation Tax
- makes a profit from exploiting patented inventions
- owns or has exclusively licenced-in the patents
- has undertaken qualifying development on the patents (it must have
- made a significant contribution to either the creation or development of the patented invention (or a product incorporating the patented invention)
Patents must be granted by:
- the UK Intellectual Property Office
- the European Patent Office
- specific countries in the European Economic Area
If your company licenses its patent rights it must have exclusivity which is at least country-wide.
How does the Patent Box tax regime work?
The Patent Box tax regime requires the company to identify the profits made that are attributable to their patented inventions and use these to calculate the patent box deduction, which is then applied in the company’s tax computation. This is done using a method called streaming.
There are 7 steps to this process, and the costs of the business must be assigned to each individual revenue stream.
Various deductions prescribed in the legislation are then made before applying the R&D fraction to each revenue stream before combining to arrive at the relevant IP profit which is then used to calculate the patent box deduction.
What is the R&D Fraction?
This is the ‘nexus’ principle introduced by the OECD to ensure that tax benefits like the Patent Box are linked to actual research and development (R&D) activities conducted by the claimant company.
The R&D fraction is used to determine how much of the qualifying intellectual property (IP) profits can benefit from the reduced 10% corporation tax rate.
Once again, the formula to calculate this is given in the legislation and takes into account the costs that are eligible for R&D tax relief, payments made to subcontractors for R&D work and any payments made to acquire qualifying IP rights.
The R&D fraction is a number between 0 and 1, reflecting how much of the R&D for the patented IP was performed by the claimant company (or group) versus acquired or subcontracted externally. The higher the fraction, the more of the IP profits qualify for the tax break.
Why choose our Patent Box Service?
In depth understanding of the legislation: we can tell you what IP qualifies, what income qualifies, how are costs are apportioned, and how much the regime can benefit your business in terms of tax savings.
We will advise you on the record keeping requirements to successfully track and trace your R&D expenditure to enable calculation of the R&D Fraction with accuracy.
Our knowledge of HMRC’s requirements meaning we know how to make the election to join the regime, advise you on the most appropriate time to make the election and what supporting documentation HMRC will want to see when an election is made.
Seamless connectivity with R&D service: many clients able to join the Patent Box regime will be involved in R&D, and vice versa, and where that happens we can ensure that both tax incentives are applied correctly and in conjunction with each other.
Our Patent Box service is led by Lisa Waller. Lisa is an ACCA qualified accountant and CTA qualified tax advisor, with over 20 years’ practical experience in Corporate Tax. Through dual membership she can combine knowledge and provide valuable insight in both areas. Lisa has been specialising in R&D and Patent Box tax advisory since 2013.
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