A Guide To The UK Patent Box

The UK Patent Box is an intellectual property-related tax relief scheme for innovative Corporation Tax-paying companies turning a profit from patented inventions. Profits from eligible patents are then taxed at a preferential rate. The idea is that it encourages innovative companies to continue, and to commercialise, their UK-based research and development work.

As strong advocates of company innovation through research and development, Myriad Associates is keen to promote the Patent Box scheme and its benefits. That’s why we’ve put together this guide around everything UK businesses need to know, and how to claim, all in one place.

Background

First unveiled back in 2013, the Patent Box is due to remain in place until at least the 30th June 2021.

The scheme was updated on the 1st July 2016, where a more complex approach for calculating the IP-related tax relief was introduced. It became known as the “modified nexus approach”. Since then, the amount of relief a company receives has been based on the proportion of eligible R&D expenditure in relation to the total R&D expenditure resulting from the creation of the IP asset. This newer scheme is therefore particularly attractive to organisations that are regularly carrying out larger scale/more expensive R&D projects.

The scheme essentially offers an additional deduction when calculating taxable profits, so that applicable intellectual property profits attract a reduced Corporation Tax rate of 10% (instead of 20%). The relief was phased in across a four year period, and so maximum relief on all Patent Box profits has existed since 2017.

What is the criteria to be eligible for the Patent Box scheme?

In order to qualify, a company needs to meet three basic criteria. Firstly it must have a qualifying IP right. This in turn should include:

• A patent that is fully recognised by the UK Intellectual Property Office or the EPO;
• A patent that is fully recognised by some states in the European Economic Area (but not all); and
• Certain other European IP rights (for example SPCs, plant variety rights, plant breeders’ rights)

Secondly, the company needs to actively hold the eligible IP right either as an exclusive licensee or as an owner. The company must also essentially be creating, or contributing substantially to, the protected invention. Alternatively, it must be performing a considerate amount of activity to develop the protected invention, or any processes/products that rely on it. If an organisation is a member of a group and meets this requirement via the activities of a third party in the group, it must have a hands-on role in managing its portfolio of eligible IP rights.

Finally to point three. The company must have an income that is the result of the IP right; this may for example through the selling of patented products.

Qualifying IP rights

The Patent Box is mainly aimed at patent owners, however besides granted patents, qualifying IP rights include:

• Granted supplementary protection certificates
• UK or European plant variety rights
• UK or European plant breeder’s rights
• Marketing or data exclusivity rights under a medicinal, plant protection or veterinary marketing authorisation.

It’s also worth remembering that designs, trademarks and copyright are not eligible IP rights.

Which companies/areas are most benefiting?

Latest figures released in October 2019 reveal that in 2016-17, 1,170 companies claimed Patent Box relief, with total claim value of £1,035 million.Of the companies that made a claim during that year, approximately a third (31%) were ‘large’ companies. They made up a very substantial majority of relief received (95%). Additionally, more than half (55%) of the companies were in manufacturing which includes pharmaceuticals.

Figures also show notable differences in UK geographical areas. Most claims came from the South East at 17%, with the least from the North East at 3%. London specifically took more than half of the total relief, at 51%.

When does a patent have to be granted?

A patent must be granted prior to it becoming an eligible IP right. However, the Patent Box tax relief can be used in respect of any profits for up to six years before the date of the grant, as long as the patent application had been elected into the Patent Box scheme for those accounting periods. With this in mind, it’s recommended that companies elect into the Patent Box as soon as a relevant patent application has been filed.

Does a company have to be making profit from its own inventions to qualify?

No, it doesn’t. Patent holders often give the rights to other companies to develop their inventions under license. If your organisation holds a license (or licenses) to use somebody else’s technology, you can still avail of Patent Box benefits providing you have:

• One or more rights to the exclusion of anybody else (including the licensor)
• Rights to develop, exploit and defend rights in the patented invention
• Exclusivity throughout a minimum of one whole national territory. This means for example that manufacturing or selling rights in just part of one country wouldn’t count.

How does my company claim Patent Box Corporation Tax relief?

Companies need to make an election to benefit from the reduced 10% Patent Box rate of Corporation Tax within two years after the end of the accounting period during which applicable income was received. This can be done in the computations that go with your Company Tax Return or done in writing separately.

However, claiming isn’t always straightforward…

The calculations required in working out the eligible expenditure for Patent Box tax relief are rather complex. When the changes came about in 2016, this complexity was increased to help protect the scheme against abuse.

For this reason we strongly advise you don’t go it alone, but instead take specialist expert advice as soon as you can.

How Myriad Associates can help

Our team of expert R&D accountants and specialists are here to help with anything related to innovation and tax relief specifically. With almost two decades of experience, we can guide you through an R&D tax relief application, as well as answer any queries you may have about anything in this article.

Call us today for advice on 0207 118 6045 or use our contact form