What is the Patent Box?
Whilst we never cease to be surprised by the number of businesses who are totally unaware of the Research and Development (R&D) Tax Credit scheme those who have heard of the Patent Box are even fewer and further between!
Statistics from HM Revenue and Customs (HMRC), published in September 2017, report that in the financial year 2014-2015 there were 1135 companies who claimed relief under the Patent Box, with total claims of £651.9 million.
The Patent Box is a complex specialist tax regime which was introduced by the Government to offer an incentive to companies to retain more of their profits arising from qualifying intellectual property.
The Patent Box has been developed specifically for intellectual property revenues. Sometimes referred to as the 'intellectual box regime', 'innovation box' or 'IP box' the essence of the Patent Box is that it enables eligible companies to apply an effective Corporation Tax of 10% on profits arising from patented products.
The Patent Box applies to components as well as to complete products. In the situation where a component meets the criteria for the Patent Box relief the whole product will be eligible for the benefit.
How does the Patent Box work?
The UK Patent Box was introduced in April 2013 and it allows companies to benefit from an effective 10% rate of Corporation Tax on profits earned from patented inventions after the 1st April 2013. The company must elect to join the scheme. This can be done when a company submits its Company Tax Return through the computations on the Return or if preferred the company can chose to elect separately in writing.
A company must elect to join the Patent Box regime within 2 years after the end of the accounting period in which the relevant profits and income arose.
The Patent Box regime operates under a 'phasing-in' rule. This simply means that the full benefit of the 10% effective rate of Corporation Tax will be phased over a five year period. For example a company electing to join the Patent Box in April 2013 would benefit in the following way:-
60% of full benefit applicable from 1st April 2013 to 31st March 2014
70% of full benefit applicable from 1st April 2014 to 31st March 2015
80% of full benefit applicable from 1st April 2015 to 31st March 2016
90% of full benefit applicable from 1st April 2016 to 31st March 2017
100% of full benefit applicable from 1st April 2017 onwards
What are the eligibility criteria for the Patent Box?
A company has to be liable for Corporation Tax and intending to make a profit as a direct result of patented inventions.
The patent must be owned by the company or it must exclusively license-in the patents and must have undertaken qualifying development on them.
In the situation where a company is a member of a group it may qualify under the regime if the qualifying development has been undertaken by another company within the group.
A company may also qualify if they hold eligible medical or botanic innovation rights.
Licensing innovations from others?
If a company holds the patent for its innovation but has chosen to licence it to other companies to develop it may still benefit under the Patent Box regime if the following conditions are met:-
The company has the rights to develop, exploit and defend rights in the patented invention.
The company has one or more rights to the exclusion of all other persons, including the licensor.
The company has been granted exclusivity as a minimum in an entire national territory.
How are profits arising from exploiting patented inventions defined?
The sale of patented products or products that incorporate the patented invention or bespoke spare parts
Profits arising from the licensing out of patent rights
Profits generated on selling patented rights
Profits as a result of infringement income
Profits on damages, insurance or other compensation received as a result of patent rights.
Patent Applications and Patents Granted in the UK 2016 - Facts and Figures...
Whilst it is generally acknowledged that obtaining a patent is complex and costly the process is a lot simpler and more cost effective than it used to be - as can be seen in the figures below:-
13,842 applications for patents filed
2,893 patents granted
The highest number of applications came from London - 2592
The highest number of patents granted was for the South East - 493 out of 2140 applications
The top 3 industry sectors for patents granted were:-
Electricity - 1114
Instruments - 1071
Transporting - 549
Top 5 patent applicants:-
One individual topped the chart for the submission of patent applications with 623 submissions!
Halliburton Energy Services Inc. 447
Jaguar Land Rover Limited 328
Rolls-Royce plc 322
Ford Global Technologies, LLC 271
International Business Machines received the highest patents - 188.
*All figures taken from a report published by the Intellectual Property Office for 2017.
Want to know more about the Patent Box?
To find out more about the Patent Box and whether your business should elect into the scheme please contact our Technical Director, Stephen Bunting, on 01440 708333.
If you would like to find out more about R&D Tax Credits please call 01440 708333