The Patent Box is a further incentive available on top of R&D reliefs, meaning you could make additional tax savings from your Research & Development investment and make your funding go further.
The patent box was introduced 10 years ago and in that time the number of companies claiming the relief has almost doubled from 830 to an estimated 1,535 for the tax year 2020 to 2021. Whilst the uptake of this beneficial relief has not been as high as hoped to date the rise in corporation tax rate to 25% from 1 April 2023 is likely to make this a more attractive relief to many companies.
The original aim behind the patent box was to help incentivise companies to:
- Increase patenting of IP developed in the UK, hopefully leading to further development and commercialisation of that IP in the UK
- Manufacture and sell innovative products and services from the UK
- Locate high value jobs associated with the development, manufacture and exploitation of patents in the UK
The patent box works by taxing eligible profits of qualifying companies at a 10% rate of tax, providing a significant tax saving of 15% on relevant profits from 1 April 2023.
To be eligible for patent box companies need to meet the following criteria:
- Hold an EU or UK registered patent* (or an exclusive license over one)
- The company or another group member has undertaken eligible development activity
- The company undertakes management activities in relation to the IP
- The company generates income from the qualifying IP
The patent box calculation is formulaic and aims to identify the pure IP profit arising from the patented income with a number of adjustments made to the relevant IP income to determine this. Whilst additional work may be required in the first year of claiming to establish eligibility, an appropriate methodology and level of streaming, this can usually be carried forward for future calculations, requiring less work in subsequent periods.
An important step in the calculation is establishing the company’s ‘nexus fraction’ which will be applied to the relevant IP profits. The fraction is based on the R&D spend of the company and is used to determine the amount of IP income that patent box relief is given on. In order for businesses to obtain maximum patent box benefit businesses need to have undertaken the development of the IP in-house or have subcontracted the work to a third party.
Companies are able to claim both R&D and patent box relief, and due to the similarities between the patenting criteria and the definition of R&D if you have already made made a successful R&D claim you may well have an invention that could be patented and benefit from patent box.
If you don’t yet hold any patents, we can work with you and your patent attorney to assess what developments meet the criteria and would drive the most benefit for patent box.
It’s worth noting that the patent box benefit accrues from the date the patent application is made, so putting off the patent application could mean you lose out on tax relief!
If you already hold patents and are unsure whether claiming would be worthwhile we can help you assess eligibility and the potential level of benefit and assist you with the full claims process should you decide to make a claim.
For more detailed information get in touch with our innovations tax team.
*Or certain other EEA countries
