The imminent rise in UK corporation tax makes the financial benefits of the Patent Box scheme look even more attractive, and there may now be additional incentive for many innovative and IP-focused companies to give Patent Box greater attention.
Tax has been in the news a lot lately, especially corporation tax. In March this year, the then UK Chancellor Rishi Sunak announced that corporation tax would rise from 19% to 25% in April 2023. That position was reversed in the mini-budget delivered by Chancellor Kwasi Kwarteng on 23 September. However, on 14 October, the then Prime Minister Liz Truss announced that the increase to 25% would go ahead next April. She also sacked Kwarteng and replaced him with Jeremy Hunt, followed by her own resignation on 20 October.
Unless there are further changes (which cannot be ruled out, given the government’s apparent enthusiasm for U-turns) it looks likely therefore that the rate of corporation tax paid by companies in the UK will increase from 19% to 25% from April. That is a significant change, especially for small businesses.
It’s not all gloom though, as the rise in corporation tax makes the benefits of the Patent Box (which was launched in 2013) look even more attractive, and as such there may be additional incentive for many innovative and IP-focused companies to give Patent Box some attention.
What is the Patent Box?
The Patent Box allows companies to apply a 10% rate of corporation tax to profits earned from patented inventions. That is a full 15% lower than the rate of corporation tax that will apply from next April. To benefit, companies must elect into the Patent Box within two years from the end of the relevant accounting period.
As to be expected from a government tax relief scheme, there are several conditions that companies must meet. To be eligible for the Patent Box, they must be liable to corporation tax, make a profit from exploiting patented inventions, own or have exclusively licensed-in the patents and have undertaken qualifying development on the patents.
For companies that elected into the Patent Box after 30 June 2016, the benefits are restricted if the company incurred expenditure in acquiring the patents or made payments to connected parties for their R&D expenditure.
The Patent Box covers income from patents granted by the UK IPO, EPO or IP offices in certain other countries in the EEA (including Germany and Sweden but excluding France, Italy and the Netherlands). In addition, companies must have undertaken “qualifying development” for the patent through the creation/development of the patented invention or a product incorporating the patented invention, and income from exploiting patented inventions must be separated from other income for calculation purposes.
To offset some of the conditions, a significant upside is that patent income is defined broadly: it can include revenue from the sale of patented products, licensing, the sale of the patents themselves, royalties arising from infringement, damages or other compensation and encompasses sales beyond the UK shores.
The full rules on the Patent Box, a guide to how to calculate it and an example of a calculation can be viewed on the government’s website here.
Who uses the Patent Box?
According to data published by HMRC last month, in the tax year 2020-21 there were 1,535 companies that claimed relief through the Patent Box. The total value of the relief was £1,205 million.
That compares with 1,395 companies who claimed £1,220 million in 2019-2020. Of these, 28% of the companies were classified as “large” and they accounted for 95% of the relief claimed. Over half of the companies that claimed were in the manufacturing sector.
These figures suggest that the Patent Box is used less than other similar benefits, such as the R&D tax credit scheme (through which it is estimated that there were 89,000 claims amounting £6.6 billion in 2020-21, most of them through the SME scheme). That is a pity, particularly given the attraction of the Patent Box to high-tech, innovative businesses.
There may be various reasons for the lack of take-up of the Patent Box. They include the complexity of the patent system, which some SMEs see as expensive or irrelevant to them, and the additional complexity of the Patent Box rules.
The low rates may also reflect a wider lack of understanding about patents, or at least a view that patent rights are for other people. Some SMEs may see patents simply as tools for suing other parties, rather than assets that can be used to create value – such as through licensing, to raise funding or in commercial negotiations.
Taking advantage of the Patent Box also requires input from accountants but in my experience the accountancy function in businesses is not always fully aware of the scheme or may not be able to offer comprehensive advice.
A new opportunity
Given the planned hike in corporation tax, now might be a good time for companies to look afresh at the Patent Box. It may not be appropriate for everyone and, as briefly set out above, there are several hoops you have to jump through. But if you meet the criteria and have regular income attributable to patent rights then the benefits may be significant – especially where patents are maintained for their full 20-year term.
Keltie have considerable experience in working with companies to help them take advantage of the Patent Box and similar schemes. For example, we can advise on how to draft and prosecute patents that are likely to be robust and to help you benefit from the Patent Box. This includes considering issues such as claim scope, the state of the prior art and likely applications of the patent.
Thanks to this experience, we can provide advice that is relevant to your business and technology. We can also connect you with other experienced professionals who can address specific questions about tax and accounting.
picture credit Ozark Drones on Unsplash
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