Patent Box: What is it and what are the benefits?
23 January 2015 by Michael Downing
If your company is making a profit, or soon to be making a profit, as a founder you're probably starting to get concerned about the corporation tax liabilities which will accumulate. It’s worth noting that you can only benefit from the Patent Box if your company is liable to corporation tax.
The good news is The Patent Box took effect in April 2013 and enables companies to pay lower tax bills on profits derived from inventions they patented, which is typically 10 per cent. You can benefit from the Patent Box if your company owns or exclusively licenses-in patents granted by the UK Intellectual Property Office or the European Patent Office or designated European territories.
Your company or another group company must also have undertaken qualifying development for the patent by making a substantial contribution to either:
1. The creation or development of the patented invention
2. A product incorporating the patented invention
The Patent Box, also known as IP-Box or Innovation-Box, is part of the Government’s growth agenda. The aim of the Patent Box is to provide an additional incentive for companies to retain and commercialise existing patents and to develop new innovative patented products. The UK government wants to encourage high-value growth in the UK and the Patent Box forms a key part of this strategy and hopes to attract and create investment and jobs in hi-tech industries.
To be eligible for the Patent Box, a company must fulfil certain qualifying criteria, the IP rights must be 'qualifying rights' and the IP right must also carry out a 'qualifying development'. Complex calculations of qualifying profits also apply and there is a phasing in period.
As reported in the Guardian Osborne has insisted patents are a legitimate focus for tax breaks because of "a particularly strong link to ongoing high-tech research and development". But the IFS noted that "the policy does not require that the innovative activity underlying a patent takes place in the UK".
The Patent Box scheme, first proposed under the previous Labour government, has also been criticised for handing big savings to large groups which account for the majority of patents, such as the pharmaceutical company GlaxoSmithKline.
How much does it cost to file a Patent Box?
Obtaining a UK patent by filing a Patent Box oriented application at the UK intellectual Property Office will typically costs less than £10,000 and in some circumstances less than £5000..
How the Patent Box claim process works:
Companies can follow the following criteria -
- Calculate your qualifying income by identifying the revenue streams from qualifying patents
- Calculate the profit generated from your qualifying income
- Calculate residual profit by deducting routine profit made from routine business activities
- Calculate the Patent Box profit by deducting any profits derived from branding or marketing elements
- Use the formula to calculate the corporate tax deduction
If you need help with your Patent Box claim you should check with your patent attorney, solicitor, patent advisor or inventor-support organisation.
The future of the Patent Box
According to a recent article by out-law.com they state “the UK has agreed to put forward a proposal to close its patent box tax break.” The details have not yet been finalised but the current UK Patent Box will now be closed to new entrants in June 2016 and will stop operating in June 2021. Companies already benefiting from the tax break can continue gaining the tax relief.
There have also been allegations that a new, reformed version will be in place beforehand. However, it will only offer tax incentives where significant Research and Development is undertaken in the UK. There will be restrictions on qualifying expenditure where R&D work is not undertaken by the claimant, although the nature of this is still to emerge.
According to the Financial Times “details of the new rules will be agreed by governments taking part in an international forum on harmful tax practices, as part of a global crackdown on avoidance led by the G20 group of leading nations. The Treasury said that in line with the normal tax policy making process, it would consult on the legal changes that will begin this year.”
If you would like expert advice on the Patent Box and how to claim, Downing IP can help. For confidential, professional advice please contact us on 01494 422626 or email firstname.lastname@example.org.