Tax savings for Intellectual Property: Patent box scheme

What is the patent box incentive?

The patent box incentive is designed to reward innovative UK businesses for retaining IP in the UK. The scheme applies a reduced corporation tax rate to profits derived from the licensing of patents and the sale of products incorporating patented technology, provided the claimant company was involved in the development of the patented technology, product, or service. Eligible companies will pay a lower rate of just 10% on their patent box profits, compared to a corporation tax rate of 25%.

The benefits of the scheme can be substantial for more lucrative corporations and businesses with high-margin products. However, the calculation is complex and can cause complications that reduce the benefits obtained. We work with businesses to identify the potential tax benefits of using this incentive, by modelling their product and value streams.

Who is eligible to claim the patent box?

To be eligible, you must be:

• A UK-based limited company that pays UK corporation tax;
• Involved in the development of an innovative product or process; 
• have the right to exploit a granted patent; and 
• be the company with the trading profits arising from the patented invention. 

Many companies are unaware of the development and trading criteria and are structured in such a way that they find themselves unable to make a claim. The scheme seeks to establish a link between the patent for which relief is sought, and the entity performing the R&D to produce and commercialise the IP. A Nexus fraction is applied where development is split across a group to try and seek to create a realistic claim that rewards the work undertaken in the UK. There is necessity for IP earnings to be streamed, which can be a stumbling block for newcomers to the plan, but we can help plan your accounting and record keeping to remain consistent with some of the more complex rules.

Qualifying IP

To qualify, a company must have a patent awarded by the UK Intellectual Property Office, the European Patent Office, or a designated EEA nation. Design or copyrights do not qualify under this scheme, even if they cover a new product that has been the subject of an R&D claim or, for example, where a US patent exists. The patent box can be accessed by having legal ownership of an invention or having an exclusive license to commercially utilise a patent.

Another key aspect of the scheme is linking patents to products. If a business has one patent that covers several products this can be simple, but where a company holds a portfolio of patents where some need expiry this patent linkage can be critical to retaining maximum benefit from the scheme. We assist companies in scoping their patent portfolio for likely patent box candidates and creating the profit streaming to assist the potential claim benefit.  

How to claim

If claiming, you must make an election into the patent box system within two years of the relevant accounting period in which relief is sought. A company can elect early, before a patent is awarded, to claim tax reduction on qualifying revenues earned between the filing of the patent application and the grant of the patent - the patent pending period. The accumulated relief is claimed in the year the patent is awarded on the tax return. After this point, the patent box scheme follows the normal corporation tax rules allowing amendments to be made up to two years after the end of the qualifying accounting period.

However, electing into the scheme too early when the product is not making a profit can be detrimental and reduce any subsequent benefits. Therefore, careful planning is required. Buzzacott offers a modelling service to plan out patent box submissions to support this process.

Patent box calculation

A multi-step calculation is necessary to determine the amount available for patent box relief. An additional deduction is claimed in the company's tax computation, resulting in a 10% effective tax rate on qualifying IP profits. Marketing profits and the value of the company's name are subtracted from the qualifying profits. Small and medium-sized businesses, on the other hand, may opt for a streamlined small profits calculation that avoids many of the transfer pricing difficulties. It's difficult to get this computation correct the first time, but we can help businesses set up their claims correctly. 

On 1 July 2016, the patent box rules were changed establishing a link between the patent for which relief is sought and the entity performing the R&D to produce and commercialise the IP. This Nexus fraction, as well as the necessity for IP earnings to be streamed, can be a stumbling block for newcomers to the plan, but we can help you manage these new requirements.

The relief extends to income from worldwide sales of patented products, which is a feature of the patent box concept that is sometimes missed. Therefore to get the most of this incentive, businesses must examine their global activities and earnings flows. Because licences are included in the patent box arrangement, it may be advantageous to establish the United Kingdom as an IP holding company.

How we can help

We can help you develop a business plan for patent box and other R&D incentives available in the UK and abroad, allowing you to get the most out of the support you receive over the life of your products. 

We can work with you to get the best possible tax savings by examining your current company structures and preparing to maximise your patent box savings. Our team takes a holistic approach to R&D incentives, overlaying international incentives to give you a full picture of how these funding sources can help you achieve your goals.

The special incentives team at Buzzacott will assess the profits earned by patented products so they can be included in your patent box submission. Profits from patents that have been applied for but not yet awarded will be recorded. Our team is familiar with the intricacies of the patent box concept and will guarantee that your claims are accurate.

If you would like to speak to one of our patent box experts to find out more about how we can help, please get in touch via the form below.