Guide

A guide to the Patent Box

Gateley Capitus

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In this guide we outline what the Patent Box is, what qualifies for this tax relief and how to make a claim.

What is Patent Box Relief?

The Patent Box is a tax incentive offered by the UK government to companies to encourage them to undertake R&D and protect the intellectual property (IP) resulting from creating a patent. These activities form an important part of government policy to create skilled jobs in the UK, increase the country’s scientific and technological base and ensure that income arising from commercialising IP flows into the UK. Many other nations competing for R&D-focussed foreign direct investment offer similar schemes, so it is important for the UK to remain a competitive tax environment and prevent IP created in the UK being moved offshore.

The Patent Box allows profits derived from patents to be taxed at a corporation tax rate of just 10%, which is significantly lower than the headline rate of 19% (increasing to 25% from April 2023).

Profits are eligible if they fit into the ‘Box’ – that is, meet the relevant tax definition.

How does a company qualify?

In broad terms, a company will qualify for the Patent Box if it derives profits from patents that it owns or exclusively licenses, and has undertaken qualifying development on the patents. 

Profits that are eligible for Patent Box include those from the sale of patented products (including products that incorporate a patented product), licensing out patent rights or from the use of a patented process.

The company (or a group company) must also have undertaken qualifying development for the patent. It must have made a significant contribution to either the creation or development of the patented invention, or a product incorporating the patented invention.

Where a company is a member of a group, it may also need to demonstrate that it actively owns the patented invention and takes a significant role in managing its whole portfolio of eligible patents.

How does a company claim?

Patent Box claims are made on the company’s corporation tax return, either on the original return or a return amended within statutory time limits.

It is best practice to prepare and submit details of the calculations of the Patent Box relief to HMRC alongside the tax return so that they can be checked without the need for a formal compliance check.

Companies also need to make a formal election into the Patent Box rules to benefit. This must be done within two years of the end of the accounting period when the relevant profits and income arose. The company can make an election in the tax computations accompanying the tax return, or separately in writing. There is no special form of words for the election and no box on the tax return to complete.

What patents qualify?

Patents granted by the following are eligible where they are owned or exclusively licensed by the company:

  • the UK Intellectual Property Office
  • the European Patent Office
  • relevant IP authorities in these countries in the European Economic Area: Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia and Sweden.

How does the calculation work?

The Patent Box benefit calculation follows a complicated series of steps, which Gateley Capitus can help with. At a high level, these include the following:

  1. Identify relevant IP profits using a ‘streaming’ methodology, which requires a just and reasonable apportionment of a company’s expenses.
  2. Deduct a ‘routine profit’ which is a notional 10% return on certain operating expenses. 
  3. Deduct profit derived from the company’s marketing assets/ brand. 
  4. Multiply by the R&D fraction, which limits the benefit of the Patent Box where the company did not carry out all the relevant R&D itself.
  5. The resulting figure is the amount eligible for the reduced 10% corporate tax rate.

How can we help?

A Patent Box claim requires both a technical and financial justification. At Gateley Capitus we can bring the claim together on your behalf using our tax specialists and technical professionals. 

Calculating the final figures for a Patent Box application isn’t straight forward and requires us to work with you to identify specific revenue streams, assess each IP right individually, look at the R&D involved, and apply a complex HMRC formula. We will ensure that a robust claim is put together using our rigorous process to identify your full benefit, whilst providing a clear justification to HMRC.

Speak to one of our team for an initial assessment or visit our Tax efficient R&D page to find out more. Even if you have not previously looked at protecting your IP, we can help.

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