Patent Box: an underutilised scheme

It’s important for businesses to look at ways to reduce tax liabilities to enable them to reinvest their profits into growth and innovation. Patent Box is a government tax incentive that was specifically designed to encourage innovation and reward businesses that invest in research and development (R&D).

The scheme has the potential to provide substantial tax savings, however, many businesses are not fully aware of this opportunity.

The Patent Box scheme explained

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. This should encourage companies to locate the high-value jobs associated with the development, manufacturing and exploitation of patents in the UK, and maintain the UK’s position as a world leader in patented technologies.

The headline for the scheme is that it can reduce the Corporation Tax rate to 10% on profits that are derived from the sale of products or services containing a qualifying patented innovation. The relief can be applied to profits from the worldwide sales of products that contain the patented part or have been through the patented process. The potential savings can be significant.

Qualifying for the Patent Box scheme

To qualify for the scheme, a company must own or exclusively license patents granted by the UK Intellectual Property Office, the European Patent Office, or certain EEA countries.

The calculation for the relief has several parts to determine the final tax saving. It involves separating the revenue generated from patented products or processes from other revenue, removing costs and then looking at other costs in the accounts and assessing how much of the R&D to develop the intellectual property was performed in-house. The calculation will then determine the tax saving for the company through Patent Box.

A company may still be able to back-date the benefit to the date when the patent was applied for, however, this will depend on the timeframe involved to get the patent granted and whether an election was made in to Patent Box. Professional advice should be sought about the best time to elect into the scheme to ensure it does not affect any potential future tax savings.

The benefits of Patent Box for innovation and growth

Despite the perceived complexities of the scheme, and the current low number of companies claiming the tax benefits, businesses that have taken advantage of the Patent Box scheme to date have received substantial tax benefits.

Companies that are considering investing in R&D should be made aware of the scheme and the potential tax savings it can provide. By doing so, businesses can take full advantage of this valuable tax incentive by reinvesting any savings to drive growth and innovation in their industry.

Consideration should be given into obtaining a patent, as well as assessing the other benefits of protecting intellectual property (including licensing, asset value and enforcement) to ensure it is right for the company overall and not just for Patent Box purposes. Businesses should seek advice from an expert adviser to take full advantage of this tax incentive.