The Patent Box tax incentive allows companies to apply a lower rate of Corporation Tax to profits from patented technology.
Our partner Hugh Dunlop explains the Patent Box tax incentive and the necessary considerations when making a claim.
The UK Government legislation on the Patent Box tax incentive came into effect in April 2013, but has attracted heightened interest following the 3 March 2021 budget.
The incentive is a reduced corporation tax rate of 10% on net profits attributed to patents, with the aim of encouraging development of patentable technology in the UK. This compares highly favourably with the announced corporation tax rate of 25% due in April 2023.
It is very important that UK technology companies understand this benefit and file patent applications now to mitigate the forthcoming rate increase.
All revenue from a UK company can count towards your Patent Box application and any patent in a qualifying patent office can count. UK national patents attract low official fees, so are a cheap way to qualify for the Patent Box without the need to file in other countries.
You may qualify for Patent Box through legal ownership of the patent and/or exclusive license from the patent owner. Patents acquired from or developed in collaboration with other companies may also qualify.
It can be a UK or European patent, or a patent granted by another EEA country with similar patentability criteria, such as a German patent. US patents do not qualify, as they may cover inventions such as business methods that would not be patentable in the UK.
The tax incentive is not limited to profits derived from countries where the patent is granted; instead, the existence of a qualifying patent is taken as an indication that the technology meets the requirements of technicality, novelty and inventive step.
Pending patent applications do not qualify, but once a patent is granted, profits arising up to 6 years before grant may qualify for the reduced tax rate.
The company must have undertaken ‘qualifying development’, by making a significant contribution to the creation or development of the invention claimed in the patent, or a product incorporating the patented invention; mere ownership of the patent is not enough. A company can also qualify if it actively manages the portfolio of patent rights for another company in the same group that has undertaken the ‘qualifying development’.
There are three stages to calculating tax relief:
1. Identifying qualifying patents
Identifying qualifying patents or patent rights ('relevant IP income') means calculating the basic profit attributed to qualifying income.
2. Qualifying residual profit
You can calculate the qualifying residual profit by deducting routine profit the the Treasury expects that you would have made without benefitting from patented technology. The Treasury assumes a routine return of 10% on expenses.
3. Removing marketing assets return
Marketing assets return refers to any profits attributed to brands and marketing that do not depend on innovation. Once these are removed you pro-rate patent and non-patent profit to give the patent box benefit.
A worked example of this calculation can be found here: The patent box fact card
0 months: Filing/priority date (eg. UK application)
12 months: File PCT/national application claiming 'priority' from UK application
18 months: Publication date
(30-31 months: Enter PCT national phase in countries of interest - optional)
3-4.5 years: Grant of UK and other National Applications
(earlier if the Green Channel applies)
Patents may be filed purely to gain a tax benefit: there is no need to enforce the patents against competitors.
Before applying you should check whether any of your existing products already contain qualifying patents or employ qualifying patents in their production. If not, you should consider whether any patented ideas could be legitimately included to enhance production processes or product functionality.
When developing a new prodcut it is equally important to consider what IP rights you may have. Patents or other IP rights may be available to you.
The tax implications of the Patent Box are complex, and specialist tax advice will be needed to determine the proportion of profits that qualify.
If you are looking for patenting technology to benefit from the Patent Box come to us and we can discuss what new ideas might span a range of your products: Contact Us
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