Date: 4 March 2021
The UK Government legislation on the Patent Box tax incentive came into effect in April 2013, but will attract 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.
To qualify for the Patent Box, a company must own, or be an exclusive licensee of, a granted patent: this 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’
Qualifying profits may arise from sale or licensing of products covered by the qualifying patent, damages or other compensation under the patent, or sale of the qualifying patent itself. The qualifying profit is then reduced by removing a notional ‘routine return’ of 10% on relevant expenses, which is assumed to be the level of profit the company would have made without the qualifying patent.
The qualifying profit is reduced further by removing a return due to marketing. The profit that qualifies for the 10% rate may then be a relatively small proportion of the overall profit of the company. The patent need not cover the whole of the product, but must at least cover an item that is part of the product and intended to remain so for the life of the item. For example, if the patent covers an ink cartridge for a printer that is not intended to be removed until the cartridge is empty, profits from the sale of a printer including the cartridge will qualify, even if the printer itself is not patented.
However, if a patent covers a DVD intended to be removed from a player after use, profits from the sale of the DVD player will not qualify. Packaging is not considered part of a product, unless the packaging performs a functional essential to the use of the product. The Patent Box is voluntary: a company may elect to joint the regime. The company then stays within the regime until it elects to leave, but cannot then re-enter for the next 5 years.
In the case of an international coporation, the benefit is linked to the R&D incurred in developing the IP asset in the UK subsidiary company claiming the tax benefit. Companies joining the scheme before June 2016 can benefit from the existing rules until 2021.
Please note: the tax implications of the Patent Box are complex, and specialist tax advice will be needed to determine the proportion of profits that qualify.
Read and download our full advice on our pdf fact card here: Patent Box Fact Card