Continuing our series which explores the various types of tax relief and incentives available to UK businesses, we once again spoke to Foxley Kingham partner and resident expert, Giordano Goggioli, Senior Associate at Markel, a specialist insurance and tax consultancy firm. This edition’s topic is on the UK Patent Box – a tax relief available for companies profiting from a patented innovation. Here we explore how the relief works, the reasons behind the incentive, and just how much it could save companies who qualify.
What is the Patent Box tax benefit?
Patent Box is perhaps a lesser-known tax incentive and one that works by lowering the rate of Corporation Tax payable against profits made from a patented technology or product. Delivered by HMRC, the idea behind the scheme is to reward businesses for creating new technologies and investing in innovation – and to encourage them to keep the IP within the UK.
As most of us know, corporation tax increased from 19% to 25% in April 2023 for companies with profits over £250,000 – making the potential saving, even more significant. No matter how minor the patented part of a product or process is, 100% of profits deriving from qualifying IP income will pay a corporation tax of only 10%.
Recent changes to the incentive mean that if you have been responsible for the development of the patented innovation (as opposed to purchasing it) the tax benefit will be even more advantageous for your business.
How does the Patent Box work?
When you first elect to the patent box tax relief, you can claim retrospectively for up to two previous accounting periods. And then from that point forward, you have the option to claim relief every year. When preparing your first claim, also remember that you can claim for any profits attributed to the technology while the patent was pending – for a previous period of up to six years.
If you no longer wish to claim tax relief for a patented product or technology, you can opt out of the Patent Box regime – but make this decision carefully! Once you’ve opted out, you can’t opt back in for a period of five years.
What is the process to qualify for patent box tax relief?
To qualify for patent box tax relief, your company has to own or exclusively license-in patents granted by a number of qualifying offices or territories, including:
- The UK Intellectual Property Office (IPO)
- The European Patent Office (EPO)
- Austria
- Bulgaria
- Czech Republic
- Denmark
- Estonia
- Finland
- Germany
- Hungary
- Poland
- Portugal
- Romania
- Slovakia
- Sweden
Once you’ve confirmed that your patent, or patents, qualify, it would be sensible to seek professional advice in the first instance. Consulting with a specialist, as well as your Foxley Kingham accountant, will give you an initial idea of the process and the potential benefits to your business. If you choose to move forward, you’ll provide the relevant data, and your appointed specialist will do the calculations and make the relevant submissions on your behalf.
Top tips to consider in relation to Patent Box…
- If you are actively deriving profits from a patented technology, you own the patent and you’re paying corporation tax – you should assess the benefits that Patent Box could have for your business
- If you are actively deriving profits from a patented technology and you’re licensing the patent, you are likely also eligible for the tax relief if you meet a set of criteria. Consult a specialist to confirm eligibility and your Foxley Kingham accountant
- Intellectual property income means income derived from either selling patented products, licensing out patent rights, selling patented rights, infringement income, or damages, insurance, or other compensation related to patent rights. It’s 100% of this income which could be eligible for the 10% corporation tax rate
- If you work in the manufacturing industry, you could generate qualifying income by either using a patented process in your manufacturing or by providing a service using a patented tool
- It’s worth noting that this relief doesn’t pertain to other types of intellectual property, including copyright, trade marks, or design rights
If you think you could be eligible for patent box tax relief, the team at Foxley Kingham would be delighted to have a conversation.
