Welcome to the third part of our mini series regarding funding for green tech start-ups, which is about the UK’s Patent Box scheme.
If you are liable for UK Corporation tax and either have, or are looking to develop, a patent portfolio, you may wish to consider the Patent Box scheme. This part of the miniseries dives into what the Patent Box is, who is eligible and when to apply. We also briefly look into R&D credits.
What is the Patent Box?
A tax-relief scheme for companies making a profit from patented inventions. The owner of a relevant patent can benefit from a 10% effective rate on corporation tax on profits made from patent inventions. The scheme is not limited to UK patents, but any patents granted by the EPO, or certain national patent offices in Europe.
Who is eligible?
To qualify, a company must:
- be liable for UK corporation tax on profits of a trade;
- hold qualifying IP rights;
- demonstrate development or active ownership of IP; and
- generate qualifying income from the IP right.
Qualifying IP rights
To hold a qualifying IP right, the company must own or exclusively licence the patent. The patent must also have been granted by the UKIPO, EPO or national IP offices of selected countries in the European Economic Area.
Qualifying development
A company (or, in some circumstances, another company in the same group) must have performed a qualifying development in relation to the qualifying IP right. A qualifying development is defined as:
- creating, or significantly contributing to the creation of, the patented invention; or
- performing a significant amount of activity to develop the patented invention, any product incorporating the patented invention, or any process incorporating the patented invention.
There is no set metric for determining if a contribution or activity is significant. However, developments can be considered significant by virtue of the cost, time or effort required for the work.
Qualifying income
There are five income streams that qualify for the Patent Box scheme:
- Sale of patented products (includes the patented product, products incorporating the patented invention and bespoke spare parts);
- Fees from licencing the patent;
- Sale of the patent;
- Infringement income; and
- Damages, insurance or other compensation related to the patent.
Manufacturers and service providers can generate qualifying income if they manufacture using a patented process or provide a service using a patented tool. Notional royalties from these can be treated as qualifying income.
When can I apply?
Companies must elect in to the Patent Box to obtain a tax reduction. This can be done in the computations accompanying your Company Tax Return, or separately in writing with the tax return (which is beneficial if, say, the patent is not yet granted, but you wish to elect in). It is also possible to claim R&D Credits at the same time.
The time frame to elect into the Patent Box is within two years after the end of the relevant financial year. Additionally, once your patent is granted, and provided that an election was made, you can claim relief for up to six years of profits prior to the date of grant of the patent. It’s also possible to elect out of the scheme (but do note that you cannot then re-enter for another five years).
It is important to also consider when would be the best time to take advantage of the Patent Box. The major benefit of the Patent Box is the reduction in corporation tax payments and so it may seem enticing to elect in to the scheme as soon as possible. However, this varies depending on each company’s specific circumstances. Once in the scheme, all trade is subject to the scheme and so it’s possible to make a loss, for example, due to very low profit margins. It is important to remember that the benefits only apply if a profit is derived from the qualifying IP (and any Patent Box losses must be set off against profits). As such, electing in too early may overshadow the benefits of the Patent Box. Companies should therefore carefully consider their commercial position before electing in to the scheme.
We recommend that the advice of a qualified accountant be sought before the Patent Box is used and to verify if it would be suitable for your circumstances.
Undertaking an IP Audit can be a sensible first step in determining what IP assets a company holds and what time frame might be most successful in generating a saving with Patent Box. You can find out more about UK government support for conducting an IP audit (and towards the cost of securing IP) in the first part of our mini series here.
Get in touch with our energy and green technologies team today.
