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UK Patent Box
18 January 2017 by Stephanie Thomas

UK Patent Box

Beyond securing the monopoly right to use an invention, how else can a patent be a useful asset to your business?  Just as R&D tax credits are available for companies that invest in creativity and innovation, so now is UK Patent Box relief.

The UK Patent Box scheme first took effect on 1 April 2013.  Companies seeking UK Patent Box tax relief saved a total of £343million[i] in the fledgling scheme's first fiscal year.  More and more UK companies are likely to opt in to the scheme as word spreads.

How can I benefit from UK Patent Box tax relief?

A claim for Patent Box tax relief must be made to HM Revenue & Customs within two years of the end of the financial year in which the profits are made.  The first figures signalling the benefits available, based on the tax returns of those companies who elected in to Patent Box in year one, are now emerging two years on. 

Since 2013 the potential savings have been increasing incrementally and, by 2017, a company will be able to reduce Corporation Tax to just 10% through Patent Box, for profits resulting from the exploitation of a patented invention.

The rules of the Patent Box have changed since the scheme began. The points to take home are:

- companies must invest in research and development in the UK, and

- the benefits may stretch to profits from their IP made worldwide.

It is not currently a requirement that the profits are generated in the same country as the country in which the patent is held - so, patents granted by the European Patent Office, and patents granted in certain states in the European Economic Area (Germany, for example), allow the patent holder to benefit from UK Patent Box tax relief.  It is worth noting, however, that one cannot use US and Japanese patents, for example.

Who has used the UK Patent Box scheme so far?

700 companies benefited from the scheme from 1 April 2013 - 31 March 2014, with large companies saving an average of £1.5million on Corporation Tax (i.e. companies having 250+ employees and a turnover in excess of €50 million).

Companies of any size are eligible for Patent Box relief - medium-sized companies saved an average of £67,000 in the first year of the scheme and represented a quarter of the total uptake. 

Manufacturers made up the largest share (over 63%) of those seeking Patent Box relief.  Innovative manufacturing tools and machines provide a route to benefitting from the scheme, as manufacturers can receive a reduction in tax on the profits from products made by a patented machine.  Claiming relief for products that simply result from a patented process involves more rigorous tax calculations, as it is less clear-cut that the profits result directly from what is patented.  Under the Patent Box rules, a 'notional royalty' may apply to these profits instead.

Aside from manufacturers, Patent Box is available to companies with patented inventions in any field. For example, companies in the fields of construction, scientific and technical fields, and education and health sectors have all benefited.

Of the 700 pioneering Patent Box beneficiaries, 185 companies are based in London and the South-East, saving over £215million between them in the first year.  In contrast, 80 West Midlands-based companies signed up, and in the North West, only 55 companies had used the scheme by March 2014.   As manufacturing and creative hubs, however, it is likely that the popularity of the Patent Box will grow in these regions over the next few years.  

Now that the figures from year one of the Patent Box are available, we expect to see a rise in patent applications filed by UK companies.  The potential tax savings alone are likely to incentivise companies to innovate.

Patents are not reserved only for revolutionary new products.  Many patents represent incremental changes to existing products or processes.  Any new feature that provides an advantage - such as being faster, cheaper or simpler to manufacture, or resulting in an improved product, may be patentable in its own right.  Clever adaptations of existing products or manufacturing techniques could lead to companies saving on Corporation Tax by way of obtaining a granted patent.  

Talking points

  • To claim Patent Box relief, you must be the patent owner, or have an exclusive license to use patent rights
  • Obtaining patent protection for a component common to, and essential to the working of, several products could provide a tax reduction across each of those products 
  • Income from IP can mean income from licensing out patent rights, or from infringement proceedings, as well as from sale of a patented product
  • A patent holder can commission R&D, and still count this as R&D performed by the patent holder for the purposes of the new Patent Box rules, so long as the work is undertaken in the UK
  • By electing in to the scheme while a patent is pending, profits from up to six years preceding the grant of a patent can also be taxed at a lower rate and included in a Patent Box claim for the year of grant

For the full publication of figures from 2013-2014, please visit https://www.gov.uk/government/statistics/patent-box-reliefs-statistics, and contact us at Forresters for further information about how to obtain patent protection.