The Patent Box is a tax relief which was introduced by the UK Government in April 2013 which offers companies reduced tax rates on profits from products and services covered by patents, in order to recognise innovation in business.
Initially the Patent Box reduced the rate of corporation tax for a portion of the patent profits to 14% for the 2013 tax year. The rate was then reduced by a further 1% each year to the current rate of 10% (as of on 1 April 2017).
The exact calculations to determine the reduction in tax can be complex. In essence, to calculate Patent Box reduction in corporation tax, accountants calculate ‘patent related’ profit, which is the profit relating to products or services covered by a granted patent in a qualifying jurisdiction. From this ‘patent related’ profit, they deduct a routine or expected profit (i.e. if no patents existed) and then deduct the brand value (i.e. any profit attributable to your brand alone). This will result in an amount on which only a reduced corporation tax rate is payable. The Government’s intention is that, as of 2017, non-‘patent related’ profit is taxed at 25% while ‘patent related’ profit is taxed at 10%.
To qualify for Patent Box, a company must have made a significant contribution to either the creation or development of the patented invention or a product incorporating the patented invention. The patent must have been granted by the European Patent Office (EPO), UK Intellectual Property Office (UKIPO), or one of 13 EU states.
Companies will also qualify if the patent has been in-licensed on an exclusive basis. Pending patents are not eligible for patent box, however, once the patent has been granted, profits from up to six years prior to the date of grant (relating to the patent) may be granted tax relief.
The UK and German governments have jointly announced that they have reached agreement on a proposal regarding the treatment of IP regimes. This proposal will then be put forward to other members of the OECD’s Forum on Harmful Tax Practices when they meet.
HM Treasury has advised that the UK Government would consult with businesses on the detailed proposals before implementing any changes.
The Mathys & Squire team is highly experienced with helping clients obtain and maximise the potential tax savings that are available through the Patent Box scheme. We can file patent applications solely for the purpose of enabling Patent Box tax relief to be claimed, and have done so for many of our clients. In this scenario, we will prepare a patent application which is narrower in scope in order to minimise the costs and timescale associated with obtaining a granted patent. Where needed, we can also help with identifying innovations which are suitable for patent protection and which cover commercial products or processes.
The UK Government hosts a series of pages further explaining the Patent Box, how to qualify and an example calculation showing how tax burden on qualifying profits may be reduced.
For general information about the Patent Box, see the UK Government page here.
For an example calculation of how Patent Box relief may be calculated, see the exemplary calculation here.
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