Patent Box tax relief was phased in from 2013 with the full scheme in place by 2017, offering a reduced rate of corporate tax on all profits made from patents.
In fact, it offers a near halving of the rate of corporation tax paid on intellectual property (IP) related profits to just 10 per cent.
The aim is to incentivise the development of new patented inventions in the UK and build a competitive future economy.
For companies that either own or hold an exclusive licence for specific patents, who have carried out R&D to develop the underlying invention patented and who choose to exploit their patents commercially, election into the Patent Box could lead to a substantial reduction in the corporation tax payable on IP related income.
However, despite potential savings of tens, even hundreds, or thousands of pounds, the take up of the Patent Box tax relief remains very low.
Just over 1,000 Patent Box claims are made each year, compared to more than 5,600 patents granted on average every year between 2012 and 2017.
The 1,160 Patent Box claims made in 2015/16 had a total value of £754.3 million while the 1,025 recorded so far for 2016/17 are worth £942.5 million. This means the thousands of eligible companies who fail to claim are missing out on six figure sums.
So what are the barriers and misconceptions causing this low take-up?
The complexity of the Patent Box
The Patent Box tax relief is not simple and the calculations and complexity over what does and does not qualify can be confusing. This puts many off from applying.
However, as with most things in life, once you have a proper understanding of the process, many claims are not as complicated as they first seem.
The reduced tax offered by the Patent Box is payable on sales income resulting from the sales of patented products, products incorporating the patented components and spare parts where the principal purpose is incorporation into a patented product.
Sales income arising from patent disposal; licence income and royalties arising from the grant of a licence and income received as compensation or damages for patent infringement also qualify for the reduced rate.
Finally, any increase in income arising from the exploitation of the patent in-house such as using a patented process or piece of equipment could also give rise to IP income for Patent Box purposes.
But where company executives and their accountants do not have expertise in this area, it is sensible to seek advice from a tax relief specialist with experience in making such claims who can sift through all the parts of the calculations that are not relevant to each case and produce the correct final sums using the client’s accounts and specific additional accounting and tax information.
Most reputable tax relief specialists will work on a contingent fee basis so there is no need to worry about upfront costs.
Where companies are eligible for the Patent Box, there is a high likelihood they are also eligible for research and development (R&D) tax relief. This is where an experienced tax relief specialist will be able to advise further, as such claims can significantly boost annual revenue. The average value of an R&D claim among our clients is £54,000 per year.
Loss making companies
It is often assumed that, as this relief lowers tax liability, then it’s not available to companies making a loss. While companies generating a loss from their patent income would have nothing to gain, companies with an overall loss which still includes profits on patent-related income would still benefit, as it increases the tax loss the firm is able to offset elsewhere.
The resulting benefit isn’t as generous as a 10 per cent tax rate but it can still be very worthwhile, so it’s essential you crunch the numbers and get good advice.
During the four years when the relief was phased in, early claimants did not see the full benefit of the relief and perhaps felt the tax saved did not justify the effort. However, the relief is now fully in place, so this is no longer an issue and savings are usually significant, averaging £54,000 among our clients.
Intellectual property such as patents is geographically specific, meaning patents need to be protected when moving into new markets. This has led to widespread concern about the potential impact of Brexit on patents.
Happily, patents secured via the UK intellectual property office (IPO) will not be affected by Brexit. More surprisingly, nor will patents obtained through the European Patent Office (EPO) because the EPO is not an EU organisation.
So companies holding patents registered via the UK IPO or the EPO can relax, knowing their patents are still protected and they will still qualify for the Patent Box tax relief.
UK businesses that are seeking to submit new patent applications to the EPO will still be able to do so since the UK will continue to be a contracting state to the European Patent Convention after exiting the EU.
Where IP rights originate from EU legislation, such as supplementary protection certificates for medicinal products and plant protection products, Brexit will not invalidate these rights as they will remain protected by the Taxes (Amendments) (EU Exit) (No 2) Regulations 2019.
But patent applications still need to be considered for each country where a product is to be sold, in order to provide a business with commercial protection in that country.
The wrong name
This is an example of where a small technicality can cause big problems. Where expert advice is not sought, a common error is to place the patent in the individual’s name as opposed to the company that undertook the development and is exploiting the patent.
This prevents that company applying for Patent Box tax relief. While a sale or licence of the patent will resolve this, it does lead to additional legal costs and potential income tax implications. Getting good advice at the outset is crucial.
Lack of awareness about the Patent Box
Our own research carried out last year showed that more than half – 54% – of the companies questioned were not aware of the Patent Box tax relief.
This suggests the government needs to work much more closely with business groups and organisations to communicate the tax rewards available to pioneering companies if it is to achieve its goal of supercharging innovation. Accountants should also ensure they advise all clients who are undertaking R&D to engage with a patent attorney and undertake a detailed IP audit to ensure they are properly protecting and capitalising on all their innovations.
Where companies have undertaken R&D but don’t yet have a patent on the results of their work, these companies are missing out on nearly halving their tax bill.
A good patent attorney will be able to advise a company on how best to apply for a patent if the main motive is the tax savings as opposed to Intellectual Property protection.
Mark Tighe, founder and managing director at specialist tax consultancy Catax