Misconceptions about a tax relief that can almost halve your costs

It’s hard to believe that anyone would turn their nose up at a tax relief that nearly halves the rate they pay, but there are only 1,000 Patent Box claims in the UK every year.

There are a number of barriers and misconceptions behind the low take-up, many of which are easily explained.

For those who don’t know, Patent Box is a corporation tax relief that reduces the tax rate on profits from a patented product or process from 19% to an effective rate of 10%.

Many potential claimants can be put off by the complicated definitions and calculations, but many claims are not as complex as they first seem.

All businesses need to do is provide accounts and some additional tax and accounting information to a Patent Box specialist who does the rest.

Since Patent Box lowers a company’s tax liability, many companies assume that there is no benefit for loss-making entities. But this is a mistake.

It is true that companies whose patent income is loss-making would be advised not to pursue a Patent Box claim. However, firms that have patent profits but are loss-making overall would still benefit, since the claim increases the tax loss that can be offset elsewhere.

Another reason for the low take-up is because the relief was phased in over the first four years. This meant that early claimants did not benefit as much as those who took advantage of it in succeeding years, and potentially felt that the tax saved did not justify the time or effort.

Now the relief is fully in place, clients can get the full benefit.

One complication that prevents some claimants arises when the patent is in an individual’s name, rather than that of the company that undertook the development and is exploiting the patent.

Patents held in individual rather than company ownership are not eligible for Patent Box. Selling or licensing the patent will resolve this issue, but it does lead to additional legal costs and potential income tax implications, highlighting the need for good advice at the outset.

Hopefully, that clears up some of the misconceptions for companies that already have patents, but what about those who have undertaken R&D but don’t yet have a patent due to the time and cost it takes to secure one?

These companies are missing out on several fronts. They could nearly halve their tax bill once the patent is granted, recouping the patent costs many times over. In addition, the relief available while the patent is pending can be given in the accounting period when the patent is granted.

Expert advice is essential, as a good patent attorney will be able to advise a company how best to apply for a patent for the purpose of securing tax savings instead of Intellectual Property protection.

This is a perfectly legitimate reason to seek a patent but is one of the most neglected weapons in the tax relief armoury. Many more companies will already have patent income that they are not using to claim their full tax relief entitlement and, for these firms, the barrier to doing so is tiny and well worth the effort.

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